Saudi politics poised for further developments as tensions with Iran rise. Chile selects new president to succeed Bachelet. U.S. stock market continues to rise despite government policy failing to live up to the hype. All in The Week Ahead.
Saudi politics poised for further developments as tensions with Iran rise
- The many branches of the Saudi royal family are anxiously awaiting any further developments in the ongoing anti-corruption investigation. Last week, more than 200 people, including several prominent members of once powerful branches of the royal family, were arrested on charges of corruption. The Attorney General and the new investigative body have not indicated what laws exactly have been broken or what the adjudication process will be.
- Crown Prince Mohammed bin Salman (MBS) has made it very clear that the previous method of governance by broad family consensus will no longer prevail as he seeks to modernize the country. Subsequently, this has begun to really spook markets that dislike this sudden introduction of substantial uncertainty, and questions have begun to arise over whether some member of the family could foment a plan of opposition to MBS’s governance and crackdown of key figures in the military and political infrastructure.
- What also remains an open question is whether MBS will be able to sustain the movement to reform Saudi Arabia’s economy. Although there have been market accolades for moves to sell off part of Saudi’s oil company, slightly expand the rights according to women, and invested billions in innovation, many of the hard actions necessary to complete the ambitious 2030 plan are unfinished.
GRI take: Raising taxes, reducing the massive subsidies accorded to Saudi citizens and the particularly substantial largesse accorded to members of the royal family will certainly raise the ire of Saudis as well as members of the royal family. Although MBS has not yet faced a backlash that combines the citizenry with the family, marginalizing the influence of the Saudi princes could go a long way in neutralizing the threat in the short and medium term.
Chile selects new president to succeed Bachelet
- This Sunday, Chileans will head to the polls in the first of possibly two rounds to select the next president. Although Chile has been one of the best performing economies in South America for the past two decades, with a combination of economic liberalization and relatively extensive social services, Chilean voters have been affected by a fall in economic growth.
- The fall in commodity prices, particularly of copper, has affected Chile’s substantial mining industry, and although Chile is one of the wealthiest per capita countries in the world — the first South American country to join the OECD — it also struggles with one of the highest levels of inequality.
- On this backdrop, Chile’s term-limited President Bachelet looks increasingly like she will not be followed by another center-left president. Instead, former president and center-right billionaire Sebastian Pinera appears to have a lock on securing the lead in the first round of voting. Polling has consistently given him around 40% of the vote while the Chilean left has been divided by center left candidate Alejandro Guillier and the more leftist Beatriz Sanchez.
- Should Pinera be unable to secure 50% of the vote in this first round, he will have to contend with either Guillier or Sanchez in the second round of elections in December.
GRI take: Although Pinera is likely to prevail in the second round too, Guillier has shown surprising strength, due in part to hesitation for many Chileans to elect someone from the right following Pinochet, and may be able to consolidate the center and left in a second round election with Pinera. On the Congressional side, the left coalition in the Senate will have to contend with defending 9 of their 20 seats for an 8-year term, while the right coalition will have to protect half of their 14 seats. On the House side, all 120 members are up for reelection, and with the left majority at fairly narrow 67, control of both chambers is easily up for grabs, and the success of either Pinera or (likely) Guillier could scramble coalitions to form a working majority for the new president.
How long can the U.S. stock market continue to rise as government policy fails to live up to the hype?
- The Dow Jones Industrial Average (DJIA), the benchmark of the U.S. financial system, has risen by approximately 24% since January 2017. Nearly every week the stock market breaks new records as it continues to rise almost without hesitation. While a part of this has been due to the success of certain tech firms, many market participants have noted an optimism in the policy portfolio a Republican president and Congress could advance after gaining control of Washington last November.
- The 7 month failure of the Republican House and Senate to agree on a package to repeal and replace the Affordable Care Act with their own legislation did not appear to dent market enthusiasm with a deregulatory-focused Republican Congress. Any of the prognostications regarding the future of the Republican Congress was predicated on a successful passage of tax reform legislation.
- However, both the House and Senate have introduced competing legislation to collapse the tax brackets and reduce the corporate tax rate. Several senators, including Susan Collins, John McCain, Jeff Flake, Bob Corker, Steve Daines, and Rand Paul, have expressed skepticism at certain parts of the tax bill, and just two defections, without the support of Democrats, would collapse the bill in the Senate.
- The repeal of the state and local tax deduction has also led to ire from House Republicans in liberal, higher tax states, imperiling passage of the bill in the lower house.
GRI take: Should a formal push to pass a tax bill in either house fail, it could collapse market confidence in the ability of a pro-market Congress to get anything passed, and could lead to broader market ramifications.