Geopolitical Issues to Watch in 2016
Date: 25 May 2016 Share on Twitter Share on Facebook
International emerging powers are progressively using their economic assets and resilience, which were exposed during the global financial crisis, to gain global control. Their influence is revealed by reports of many global organizations, from the IMF to the G-20. With regard to dealing with international problems these powers have slowly become irreplaceable. Interestingly, they are leveraging their financial relationships to develop their geopolitical influence. This may create a completely different status quo, so let’s have a closer look at some of the countries that may well influence the future of business.
As I wrote in a previous article – that Saudi Aramco was facing an IPO with a valuation in the trillions of dollars – it seems inevitable that Saudi Arabia is going to have a considerable impact on the rest of the financial year. We have already seen serious strains on the country’s GDP and deficit, and it doesn’t look as if things are going to get better unless Aramco goes up for sale. For instance, the country’s budget deficit currently sits at around 20% of its GDP, and combined with the aforementioned IPO the government has announced a debt issuance scheme that can best be described as aggressive. Well, some readers may be thinking, ‘But isn’t oil private equity in a way?’ No. Not when it comes to Saudi Arabia. Aramco is a government run, multi-corporation which makes Enron and the rest look miniature in comparison. So if Saudi Arabia is selling off its key assets, its sure the entire economic world is going to feel the repercussions.
Higher wages versus lower profitability
Yet another subject I recently wrote an article on. It looks as if this year we’re going to see a serious effort made globally to tackle the pressing issue of income inequality, especially in the West. This has been particularly triggered by the fact that the issue of the 1% has probably not been so topical since the 1920s: never before has the income gap been so colossal. As a result, large companies and corporations in the English-speaking world at least are raising wages – something driven too by the current lack of suitably qualified staff, and a move towards even greater democracy and socialism in Western politics. But while this is all very commendable, it’s having an adverse impact between a third and a half of all companies (according to US market research), as their corporate profitability is taking a major hit. This a global issue.
It looks as if the break up of the state of Iraq is increasingly inevitable. There are simply too many political and religious factions to make the current system of government sustainable. For, while the Shiite-headed government, as well as the Kurds and Sunnis currently have their attention focused on fending off ISIS (with limited success it should be added), the number of secessionist military forces is rising in Kurdistan and other Sunni areas of the country. We recently even saw a breaking of the Kurdish from Baghdad’s authority completely, as they decided to directly market and export their own oil without the government’s say-so. On top of this, the Kurdish hierarchy has been pushing Washington to allow it status as an independent state – a type of federal break-up that would almost certainly only debilitate the country further and increase the level and severity of border disputes between neighbouring countries. With Iraq being one of the world’s largest oil providers (alongside Saudi Arabia), this could have a severe impact on the rest of the world, given that oil prices do not currently have a geopolitical risk premium attached to them.
Political and economic tension is rising in China. And it’s proving hard to either ignore or see past. As well as a recent and serious slow-up in its economy, China is also currently trying to assert its claim to sovereignty over a huge part of the South China Sea, while also rapidly building facilities that look suspiciously like military installations. This shady action can only raise tensions between the countries involved in the dispute, who will also likely be pushing for a more military-minded Japan to keep the Chinese expansion in check. And what’s more, Taiwan is holding elections shortly with the pro-independence party expected to win. Tensions can only rise from here, it seems, making investment risky.
Brexit in the EU
The conflicting parties in the EU referendum are actually much closer than previously expected, so frankly come late June it’s hard to predict what’s going to happen, even if Boris Johnson is determined to repeatedly put his foot in it. But if Britain does end up leaving the EU, asset prices will likely plunge and international investment will take a major hit.
Last but by no means the least important geopolitical issue of the year is the upcoming Presidential Election stateside. The candidates for the parties haven’t even been finalized and already they cause waves financially – for example, all HRC needed to do was send a tweet bemoaning excessive pharma prices and share prices crashed, while it already looks like Donald Trump will put protectionist measures in place should he win the race – both factors which will impact emerging markets. Whoever wins, experts are predicting a significant rise in the levels of infrastructure-geared investment, especially in the US economy continues to slow in its growth. This could be a silver lining for commodity markets, which look set to suffer what with the slow of demand coming out of China.