Global Issues to Watch - April 2013 by ISA - International Strategic Analysis

April 05, 2013 1:00 PM | Deleted user
Global Political Risk Levels Rise (2013-04-10)
Tensions on the Korean Peninsula, Iran’s nuclear program and a host of other issues are resulting in higher global political risk levels that are threatening to destabilize many areas of the world. Moreover, simmering political disputes in many areas of the world, particularly Asia, have the potential to emerge as major risks to global stability in the months ahead. In addition to the security implications, these rising political risk levels have the potential to derail the tentative economic recovery that is underway in many areas of the world. 

Over the near-term, the potential for a conflict on the Korean Peninsula or in the Persian Gulf has risen as both North Korea and Iran proceed to push forward with their nuclear programs. While North Korea is currently attracting much of the world’s attention due to its bellicosity, the potential for a full-blown conflict involving Iran remains greater. Another factor that is driving up global political risk levels is the large number of territorial disputes in Asia, many of which involve that region’s leading power, China. As these disputes linger, the potential for clashes between China and its neighbors will rise and this could quickly escalate into a wider conflict that will destabilize that vital region.

Even if these potential conflicts are avoided (and we forecast that none of these potential conflicts will erupt over the next six months), the fact that they have led to rising political tensions is having a noticeable impact on the global economy. Most importantly, these tensions are damaging business and investor confidence levels in many key economies. Furthermore, the greatest risks at present are located at the heart of two of the world’s most economically influential regions (East Asia and the Middle East). As we have seen in the Middle East and in southern Europe, economic and political risk levels are often correlated and can drive one another upwards to very dangerous levels and here lies the greatest risk at present.

Will Shinzo Abe Save Japan? (2013-04-09)
For the past two decades, Japan has been mired in an economic slump that has brought deflation and stagnation to what was once the world’s most dynamic developed economy. Moreover, Japan’s plight has led many economists to conclude that other aging developed economies such as Europe were bound to suffer the same fate as the Japanese economy. However, under new Prime Minister Shinzo Abe, the Japanese government is undertaking a series of significant policy shifts for Japanese economy that might just revive the world’s third-largest economy and offer hope to other aging developed economies around the world.

Since taking office in December 2012, Prime Minister Abe and his Liberal Democratic-led government have undertaken a number of steps designed to bring an end to Japan’s two-decade slump. First, the government, together with the Bank of Japan, has raised the country’s inflation target to 2% while forcing down the value of the yen. This has helped to significantly improve Japan’s export competitiveness that has been eroded by competitors in Asia over the past two decades. Meanwhile, the government has introduced a series of massive economic stimulus programs designed to boost domestic spending at a time when the domestic market has continued to shrink as Japan’s population declines and as deflationary pressures have persisted.

It remains to be seen if these policies will raise the average Japanese economic growth rate to 2% as the government hopes, but there is little question that without these moves, Japan’s long-term decline would continue. While these policies may boost domestic demand over the short-term, Japan’s continued demographic decline will make it difficult to sustain domestic demand growth over a longer period. As for exports, Japan’s export competiveness looks set to improve over the near-term, but international competition will remain fierce. Moreover, tense relations with China could stymie growth in what has been the fastest-growing market for Japanese exports in recent years. Nevertheless, Japan, unlike Eurozone economies, has control over its monetary policy and this has given Japan a ray of hope, at least over the near-term.

Could Oil Prices Soar in 2013? (2013-04-03)
Oil prices have remained relatively stable over the past two years, albeit at a level that is well above the average of the previous three decades. This stability followed a period of extreme volatility that saw oil prices reach a record high in the 2008 before they plummeted in the wake of the global economic crisis later that year. Oil prices rose again from the second half of 2010 to early 2011, and since then, have remained near current levels. While there is increasing speculation that oil prices could be set for a sharp fall, there is also a considerable chance that oil prices are on the verge of another major upturn.

There are a number of factors in place this year that suggest that there is a real possibility of a 25% or more increase in oil prices in the coming months. First, the potential for shocks in key oil producing areas (most notably in Iran and its neighbors) remains high as the potential for a conflict over Iran’s nuclear program remains in place. Second, oil demand that has been weakened by the downturn in Asia last year is set to increase significantly as economic growth in China, India and many other Asian economies increases. This is important as it was soaring demand in Asia that was the single largest reason for the 170% increase in oil prices from early 2007 until mid-2008.

For some economists, the recent shale gas and oil boom in the United States and the expansion of deep water drilling around the world are leading to expectations that oil prices will trend downwards over the long-term. However, we believe that growth in demand for oil (particularly in Asia, but also in other emerging markets) will significantly exceed the increase in oil output over the coming decade. The dramatic expansion of the transportation industry in China, India, Indonesia and other large emerging markets is forecast to lead to a massive increase in global oil demand in the coming years. As such, we believe that oil prices are likely to reach $200 a barrel or more before the end of this decade. For the oil industry and oil-producing countries, this will prove to be a major boost for growth, but for energy-poor countries, this will prove to be a major drag on their economies.

Is North Korea a Real Threat? (2013-04-02)
North Korea could not have had a doubt that the international community would place new sanctions on it when it decided to carry out its third nuclear test earlier this year. After all, not only had the United States warned North Korea not to proceed with this test, but so had its closest ally, China. Nevertheless, when the United Nations Security Council imposed tough new sanctions against North Korea last month, it responded with some of the harshest threats against the United States, South Korea and Japan that it had ever issued, raising tensions in Northeast Asia to their highest level in recent years.

Despite the fact that North Korea has increased its threats against its perceived enemies and placed its armed forces on high alert, the threat of a major attack by North Korea against South Korea or the United States remains small. For one, the gap in military power between South Korea and North Korea has widened considerably in recent years, while South Korea’s US ally has a level of military power that dwarves that of North Korea. Moreover, the United States has vowed to come to the defense of South Korea against any provocation from North Korea, no matter how small. This should be enough to deter Pyongyang from taking any steps that could lead to a war on the Korean Peninsula that it could not win.

Nevertheless, with tensions having risen so far and with the armed forces of North Korea, South Korea and the United States on high alert, the potential for a clash on the Korean Peninsula remains in place. For example, some experts believe that North Korea’s radical behavior in recent weeks is the sign of a power struggle among North Korea’s elite and this could lead to some act of provocation by North Korea’s armed forces, triggering a larger conflict. Moreover, North Korea sank a South Korean naval vessel and shelled a South Korean island back in 2010, highlighting the fact that it is prepared to prick its more powerful neighbor at any time. If decides to act in such a manner this time, however, it could find itself up against a much more powerful force that will not hesitate to strike back.

Mixed Signals from Latin America (2013-03-26)
Over the past year, there has been a sizeable divergence in the economic performance of Latin America’s leading economies. Moreover, there is a growing divergence in the economic competitiveness of that region’s economies and this will have major implications for the future of Latin America. While some countries in the region appear destined to record mediocre rates of economic growth in the coming years, other Latin American economies could be on the verge of a major increase in economic growth rates.

Over the past year, many of Latin America’s leading economies have suffered from major slowdowns or from a sharp increase in their level of economic risk. For example, Brazil has experienced a sharp decline in its economic competitiveness and this has led to major problems for that country’s manufacturing sector and has resulted in a very disappointing economic performance over the past year. Other sizeable economies such as Argentina and Venezuela have suffered from severe economic mismanagement that is leading to soaring rates of inflation and the potential for a long-term loss of economic competitiveness.

In contrast, some Latin American economies are making major strides and are likely to experience strong rates of economic growth in the years ahead. For example, the resource-rich countries along South America’s Pacific Coast such as Peru and Chile have experienced strong rates of growth thanks to rising export demand in Asia, but also because of sound economic policies in recent years. Meanwhile, the region’s second-largest economy, Mexico, has taken great strides in improving its export competitiveness and this should allow for Mexico to experience a long period of solid economic growth. These economies should serve as a strong example to the rest of the region as to what can be done if a country takes the steps needed to boost its economic competitiveness.

The World's Most Unstable Region (2013-03-25)
While other regions such as the Middle East and Central Asia attract more attention from the international media, there is no region in the world that is more unstable now than Africa’s Sahel and the region to its immediate south. From Senegal in the West to Eritrea in the East, this long and arid region is home to numerous conflicts that are destabilizing more than a dozen countries across the north and the center of Africa. Moreover, this region is now home to some of the world’s most dangerous militants that, while still small and limited in their capability to carry out large attacks, are nevertheless an increasing threat to global stability.

A number of factors have combined to make the Sahel and its surroundings such an unstable region. First, the vast size of the region and the fact that it is so sparsely populated have resulted in a huge region in which outside powers struggle to maintain their authority. Second, rising populations and dwindling water and food resources have led to clashes between rival groups throughout the region. Finally, the civil war in Libya and the collapse of the Qaddafi regime resulted in a major inflow of arms into the Sahel as mercenaries from the region that had worked for the Qaddafi government returned home flush with weapons. As a result, the region is now facing a series of wars and insurgencies that are proving difficult to manage.

The most prominent conflict in the region has been the war in Mali that prompted French and African intervention to force Islamist militants out of their strongholds in northern Mali. The most deadly conflicts in the region have been found in the East, involving Eritrea and Ethiopia, as well as Sudan and South Sudan. In recent months, major unrest has broken out in northern Nigeria, while rebels have recently ousted the government of the Central African Republic. Altogether, there is little chance for improved stability in the Sahel as long as population growth continues and resources dwindle and this will allow for both local and international militant groups to expand their presence in this vast region.

Reprinted from ISA Report published April 5, 2013 (updated April 10, 2013), International Strategic Analysis,  
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