Global Issues to Watch - September 2012 by ISA - International Strategic Analysis

August 14, 2012 6:01 PM | Deleted user
Turkey's Slowing Economy (2012-09-12)
Economic growth in Turkey slowed to 2.9% on an annualized basis in the second quarter of 2012, down from the 3.3% growth recorded in the first quarter of this year and well below the soaring rates of economic growth recorded in the previous two years. This slowdown was largely the result of a fall in domestic demand in the second quarter, raising the potential for interest rate cuts in the months ahead. Despite this slowdown, Turkey has done pretty well to withstand the impact of the crisis in nearby Europe and should enter into a recovery next year.

Turkey’s economy had been one of the fastest-growing economies in the world in recent years, growing by 9.0% in 2010 and 8.5% in 2011. This growth was driven in large part by the expansion of Turkey’s domestic market and the partial recovery of key export markets in northern Europe. However, Turkey’s domestic market is now weakening, with both consumer and business spending cooling off after a period of rapid growth. Moreover, Europe remains Turkey’s key export market and as Europe’s economic downturn deepens, Turkey’s export prospects continue to worsen.

While the Turkish economy has slowed significantly from the heady days of 2010 and 2011, it appears that the Turkish economy will not experience a hard landing. This is important as until recently, the Turkish economy was characterized by massive volatility and frequent severe recessions. This improved stability is due largely to the rapid increase in purchasing power among Turkish consumers and the diversification of the economy, which is allowing Turkey to develop new export sectors. As a result, economic growth in Turkey is forecast to remain lower over the near-term, but a strong recovery is likely beginning sometime in 2013.

Rising Political Risk Levels (2012-09-11)
As we head into the final months of 2012, it is clear that political risk levels are rising to dangerous heights in many of the key regions of the world. A number of factors, including the worsening economic situations in Europe and many of the world’s key emerging markets, are converging to boost political risk levels. Moreover, the fact that the United States’ presidential election and the leadership transition in China are happening at roughly the same time means that politics in the world’s two most powerful countries will become more unpredictable over the near-term and a lack of leadership will manifest itself on the global stage.

Conflict and internal unrest risk remains dangerously high in many areas of the world, most notably the Middle East where the civil war in Syria threatens to spread outside of its borders and Iran continues to push forward with its controversial nuclear program. Moreover, food prices are forecast to soar in the coming months and this is likely to raise political tensions in poorer emerging markets, much as it did in the Middle East and North Africa before the Arab Spring. Meanwhile, elections will take place in deeply divided countries such as Venezuela, Ukraine and Romania later this year and, given these countries economic troubles, could lead to a rapid escalation of unrest in each of those countries.

In addition to the threat or war and unrest, there is a major risk stemming from what can be described as a lack of political leadership in the world in late 2012. This lack of leadership stems from a number of factors, including the upcoming presidential election in the United States, the transfer of power to a new generation of leaders in China, political gridlock in India and the ongoing economic meltdown in Europe. With this leadership vacuum forecast to remain in place until early next year, the threat of rising powers or non-state actors taking advantage of this lack of leadership will rise sharply and this could precipitate unrest in regions such as Persian Gulf, North Africa, the Caucasus or a host of other flashpoints around the world.

The Syrian Civil War (2012-09-05)
A few months ago, it appeared that Syria’s disparate groups of rebels were on the verge of taking control of many of Syria’s leading cities and ousting President Bashar al-Assad from power. However, without the hoped-for intervention by the armed forces of many Western and Middle Eastern powers, the rebels have lost much of their momentum, as the Syrian government has been able to use its significant air and armor power to drive the rebels out of many of the areas they had seized. As such, it is becoming clear that, without direct foreign intervention, Syria’s civil war is likely to drag on, leading to a major increase in the death toll in that country.

When Syrian rebels seized control of many areas of Syria’s leading two cities, Damascus and Aleppo, it appeared that it was only a matter of time before the Assad regime was driven from power or forced to seek sanctuary in the Alawite-dominated regions of northwestern Syria. Instead, the rebels lacked the capabilities needed to withstand the government’s counterattacks as Syria’s armed forces used significant numbers of warplanes and tanks for the first time in the civil war. As such, the rebels have suffered major losses in recent weeks and have been forced to cede hard-earned territory to Syria’s armed forces.

These setbacks have demonstrated the rebels’ need for more support from their allies in the West and the Middle East. As in Libya, the rebels have no chance to defeat the country’s armed forces without either major defections from the government side or direct military intervention by significant foreign armed forces. Meanwhile, the death toll in Syria continues to rise at an alarming rate, with more than 5,000 people being killed last month alone and with as many as 26,000 people having died since the start of the civil war 18 months ago. As the death toll continues to rise and as hundreds of thousands of refugees flee from the country, the pressure on the rebels’ foreign allies to intervene militarily will continue to mount.

India's Economic Troubles (2012-09-04)
While India’s economic growth rate rose slightly in the second quarter of this year, there are clear signs that a return to the higher growth rates achieved in earlier years will not occur over the near-term. Moreover, many of the factors that prevented the Indian economy from matching China’s growth rates over the past two decades remain in place and are once again threatening the longer-term health of India’s economy. With India’s political system continuing to hamper growth, India’s ability to achieve the growth rates it needs to match the world’s more dynamic emerging markets is in question.

India’s year-on-year economic growth rate rose slightly from 5.3% in the first quarter of 2012 to 5.5% in the second quarter. This was a slightly better performance than had been expected, but was nevertheless well below the levels of economic growth achieved in previous years. Growth was once again held back by the country’s central bank’s unwillingness to significantly lower interest rates, despite a recent downturn in inflation. Moreover, India’s manufacturing sector continued to struggle as a result of the sharp downturn in many of the country’s key export markets.

More worryingly for the Indian economy, there are a number of long-term factors that are preventing it from reaching its true potential. First and foremost, the chaotic Indian political system is holding back growth in foreign investment, as region-based political parties and special interest groups continue to block needed economic reforms. Second, India has not invested enough in its infrastructure, a factor that has severely hindered the development of India’s manufacturing sector. As a result, India’s ability to achieve the levels of economic growth needed to reduce the level of poverty in a largely poor country of 1.2 billion people is being hindered by the country’s unwieldy political system and there appears to be little chance that this will change for the better in the coming years.

Foreign Investment Trends in East Asia (2012-08-29)
While global foreign investment levels have declined in recent years as a result of the global economic crisis, foreign investment in East Asia continues to expand at a healthy pace. This foreign investment continues to be focused on East Asia’s traditional centers of manufacturing such as China, Japan, Singapore and Hong Kong, which received 82% of all of the FDI inflows into the region. However, other countries in East Asia have begun to receive higher levels of foreign investment in recent years, a trend that is forecast to continue in the years ahead.

In 2011, East Asia received $333.5 billion in foreign investment, up from $94.2 in 2002. This accounted for 21.9% of all of the global FDI inflows in the world in 2011, an increase over the 15.0% share of global FDI inflows that East Asia attracted in 2002. Of course, China (together with its territories of Hong Kong and Macau) continued to attract the bulk of the foreign investment in the region, but its share of the FDI inflows into East Asia fell from 66.7% in 2002 to 63.4% last year. Meanwhile, Singapore remained the world’s leading recipient of foreign investment on a per capita basis, receiving a massive $64.0 billion in foreign investment last year, more than any other country in the region apart from China.

One trend worth following with regards to foreign investment in East Asia is the rapid growth in foreign investment in two of the region’s most dynamic economies, Indonesia and Mongolia. Until 2010, Indonesia had struggled to attract foreign investment due to its sluggish economy and the threat of political unrest there. However, foreign investment in the region’s second-most-populous country has risen sharply over the past two years as Indonesia’s domestic market has begun to expand rapidly. Meanwhile, Mongolia has seen a major increase in foreign investment over the past two years as mining companies make major investments in that country’s vast mineral wealth. One other country to watch in the coming years will be Myanmar, as the recent political reforms there have opened that potentially large market to foreign investment for the first time.

Seeking Peace in Colombia (2012-08-28)
This week, Colombian President Juan Manuel Santos announced that his government had held exploratory talks in Cuba with the left-wing FARC rebel group in a bid to bring peace to Colombia. Furthermore, President Santos indicated that his government was willing to hold talks with other rebel groups and paramilitary organizations active in Colombia. Should these talks lead to peace and stability in Colombia, that country could begin to realize its true economic potential and become a major center for trade and investment in Latin America.

The exploratory talks between the Colombian government and the FARC rebels took place in Havana, one year after FARC leaders indicated that they were prepared to begin talks with the government. As the FARC leadership has been decimated by attacks from Colombia’s armed forces, the new leaders of the rebel group have proven to be far more interested in seeking a peace deal than their predecessors. Likewise, President Santos has used his two years in office to prepare for such talks, unlike his hardline predecessor Alvaro Uribe who ruled out any negotiations with the rebels. As a result, these exploratory talks have taken place and it appears that full-blown peace talks could begin later this year in Oslo and Havana.

These impending peace talks are raising hopes that peace and stability could finally come to Colombia after decades of war and unrest, allowing that country’s economy to realize its true potential. Already, Colombia’s economy has begun to grow at a healthier pace as the government has had success in bringing stability to more areas of the country, opening the door for foreign investment in Colombia’s energy and mining sectors. Should a peace deal be reached, Colombia could experience a surge in foreign investment, enabling that country’s economy to achieve soaring economic growth rates such as those achieved in neighboring Peru and Panama over the past decade, two countries that overcame similar challenges as Colombia.

Ethiopia After Zenawi (2012-08-22)
The death of Ethiopian Prime Minister Meles Zenawi has left a major power vacuum in that East African country of 94 million people. This power vacuum threatens to bring an end to the relative political stability that Ethiopia has experienced in recent years, as well as to that country’s recent run of strong economic growth. Moreover, Ethiopia is at the heart of one of the most unstable regions in the world, so a difficult transfer of power could have repercussions far outside of Ethiopia’s borders.

Prime Minister Meles Zenawi dominated Ethiopian politics from the time that his rebel forces overthrew Ethiopia’s communist dictatorship in 1991 until his recent death. While he was criticized for his crackdown on opposition movements inside Ethiopia, the United States and other Western powers quietly backed the prime minister for his ability to hold together his fractious country and his willingness to intervene against radical Islamist groups in neighboring Somalia. Moreover, his government’s economic policies helped Ethiopia to record some of the highest rates of economic growth in Sub-Saharan Africa in recent years.

Having held such a tight grip on power for so long, it is little surprise that there was no plan of succession in place in Ethiopia, creating a dangerous power vacuum. Initially, former Foreign Minister Hailemariam Desalegn has been tapped to be the interim prime minister. However, he is expected to face a number of challengers when the ruling EPRDF party meets next month and he could struggle to win over the country’s armed forces and intelligence leaders. Should a power struggle ensue, Ethiopia’s deep ethnic, religious and linguistic divisions could be reopened, exposing the country to the risk of internal unrest that could have a major impact across East Africa.

Russia and the WTO (2012-08-21)
Russia officially became the 156th member of the World Trade Organization (WTO) this week, becoming the final major global economy to join that organization. This brought an end to almost two decades of difficult negotiations on Russian entry into the WTO, as opposition to Russian membership was strong, both within and outside of Russia. As a result of Russia’s WTO membership, many sectors of the Russian economy will be exposed to international competition after decades of protection, while some global exporters will find major new opportunities inside Russia.

For Russia, the tariffs that had protected Russia’s outdated manufacturing sector from international competition will gradually be lifted as part of the conditions of Russia’s WTO membership. For example, Russia’s current average tariff on imports is 9.5%, but this will be reduced to 7.4% in 2013 and to 6.0% by 2015. With the Russian government realizing the danger of the Russian economy’s growing dependence on high natural resource prices for growth, it understood that it had to attract foreign investment into Russia’s manufacturing industries in order for them to modernize and to compete with international manufacturers. If successful, this could allow Russia to develop manufacturing industries that could one day export their products around the world.

For international exporters, Russia’s entry into the WTO will give them greater access to a market of 140 million people. Over the next three years, exports to Russia are forecast to grow 50% faster than to other large emerging markets as a result of WTO membership. One sector that is poised for significant growth is high-end consumer goods, due to the lack of serious domestic competition in Russia. Significant growth is also expected for agricultural exports to Russia as Russia’s agricultural sector has struggled in recent years. On the downside, Russia’s growth potential remains limited by its shrinking domestic population and the rising threats to the country’s economy.

Europe's Shrinking Economy (2012-08-14)
Europe’s economy continued to contract in the second quarter of this year, as austerity measures continued to weaken Europe’s already struggling domestic market. This was particularly the case in southern Europe, where the region’s most debt-laden economies remained in a deep recession. The lone bright spot was found among Europe’s leading exporting economies, where the economic slowdown was tempered by export growth that was spurred by the weakened euro.

The European Union’s economy contracted by 0.2% on an annualized basis in the second quarter of 2012, its first overall contraction in more than two years. This was a slightly better performance than had been expected as the weak euro helped to bolster the economies of key exporters such as Germany (1.0% GDP growth), Sweden (2.2%) and parts of Central Europe. In contrast, southern Europe remained mired in a deep recession, highlighted by the severe contractions in Greece (-6.2%), Portugal (-3.3%), Italy (-2.5%), Cyprus (-2.4%) and Spain (-1.0%). Meanwhile, key economies such as Britain (-0.8%) and France (0.3%) continued to struggle as well.

Unfortunately for Europe, the outlook for the second half of 2012 has deteriorated and it is likely that the region’s economic downturn will deepen. In southern Europe, economic growth is unlikely to return until at least 2014 as austerity measures continue to make dramatic cuts in government spending and as unemployment rates continue to soar, weakening domestic demand. Meanwhile, northern Europe is threatened by the weakening of key export markets in Asia, as well as domestic markets that will record little growth in the coming years. As such, Europe’s economic crisis is almost certain to worsen, while the prospects for a major collapse remain in place as the future of the euro remains uncertain. Should more economies in the region require international bailouts and should one or more countries be ejected from the Eurozone, the region could be headed for a recession much worse than that experienced in 2008 and 2009.

Reprinted from ISA Report published August 14, 2012 (updated September 12, 2012), International Strategic Analysis,  
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