From M&G's Bond Vigilantes:
Last year was very eventful in emerging markets with its share of US
tariffs/sanctions, regime changes in many countries, mass protests
across the board and Carlos Ghosn escaping Japan to soon-to-default
Lebanon on the very last day of the year! 2020 promises many
geopolitical risks. We have compiled some of the key risks below for
developing economies, including “the biggest crisis no one is talking
about”. Brexit has been intentionally omitted.
Persian Gulf tensions: One knows geopolitical risk
matters when a few unsophisticated drones can suspend 5% of global oil
supply (or 50% of Saudi Arabia’s oil capacity) over one night. It
happened in September 2019 and it reminded everyone not only how fragile
the Persian Gulf status quo was but also the far-reaching impact any
type of escalation could have for the rest of the world with crude oil
up +15% the day following the drone attack. Whilst the strait of Hormuz
crisis seems to have abated in the second half of 2019, Iran now faces
parliamentary election in February 2020 in a context of a sharp economic
recession (IMF predicts -9.5% GDP growth in 2020) after two years of
unilateral sanctions from the US (since May 2018). Elections could well
revive tensions this year and escalation in the Middle-East could have a
significant impact on asset prices in the region as the risk premium
remains relatively low in some stronger-rated countries such as Saudi
Arabia, Qatar, Kuwait or the UAE. Some weaker countries like Bahrain or
deteriorating credit stories like Oman are even more vulnerable.
Finally, another source of concern is Iraq where public discontent is
growing quickly on the back of government corruption allegation.
Elections in 2020 are a possible scenario and Saudi Arabia’s influence
in the country has increased in order to counter-balance Iran’s alleged
control of some Iraqi Shia militias. The pro-Iranian demonstration at
the American Embassy in Baghdad a couple of days ago, followed by the US
killing of a top Iranian General in Iraq on 2nd Jan, are here to remind us that the US-Iran tensions are unlikely to vanish in 2020.
US-China trade war: This is one of the biggest risks
for emerging markets whose economies continue to rely extensively on
global trade. The main channel of contagion comes from weaker Chinese
GDP in turn resulting in lower demand for commodities. For instance,
Sub-Sahara Africa is China’s second-largest supplier of crude oil after
the Middle-East and also provides metals. Since 2014, most countries in
the region have seen a significant decline in trade with China after two
decades of growth. The US-China trade war has obviously exacerbated the
global trade problem and some Asian economies are now seeing falling
supply-chain related exports due to the decline in China exports to the
US. However, some developing countries have emerged as winners. Vietnam,
Mexico, Malaysia and Thailand all have benefited from either a direct
rise in exports due to diverted US demand from China and/or an indirect
rise in exports related to the supply chain of China’s competitors.
There is also hope for a sustainable deal between China and the US which
would revive global growth in 2020 and beyond. In December, both
parties agreed on the “phase one” deal with some reduced US tariffs in
exchange of improved protection for US intellectual property and
additional purchase of US products from China. Rather truce than a deal
though. The trade war is likely here to stay.
Taiwan elections, Hong Kong, North Korea and South China
Sea: The incumbent President Tsai (Democratic Progressive Party) is likely
to be re-elected in the Taiwanese January 11th presidential
elections. Her party benefited from stronger economic data in recent months
thanks to the US-China trade war which redirected some manufacturing to the
island. The Hong Kong protests have also helped the independence-leaning party
to gain ground over rival and more China-friendly opposition party. In Hong
Kong, the protests that started in June 2019 are due to continue in January as
the pro-democracy protesters now have more political capital since the
landslide victory at the Nov-19 local elections. The domestic issues, coupled
with the US-China trade war, have had a sharp impact on economic activity and
job losses. The Chinese authorities have so far been relatively quiet but that
might change after the Taiwanese elections. Elsewhere in Asia, year-end 2019
had its share of geopolitical escalation. North Korea said that it was
considering new missile testing, against the commitments taken to denuclearised
the Korean Peninsula. Malaysia recently joined Vietnam and the Philippines in
their tough stance against China’s claim that the whole South China Sea belongs
to China. The South China Sea has long been contested by many parties due to
its geostrategic importance (military, shipping lines, natural resources)....
*****
....Water Stress – “The biggest crisis no one is talking about”: In
August, this is how the World Resources Institute (WRI) – which focuses
on climate, food, forests and other environmental and social issues
since 1982 – described global water stress risk. The June-2019 Chennai
water crisis was just an example of this, when tap water had stopped
running in India’s fourth-largest city (8 million people) after two
years of bad monsoon rainfall and also because rivers are polluted with
sewage. Unlike the emotionally-driven climate activism from Greta
Thunberg, global research organisation WRI published in August 2019 a
research-backed Aqueduct Water Risk Atlas (cf. picture) which found that
17 countries accounting for a quarter of the world’s population were
facing extremely high water stress with consequences “in the form of
food insecurity, conflict and migration, and financial instability”....MUCH MORE
