43
EEUR 67 OCE 68 WEUR 87 SAS 33 SEA 53 CAS 48 ME 60 EAS 57 SA 66 AF 29 NA 88 CA 53 Internet penetration by region (% of total population) Jan 2017
EE
UR
67
OC
E
68
WE
UR
87
SA
S
33
SE
A
53
CA
S
48
ME
60
EA
S
57
SA
66
AF
29
NA
88
CA
53
Inte
rnet p
en
etration b
y reg
ion
(% o
f total p
op
ulatio
n) Jan 20
17
Source: We Are Social / Hootsuite ‘Digital in 2017 Global Overview’
Active acco
un
ts on to
p so
cial m
ed
ia netw
ork b
y reg
ion
(millio
ns) Jan 2
017
NA
23
7
SA
25
0
WE
UR
22
6
CA
112
SE
A
30
6
EE
UR
187
SA
S
26
4
OC
E
21
AF
170
CA
S
5
ME
93
EA
S
919
A warm welcome to Global Horizons 2017,Oxford Analytica’s 34th Annual Conference
Looking back at the long history of our Annual Conference, it is hard to think of a time when there is greater need for a clear-eyed, expert assessment of the global political economy, what it means for business, government and the ordinary citizen.
New forces, movements and leaders are upending established patterns of power. Technology continues to disrupt business, society and politics. The quest to reconcile the pursuit of material well-being with the fragile environ-
ment we inhabit is spawning challenges, just as it is sparking innovation and opening promising new vistas.
In short, ours is an age of upheaval, as rich in promise as it is fraught with peril. Above all, it is an age that demands understanding and interpretation – one in which for-tune indeed favours the prepared mind.
This is the main purpose of Oxford Analytica’s 34th Annual Conference – Global Horizons 2017.
This year’s event takes place at Oxford’s Christ Church College and Blenheim Palace, two splendid settings in themselves and conducive to hard thinking about the shape of the world.
As always, we convene our experts, clients and delegates for two and a half days of discussions, conversations and keynote speeches about the shape of the world, inter-spersed with valuable networking opportunities.
This tried and tested approach, and particularly the small discussion seminars at the heart of the programme, is what makes our Annual Conference unique.
It is why the Conference is now in its 34th consecutive year, and why so many of our attendees have become ‘regulars’ over the years, alongside the ‘new faces’ we are always pleased to welcome.
As a delegate, you will enjoy complimentary access to the Oxford Analytica Daily Brief. Delivered to some 200 clients in government, business and international organisa-tions from around the world, the Daily Brief draws on our global network of academics and experts to provide authoritative, impartial analysis of key events and trends.
Keynote speakers at this year’s conference include Ann Mettler, Director-General at the European Commission, and Head of the European Political Strategy Centre (EPSC) who will address us over dinner in Christ Church on Wednesday evening. Alexander Stubb, former Prime Minister of Finland and now Vice President of the European Investment Bank, will deliver the Blenheim Address on Friday evening. Both speakers will have much to say to those of us keen to understand our times, and to learn how to prosper in them.
Our principal conference partner, for the third consecutive year, is the Cook Trust. We are also delighted to work again with Willis Towers Watson Financial Solutions and with Chevron. Thomson Reuters and the New York Times are our customary, much-valued media partners and this year we also welcome a new relationship with APCO Worldwide as our communications partner.
Every Annual Conference is an exciting and eventful journey. I am confident that our 34th gathering will be no exception.
On behalf of Dr David Young, Founder and President of Oxford Analytica, the firm’s Board and its Leadership Team, it remains for me to thank you for joining us, and to say that I look forward to meeting you personally over the next few days.
David K. Young Global Managing Director
WEDNESDAY
THURSDAY
Registration Opens
Welcome remarksDavid K. Young, Global Managing Director, Oxford Analytica St Aldates Church
Opening debateMOTION: SOCIAL MEDIA, FAR FROM ENLIGHTENING THE PUBLIC, REINFORCES PREJUDICE St Aldates Church
Drinks Reception The Deanery
Opening Dinner Guest speaker: Ann Mettler, Director-General at the European Commission, Head of the European Political Strategy Centre (EPSC) The Great Hall
Oxford Analytica Morning Conference McKenna Room
Conversation options:
A MANUFACTURING RE-MADE The Sir Michael Dummett Lecture Theatre
B GLOBAL TRENDS St Aldates Church
Concurrent discussion seminars
Coffee Break JCR
Conversation options:
A FINTECH The Sir Michael Dummett Lecture Theatre
B HOW IS POLITICAL RISK MANAGEMENT CHANGING? St Aldates Church
Lunch The Great Hall
Concurrent discussion seminars
Tea Break JCR
Concurrent discussion seminars
September 20
September 21
14.00
16.00 – 16.10
16.15
17.30
19.00
07.45 – 08.45
09.00 – 10.00
10.10 – 11.40
11.40 – 12.15
12.20 – 13.20
13.30 – 14.30
14.40 – 16.00
16.00 – 16.25
16.30 – 18.00
September 22
Conference Agenda
FRIDAYSeptember 22
18.30 – 19.15
19.15 – 20.30
20.45 – 21.30
07.45 – 08.45
09.00 – 10.30
10.30 – 11.10
11.15 – 12.45
12.50 – 13.50
14.00 – 15.30
15.30 – 15.55
16.00 – 17.00
17.00 – 17.10
18.30
19.30
20.00 – 23.00
23.00
Oxford Analytica Morning Conference McKenna Room
Panel discussionCYBERSECURITY The Sir Michael Dummett Lecture Theatre
Concurrent discussion seminars
Coffee Break JCR
Panel discussionA WORLD RE-ORDERED St Aldates Church
Concurrent discussion seminars
Lunch The Great Hall
Concurrent discussion seminars
Tea Break JCR
Closing DebateMOTION: THE ERA OF ‘HIGH GLOBALISATION’ IS OVER St Aldates Church
Concluding RemarksDavid K. Young, Global Managing Director, Oxford Analytica St Aldates Church
Coaches Depart for Blenheim Palace Tom Gate, Christ Church
Drinks Reception at Blenheim Palace
Blenheim Palace DinnerKeynote speaker: Alexander Stubb, former Prime Minister of Finland and Vice President of The European Investment Bank
Carriages
Drinks Reception Pocock Garden
Dinner The Great Hall
Evening Concert Christ Church Cathedral
Evening Discussion CAN TERRORISM EVER BE TAMED? McKenna Room
The 34th Oxford Analytica ConferenceGlobal Horizons
Global Horizons 2017 5
IntroductionGeopolitics is the new economics
Russia / CISSeeking a new narrative
The Middle East: Conflict and disorderChaos, Kurds and confusion
The Middle East: Economics and governanceDeficits, diversification and divisions
Latin America A potentially transformative year China Reform and repression India Risk of complacency
Africa Uncertain transition South-east Asia Pivotal times and policy tests The United States The outsider in the White House East Asia Regional reordering Europe A comeback of sorts Global Economy Sanguinity amid uncertainty
Contents
07
10
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24
26
30
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34
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2017
Global Horizons 2017 7
2017
The 34th Oxford Analytica ConferenceGlobal Horizons
Geopolitics is the new economics This booklet provides a collection of background brief-ings for the three days of plenaries, panels and personal conversations that constitute Global Horizons, 2017.
When we gathered at Christ Church a year ago, the shock of the United Kingdom’s referendum vote to leave the EU was reverberating strongly, and an insurgent Donald Trump was closing in on his election as president of the United States.
The tremors from ‘Brexit’ have diminished, at least outside the United Kingdom. Inside it, Brexit has redrawn the fault lines of UK electoral politics, as Prime Minister Theresa May found to her cost in June.
For Brussels, Brexit has become a second-tier tech-nical issue of London settling its bill as it goes out the door. It has weightier matters – Russia, China, Trump – to attend to, as well as those of its future under a revitalised Franco-German leadership that will no longer need to accommodate London.
In marked contrast, the consequences of Donald Trump’s election and the conduct of his administration since taking office have only amplified the concerns and conster-nation felt by the United States’ allies and adversaries alike.
If there is one word that runs through all the papers in this edition of The Issues, it is ‘Trump’.
His is a presidency like none other the United States has seen. The question is whether it is an aberration or a harbin-ger of a future in a world where traditional nodes of power are fragmenting and reassembling in unexpected ways.
Will the populist, mercantilist, authoritarian-leaning nationalist, as adept at exploiting identity and personal-ity politics as social media, be commonplace? Look at China, Russia, Turkey, Hungary, and perhaps Italy next year, and the question is not open and shut.
Will that mean the disintegration of the liberal demo-cratic international order that has prevailed for the past 60 years or force a reinvention of it? Will it leave a global leadership vacuum that Russia, overtly, and China, cov-ertly, yearn to fill?
Is this their time and opportunity to seize?Enabling you to navigate the risks and opportunities of
this complex, changing geopolitical and macroeconomic landscape is our perennial purpose at Global Horizons.
Today, more than ever, requires as much of an understanding of the geopolitical underpinnings as the economic fundamentals, whether you are a corporate strategist, policymaker or investor.
My colleagues and I look forward to engaging in that with you over the next three days.
Paul MaidmentManaging Editor & Director of Analysis
Enabling the world’s leading organisations to navigate the shifting landscape of global business and politics
www.oxan.com
Many things have gone President Vladimir Putin’s way: his path to re-election next March looks unimpeded; the military campaign in Syria has progressed better than expected; and the Russian economy has been out of reces-sion for almost a year.
All this scope for optimism is set back by one factor that has proved to be beyond the Kremlin’s control, whether despite or because of its alleged election meddling.
US President Donald Trump seemed to promise a ‘re-set’ in relations in which he would treat Russia as an equal power, remove sanctions and offer deals based on pragmatic interest rather than ideologi-cal differences.
None of that has happened.Putin’s first meeting with Trump in June seemed to
offer hope of a partial breakthrough, but the result was only more disappointment, expressed through Moscow’s expulsions of US embassy staff.
Enervated economy
The economy is expected to show 1.5-2.0% growth in 2017, assuming global oil prices remain steady. Investment growth is sluggish, but there are a few posi-tive indicators elsewhere.
The central bank believes it will achieve the target rate of 4% inflation this year and is cautiously lowering its key interest rate. External debt looks manageable. Foreign exchange reserves are in healthy shape, having surpassed 400 billion dollars for the first time since 2014.
There is, however, little prospect of growth accel-erating over the next five years. Russian advocates of reform are warning that continued Western sanctions mean missing out on capital and technologies essential for both a more diverse economy and sustained levels of
oil production. Hydrocarbons continue to be the cen-
tral factor shaping economic performance. Oil output remains at a post-Soviet high, but the future lies in a shift from depleted
Siberian fields to less accessible Arctic offshore and shale oil. Western sanctions block access to much of the tech-nology needed to start this transformation.
Patriotism palls
Muted economic prospects mean that living standards will take a long time to rise following recent years’ pre-cipitous declines. The compact that exchanged prosperity for many civil liberties is no longer sustainable.
The patriotic narrative that replaced it, provided by Ukraine and to a lesser extent Syria, is running out of steam. The Kremlin is casting about for a new vision of Russia – or of Putin personally – to present to apathetic voters ahead of the presidential election.
Votes for Putin will stem more from a preference for the known status quo than from excitement about uncer-tain prospects.
In 2018, Putin is unlikely to face a coordinated chal-lenge. The most prominent figure prepared to stand against him, Alexey Navalny, has successfully mobilised
Short-term successes do not mitigate future economic and societal challenges
Russia/CIS
Seeking a new narrative
Reformers warn that continued sanctions will depress growth
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Global Horizons 2017 11
to linger on as unrecognised statelets, in the fashion of Transnistria, Moscow will have to foot the bill for their civilian as well as military budgets.
With no apparent end in sight, Syria, too, is proving a lengthy commitment.
Demilitarised zones have worked well in marginalising rebel groups, but a stably governed, united client state is a remote prospect.
Russia struggles to find partners elsewhere in the world as substitutes for Western states. China is aligned on international approaches and domestic curbs on freedoms, but the economic relationship tilts heavily in Beijing’s favour. One key aspect of this relationship is China’s continuing appetite for hi-tech Russian weapons.
More generally, the Russian defence industry is seek-ing clients across South-east Asia and the Middle East. As with energy investments, political alignment plays a part, but Russia is also happy to sell to Gulf Arab states.
nationwide protests around corruption but is unlikely to muster a broad enough electoral following to seriously challenge Putin, should he even be allowed to.
The near-certainty that Putin will have one more term as president means that in the short term attention will focus on his cabi-net choices as a way of divining who might succeed him. Potential candidates and factions are already manoeu-vring for position.
Adventurism awry
The foreign interventions that boosted Putin’s domes-tic popularity levels have proved inconclusive, and risk becoming liabilities if left to fester.
Moscow can still hurt Ukraine via the eastern rebel-held zone but has little hope of translating this into broader control of the country. If it allows the rebel areas
Once-successful foreign interventions risk becoming liabilities
0
100
200
300
400
500
600
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Central Bank of Russia
Russia: International reserves (billion dollars)
Forecasts
Sources: actual, Rosstat; forecast, OECD
Russia: Quarterly GDP data (year-on-year % change)
-0.5
0
0.5
1.0
1.5
2.0
2016 2017
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4-2
-1
0
1
2
3
2016 2017 2018 2019
Source: Central Bank of Russia
Russia: Fixed investment, 2016-19 (% change year-on-year)
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Excitement about beating back Islamic State in Iraq and Syria is only partially justified
The Middle East: Conflict and disorder
Chaos, Kurds and confusion
Six years on from the Arab uprisings of 2011, the Middle East still reels from their effects. Conflict continues in Libya, Syria and Yemen, if with somewhat diminished intensity.
The pushback of Islamic State from its areas of con-trol in Iraq and Libya has eroded the group’s prominence in the media. However, the movement is far from eradicated. While a push against the group in Syria is unlikely to be forthcoming soon, there are signs that Islamic State is regrouping in Libya.
The group is taking advantage of the fragmentation of Libya’s state – a situation that shows little sign of imminent reversal. Tripoli’s UN-brokered government has limited control over the various armed factions; the strongest city in the west, Misrata, is divided internally; and Khalifa Haftar, the strongman in the east, shows little interest in compromise and negotia-tion. Bringing these groups to the negotiating table is a tall order.
Qatar crack
A more fundamental problem is a new rift in the Middle East between Qatar on one side and Egypt, Saudi Arabia, Bahrain and the United Arab Emirates (UAE) on the other, over alleged support for ‘ter-rorism’, Iran and the Muslim Brotherhood.
The affair’s repercussions are particu-larly acute in Libya, where the two factions have often found themselves on opposing sides. Saudi, the UAE and Egypt back Haftar, while Qatar and Turkey have supported western and other factions with more overt Islamist undertones.
Erodgan's exceptionalism
Ankara quickly took Doha’s side in the dispute with Riyadh and Abu Dhabi, sending supplies against the
blockade, refusing calls to close its mili-tary base and defiantly carrying out joint exercises. Turkey's increasing international isolation will reinforce reluctance to aban-don a long-time ally.
For President Recep Tayyip Erdogan, foreign policy consolidates domestic sup-
port, as he champions Turkey’s national interests and restores what he sees as its rightful place in the world.
Deteriorating relations with the EU are thus por-trayed as European Islamophobes’ fault. The Kurdish insurgency also rallies Turks around the president in his struggles with separatism.
Kurdish concern
Developments in Iraq and Syria make the Kurdish ques-tion even more acute.
The imminent independence referendum in the Kurdistan Region of Iraq is causing grave concern in other
countries with Kurdish minorities, includ-ing Iran and Turkey. It could also destabi-lise politics in Baghdad. Many Sunnis, just emerging from the Islamic State nightmare, see the Kurds as their only ally against an overweening Shia majority.
Meanwhile, Iran-backed Shia militias are operating largely outside state control, while no politician seems to have a clear vision for the future of the Sunnis.
Foreign policy solidifies domestic support for Turkey’s President Erdogan
Syrian Kurds, the key US ally against Islamic State, are otherwise isolated
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Global Horizons 2017 13
Admonishing Aden
Islamic State has also found a foothold in the chaos of Yemen – although the real winner there is al-Qaida, which has more ingrained connections with the southern tribes.
As cholera rages and the country teeters on the edge of famine, there is no sign of a rapprochement between Iran-aligned Huthi fighters in the north and the interna-tionally recognised government in the south, backed by Riyadh and Abu Dhabi.
As Islamic State reverts to conventional terrorism, tensions are likely to rise. The 2018 elections will be cru-cial to determining whether or not Iraq’s divided sects can live together – and whether Washington or Tehran has the greater influence.
The Syrian Kurds are the key US ally against Islamic State. However, they are otherwise isolated in a country where Moscow is helping President Bashar al-Assad to pick up the reins of power through the establishment of ‘de-escalation zones’. This simultaneously weakens ‘moderate’ rebels and delegitimise those linked to salafi-jihadist groups.
As direct conf lict recedes, the new ‘normal’ in Syria may look very different, with an entrenched role for Iranian economic and military interests, including Lebanese Hezbollah.
Beirut balance
That could destabilise the delicate balance of power in Beirut, where Hezbollah, as a battle-hardened and increasingly powerful military actor, is an uncomfort-able partner in the cross-sectarian coalition government of Lebanese Prime Minister Saad al-Hariri. It will also alarm neighbouring Israel – where tensions are rising with the Palestinians.
In the West Bank, Palestinian President Mahmoud Abbas is ageing, and succession politics are under-way. Abbas is putting pressure on Hamas-held Gaza to acknowledge his authority, worsening a dire economic and humanitarian crisis. New border conflagrations are an ever-present risk in this small triangle.
Two-columns element:W: 150mmH: 70-100mm (min-max)Note: There should be at least one ‘two-column’ chart per spread
IRAN
TURKEY
SYRIA
LEBANON
IRAQ
JORDAN
SAUDI ARABIA
Euphrates
Tigris
Damascus
Baghdad
Raqqa
Aleppo
Basra
Lattakia
ArsalBukamal
Deir ez-ZourHawija
Tal Afar
Palmyra
Mosul
Irbil
Ramadi
Tikrit
Falluja
Sources: Institute for the Study of War, media reports
Shrinking Islamic State control2014-17
Iraq will continue mopping-up operations, but IS is likely to return as a terrorist threat in Baghdad and elsewhere
US-backed and pro-Syrian government forces will race towards IS’s final strongholds in the Euphrates Valley
August 2014
August 2017
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With oil revenues no longer bountiful, the region is looking to diversify — but politics are a problem
The Middle East: Economics and governance
Deficits, diversification and divisions
Petroleum prices have recovered from their 2015-16 plunge, but, for now, they are unlikely to return to former highs. The region’s oil and gas producers, therefore, have no escape from the necessity of economic adjustment.
They are taking different approaches. Some are serious about fiscal austerity, look-ing to reduce structural budget deficits at all costs. Others – encouraged by ample reserves or constrained by political impera-tives – are keeping up public spending while planning long-term economic diversification.
Many of these programmes, however, are more easily drafted than implemented, given the tight hold on the pri-vate sector of economic elites with cosy ties to the state.
Middle Eastern energy importers do not get off lightly either. Their power costs may have come down, but rapid population growth combined with cuts in financing and remittances from richer neighbours are hurting the mid-dle classes. As the public feels the pinch, governance issues are rising back up the agenda.
Endemic unemployment
A key issue that all governments struggle to address is youth unemployment. One-third of the region’s population is between 15 and 29 years of age.
Unemployment among this group stood at 29% in 2013 – more than twice the world average of 13%. The International Labour Organization calculates that by 2019 unemployment among youth will reach 29.1% in the Middle East and 30.7% in North Africa.
Historically, central governments in the region pro-vided many jobs. For example in Tunisia, in response to protests over unemployment, there has been substantial recruitment into the public sector since 2011.
The fiscal cost has been that Tunisia’s public wage bill has risen to 14.5% of GDP in 2016 from 10.7% in 2010. This is one of the highest ratios in the world. However, unemployment, at 30% among youths, raises questions about the govern-
ment’s ability to respond to the challenge of structural unemployment.
Across the region, the slow growth of the global econ-omy, fears of political instability and unaccommodating legal regimes mean that the foreign investment that could help create new private-sector jobs is staying away.
Indigent Egypt
Egypt faces economic headwinds too. It has adopted harsh measures to improve its finances, including cut-ting subsidies and floating its currency.
These actions are taking a toll on the poor. Almost 28% of Egyptians were estimated to live below the poverty line in 2015. This num-ber is likely to be significantly higher this year due to the pound’s devaluation and the removal of subsidies.
Long-term diversification plans are easier to draft than implement
Youth unemployment challenges governments across the region
Global Horizons 2017 15
Sectarian split
The widening Sunni-Shia divide, spearheaded by Riyadh and Tehran, is the other factor calling into question the stability of the Gulf region. Iran, however, has greater problems than its long-standing enmity with Saudi Arabia.
In foreign policy terms, Israel is increasingly con-cerned by what it perceives as an imminent threat from Iran's Lebanese proxy Hezbollah on its Syrian border.
More importantly, US President Donald Trump is calling into question the validity of the nuclear agreement with world powers on which President Hassan Rouhani has pinned his hopes for an influx of foreign investment to jump-start the economy.
Iran is unlikely to regain full access to the interna-tional financial system anytime soon. That aside, stag-nant domestic politics is also reinforcing negative eco-nomic arrangements – especially because of the dominant role of the Islamic Revolution Guard Corps in commerce and investment.
GCC gulf
The states of the Gulf Cooperation Council have much in common when it comes to their economic and social policies. They are seeking to encourage foreign invest-ment, including through more public-private partner-ships. They want to employ a greater proportion of their nationals in the private sector. They are looking to expand non-oil sectors such as tourism.
At the same time, they need to keep their social con-tracts stable by reserving social benefits for citizens, squeezing foreign workers and keeping a tight rein on the disruptive power of the internet.
Politically, however, they have never been more divided. The decision of Saudi Arabia, Bahrain and the United Arab Emirates, together with Egypt, to launch a political and trade boycott of Qatar shocked the region, posing dilemmas for traditionally ‘neutral’ Kuwait and Oman.
As the impasse wears on, the economic fallout may become more severe. The politicisation of trade and finance will force investors to look with new caution at a previously stable and predictable market.
Actual Estimate
-30
-20
-10
0
10
20
30
-15
-10
-5
0
5
10
15
2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019
Bahrain
Islamic Republic of Iran
Iraq
Kuwait
Oman
Turkey
Qatar
Saudi Arabia
Egypt
United Arab Emirates
Source: International Monetary Fund, World Economic Outlook Database, April 2017
The Middle East: Projected budget balances (% of GDP)
2004 2014
2004 2014
2004 2014
0
20
40
60
0
20
40
60
0
20
40
60
Arab states OECD members Algeria Bahrain Egypt Iraq Jordan
Kuwait Lebanon Libya Mauritania Morocco Oman Palestine
Qatar Saudi Arabia Sudan Syria Tunisia UAE Yemen
Source: ILO
The Middle East: Youth unemployment (% of labor force ages 15-24, modeled ILO estimate)
Corruption, political uncertainty and Donald Trump hang heavily over the region’s
forthcoming elections
Latin America
A potentially transformative year
Widespread speculation that Latin America's 'Pink Tide' was in retreat, after the fall of leftist governments in Argentina and Brazil in 2015 and 2016, has subsided this year.
Lenin Moreno narrowly won the Ecuadoran presidency. President Nicolas Maduro is clinging on to power in Venezuela. Leftist populist Andres Manuel Lopez Obrador has emerged as the front runner in Mexico's July 2018 presidential elections.
Nevertheless, with commodity prices still low and growth likely to be weak across most of the region over the next two years, such leaders will struggle to live up to expectations or even to hold onto power.
Corruption allegations have swept Latin America over the past year, turning public opinion against previously popular figures and exacerbating internal party tensions. Some governments, such as that of Ecuador, face the pros-pect of rupturing, while others, including Mexico, Brazil and Colombia, look set to have lame duck leaders for the remainder of their terms.
Trump trepidation
The election of US President Donald Trump in November was an unforeseen and concerning development for most of the region's gov-ernments, above all in Mexico, which suffered a barrage of threatening and abusive rhetoric during candidate Trump's campaign.
Nevertheless, the Mexican government has emerged from the situation looking unusually confident and
self-assured. Trump's plans for a border wall appear less ambitious by the day, and the prospect of Washington ending the North American Free Trade Agreement
(NAFTA) has given way to more prag-matic talk of renegotiation.
Nonetheless, with presidential elec-tions less than a year away and NAFTA renegotiations in full swing, 2018 may prove a transformative year for Mexico.
The ruling Institutional Revolutionary Party (PRI) looks on course for defeat for only the third time in its history, with insecurity, controversial reforms and cor-ruption allegations weighing on President Enrique Pena Nieto’s approval ratings.
Polls suggest Lopez Obrador is well placed to take his place. However, events in Venezuela may give him some difficult questions to answer.
Vexed Venezuela
Deteriorating socioeconomic conditions and the increasingly anti-democratic actions of Maduro’s government have brought Venezuela to the brink of political and economic breakdown. Nevertheless, with the army sitting on its hands, wide-
spread protests and a handful of isolated rebellious actions have so far failed to dislodge the regime.
December’s elections will be tense at best and may well prove a flash point. Should the government collapse, the security risks for both Venezuela and neighbouring Colombia will be immense.
With presidential elections and NAFTA renegotiations, 2018 may prove transformative for Mexico
Venezuela is stuck on the brink of political and economic breakdown
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Global Horizons 2017 17
Temer trapped
President Michel Temer has avoided a corruption trial thus far, but with further charges pending, his political survival is far from guaranteed.
Rising public resentment means he is unlikely to have an easy ride. Dwindling political support will see him struggle to pass his planned pensions reform. Pervasive uncertainty will undermine any economic recovery.
With corruption allegations affecting swathes of the political establishment, new figures may emerge as presi-dential contenders in the run up to next year’s election.
Aid angst
Political gridlock in El Salvador and Costa Rica has left those countries’ governments in weak positions ahead of elections, giving opposition legislators little incentive to cooperate. In Honduras on the other hand, a confused opposition looks set to boost President Juan Orlando Hernandez’s hopes of re-election, despite the corrup-tion issues that dog his government.
Pervasive insecurity in the Northern Triangle shows little sign of improvement. With a newly hostile Washington set to cut aid budgets, violent crime and out-ward migration could well get worse.
Colombia conundrum
With no clear front runner so far in Colombian voting inten-tions, next year's presidential election looks wide open.
All but the staunchest of critics have moved on from the prospect of derailing the peace deal with the Revolutionary Armed Forces of Colombia (FARC), so that agreement looks safe.
How well former guerrillas adapt to mainstream politics and civilian life remains to be seen, however. An upsurge in coca production and the continued prevalence of neo-paramilitary groups will ensure that insecurity remains a concern across much of the country.
FARC dissidents will exacerbate criminality, and the introduction of a new administration sees the future of the government's talks with the ELN hang precariously in the balance.
Growth projections (%)
0
2
4
6
-8
-6
-4
-2
0
2
4
6
Latin America& Caribbean Argentina Bolivia Brazil Chile Colombia
Ecuador Mexico Paraguay Peru Uruguay Venezuela
2017
IMF output growth projections
2018 2017 2018
World Bank GDP growth projections
2017
ECLAC GDP growth predictions
WhenTypeCountry
Source: Oxford Analytica
Election timeline
Argentina Legislative Oct 2017
Chile General Nov 2017
Honduras General Nov 2017
Venezuela Regional and municipal Dec 2017 (likely to change)
Barbados Parliamentary 2018
Brazil General Oct 2018
Colombia Parliamentary Mar 2018
Colombia Presidential May 2018
Costa Rica General Feb 2018
Cuba Parliamentary 2018
El Salvador Legislative Mar 2018
Grenada Parliamentary 2018
Mexico General Jul 2018
Paraguay General 2018
Venezuela Presidential Oct 2018 (likely to change)
Source: CNI/Ibope
Brazil: Temer’s approval ratings (% of respondents)
0
20
40
60
80
Jun ‘16 Sep ‘16 Dec ‘16 Mar ‘17 Jul ‘17
Good / very good
Normal
Bad /very bad
No answer / don't know
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Global Horizons 2017 19
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President Xi could use his power to push through crucial reforms — or to turn to dictatorship
China
Reform and repression
A five-yearly Communist Party Congress in October or November will consolidate the power of President Xi Jinping by giving him the chance to fill China's top lead-ership team with allies.
The purge in July of Sun Zhengcai, a man once tipped to be Xi's successor, and his replacement by a long-time comrade of Xi, makes it look likely that he will succeed.
The rumours fly thick and fast, even as the Party's trademark secrecy makes it impossible to know anything for sure until the deals are done and the results revealed. It is not too late for a rival faction to hold on to places at the top table and make a comeback when Xi steps down – if Xi steps down – when his term expires in five years' time.
Crucial challenges
Assuming Xi's power is indeed unchallenged, what does he intend to do with it?
His work on the economic side is cut out for him. The debts that have funded China's investment-led growth are now so massive that they dwarf GDP. Zombie firms refuse to die. Policymakers seem addicted to investment despite ever-diminishing returns. A murky shadow banking sec-tor has grown out of control. Environmental pollution is poisoning the population. And society is growing old before it grows rich.
The next five years will be crucial in determining whether China can overcome these challenges and pre-vent them reaching crisis point. China's leaders know that their country must move to a knowledge-based economy driven by innovation.
Many see market forces as the solution, and the early promises of the Xi government raised expectations that a new era of openness was coming. If the behaviour of Xi's administration since then is any guide, the impulse to control has taken over.
This extends to the political sphere. What was once a fierce anti-corruption campaign has become a dra-
conian new normal. For all its ruthlessness, this is popular with a public that enjoys see-ing corrupt senior officials brought low, even if they suspect political motives to lie behind the choice of targets.
Less welcome is the authorities' shrinking tolerance of political dissent.
Law after law has expanded the powers of the state security organs. Censorship of cyberspace, in particular, has tightened, interfering with commerce and intrud-ing on the lives of ordinary people who resent not being trusted to think for themselves.
The Party must calculate the optimum balance between openness and repression. If control is too lax, ideas and information that damage the Party's image and threaten its legitimacy will spread unchecked, but if it is too severe, this will drive out foreign investment, stifle innovation and choke off the flows of information on which economic growth increasingly depends.
Beijing is also tightening the screws on Hong Kong and Taiwan, where ill-judged attempts to curtail their autonomy are fanning the flames of anti-China senti-ment and prompting strident, if impractical, calls for independence.
Regulation is the new reform
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Global Horizons 2017 21
Vacant vacuum
The inward turn of the United States under President Donald Trump has in many people's eyes left a global leadership vacuum and cast Beijing as the unlikely champion of open markets and the fight against climate change.
China dons this mantle with apparent reluctance, taking pains to reassure the world that it does not have hegemonic ambi-tions or seek to build a bloc of countries loyal to it – even as it constructs more aircraft carriers and sets up, in Djibouti, its first overseas military base.
China also advances globalisation on its terms. It does not directly challenge the Bretton Woods institutions
but weaves around them a new network of bilateral deals and 'complementary' initiatives such as the Asian Infrastructure Investment Bank.
Rather than tariffs and other protections, of which China makes abundant use, the principal barriers to trade at which Beijing's economic diplomacy takes aim are physical ones.
Surmounting those is the idea behind the Belt and Road Initiative, the vast net-work of infrastructure that Chinese firms
are constructing across Central Asia and around the Indian Ocean rim, linking China with its largest market in Europe.
It is not just China that Xi may have to lead
Africa: a ‘key partner’Latin America and the Caribbean: ‘welcome participants’
Oceania: ‘southward extension’ of the Belt and Road (New Zealand and the developing Pacific island states)
Other developed countries: ‘third parties’ with ‘complementary roles’(North America, Japan, South Korea, Australia)
New Eurasian Land Bridge Economic Corridor
China-Mongolia-Russia Economic Corridor
Blue Economic Passage leading to Europe via the Arctic Ocean
Bangladesh-China-India-Myanmar Economic Corridor
China-Central Asia-West Asia Economic Corridor
China-Pakistan Economic Corridor (CPEC)
China-Oceania-South Pacific Blue Economic Passage
China-Indian Ocean-Africa-Mediterranean Blue Economic Passage
China-Indochina Peninsula Economic Corridor
12
A
C
B
56
4
3
Source: Chinese government documents
China’s ‘Belt And Road’ vision
Source: Bank for International Settlements
Composition of debt (% of GDP)
0
50
100
150
200
250
300
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Household
Corporate
Government
Source: Bank for International Settlements
Growth in total debt (% of GDP)
0
50
100
150
200
250
300
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Bank debt
Non-bank debt
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Though politically secure, Prime Minister Modi faces myriad economic
and social challenges
India
Risk of complacency
Narendra Modi, India’s prime minister, appears stronger than ever.
He is the embodiment of the Bharatiya Janata Party (BJP) and continues to register high levels of public sup-port. His party has the most seats of any in parliament’s upper house, making it easier for him to push through all but the most controversial legislation.
After an economic slowdown attributable to demon-etization last November, India is likely once again to be one of the fastest growing large economies in the world.
Modi makes bold promises, such as the pledge to cre-ate 10 million jobs and to provide all citizens with access to electricity by 2019, but he must now demonstrate that he can deliver if he is to sustain his appeal.
Modi’s mastery
After the BJP won a stunning election victory in Uttar Pradesh in March, the anti-BJP ‘grand alliance’ in Bihar collapsed in July. With the main opposition Congress party in the grip of an existential crisis, the BJP will seek to consolidate its power across the country in forthcoming local elections.
More generally, party strategists will plot ways to gain a foothold in Tamil Nadu and West Bengal, states where the prime minister is still to secure the widespread support he enjoys across the rest of India.
Modi currently looks assured of re-election as prime minister in 2019. Nitish Kumar, chief minister of Bihar, has long been touted as the figure with the strongest credentials to rival Modi, but he has now rejoined the ruling alliance.
Any contender seeking to usurp the prime minister has to challenge Modi’s record on economic and social issues. However, economic problems do not dim adulation for Modi among his supporters.
Disruptive demonetization
India’s GDP growth, reaching 7.1% in the 2016-17 fiscal year, appears to be back on track following the disruption
of demonetization. The landmark Goods and Services Tax (GST) inaugurated in July is the most significant fiscal reform since independence and is expected to boost GDP growth by at least 1%.
However, the f inance ministry’s most recent Economic Survey has raised concerns about the out-look. A scheme to waive the loans of some farmers has hit state government revenues, and there are signs of slowing industrial output.
Modi looks assured of re-election in 2019
Source: Central Statistics O�ce
GDP growth (%, year April-March)
0
2
4
6
8
2012-13 2013-14 2014-15 2015-16 2016-17
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Global Horizons 2017 23
Community clashes
The BJP is reaching out to minority communities and has engineered an unlikely nationwide alliance of Hindu nationalists, Dalits (low castes) and the socially and edu-cationally disadvantaged castes designated as Other Backward Classes.
The election in July of a Dalit president, Ram Nath Kovind, was designed to broaden the BJP’s appeal.
However, the manoeuvrings of elite politics may not be enough to assuage fears about rising intolerance in India. The BJP’s agenda of cow protection is exposing fault-lines in Indian society. Attacks by ‘cow vigilantes’ on Dalits and Muslims are closely related to government policies on cattle slaughter.
Border bother
On top of discord in India’s localities, there is trouble at the country’s frontiers. India showed stern resolve in the border spat with China in the Himalayas over Beijing’s attempt to peel Bhutan from Delhi’s sphere of influ-
ence. Highly-charged rhetoric from both sides has potentially jeopardised economic cooperation.
Relations with Pakistan are also at a crossroads. Cross-border militancy in Kashmir is raising tensions at the Line of
Control. Elections are due in Pakistan in 2018. Depending on who becomes Pakistan’s prime minister, India-Pakistan ties could be set to enter a new and uncertain phase.
Consistently low inflation prompted the Reserve Bank of India in August finally to surrender to finance ministry pressure to cut interest rates. The government will press the central bank for further monetary loosening.
Debt difficulties
Fiscal strains belie India’s growth statistics. Public debt in India was 66% of GDP in 2015-16. The government is pursuing disinvestment of state-owned enterprises, as well as relying on the GST. It will still need other means of financing higher spending.
A related difficulty is the contraction of bank credit, with state-owned banks strug-gling under the burden of non-performing assets. India’s new Insolvency and Bankruptcy Code is designed to resolve the problem of bad debt, and the government may look to consolidate public sector banking. However, the implementation of such measures will not be smooth.
Public debt (combined total liabilities of central and state governments, % of GDP, year April-March)
Source: Reserve Bank of India
Gross fiscal deficits (trillions of rupees, year April-March)
0
2
4
6
2011-12 2012-13 2013-14 2014-15 2015-16
Centre States
Fiscal strains belie India’s growth statistics
Sources: Election Commission of India; state/union territory legislative assemblies
Bharatiya Janata Party (BJP) state power in India
Andhra Pradesh (lower house)
2
Arunachal Pradesh 78
Assam 48
Bihar (lower house) 22
Chhattisgarh 54
Delhi* 6
Goa 30
Gujarat 66
Haryana 52
Himachal Pradesh 40
Jammu and Kashmir(lower house)
28
Jharkhand 53
Karnataka(lower house)
20
Kerala 1
Madhya Pradesh 72
Maharashtra(lower house)
42
Manipur 52Meghalaya 0
Mizoram 0
Nagaland 7
Odisha 7
Puducherry* 9
Punjab 3
Rajasthan 81
Sikkim 0
Tamil Nadu 0
Telangana (lower house) 4
Tripura 10
Uttar Pradesh (lower house) 77
Uttarakhand 80
West Bengal 1
0 81 (Rajasthan)
States with National Democratic Alliance (NDA) governments and BJP chief ministers
States with NDA governments and non-BJP chief ministers
States with non-NDA governments and chief ministers
* Union territories
BJP % of legislative assembly
State representation (as of August 24, 2017)
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Internal political challenges and vulnerability to exogenous shocks cloud the outlook for
economic recovery
Africa
Uncertain transition
Buoyed by stabilising commodity prices, African econo-mies hope to regain lost economic momentum, which last year saw continent-wide growth dip to the lowest levels in two decades.
However, enthusiasm for increased export revenues must be tempered by vulner-ability to market volatility, as well as reluc-tance to implement difficult policy reforms.
Deepening debt
Many governments have sought to mitigate the impact of growth slowdowns through increased borrowing, adding to already high levels of public debt.
Nowhere are debt woes more pronounced than Mozambique. Donors welcomed the Kroll report on parastatal finances but significant gaps remain, and the
ability – or willingness – of President Filipe Nyusi to pur-sue wide-ranging fiscal reforms is uncertain.
The economic slump, meanwhile, continues to weigh heavily on the continent’s largest economies. South Africa
and Nigeria are likely to pull out of reces-sion, but long-standing institutional and structural impediments will dampen the long-term prospects of both.
Kenya’s economy has weathered the storm better than most but has also seen
slackening growth and a rapidly expanding budget defi-cit and public debt. This could pose difficulties should growth slow further.
Turbulent transitions
Many of these countries are also in the throes of poten-tially chaotic political successions.
The unpopularity of South African President Jacob Zuma has generated divisive factional struggles within the ruling ANC. These are likely to persist beyond the party conference in December.
In Nigeria, the prolonged absence of the ailing President Muhammadu Buhari has prompted an intense institutional confrontation between parliament and the executive – and reopened divisive debates about how to maintain the informal practice of alternating power between north and south.
In East Africa, Kenya’s contested election has encour-aged unsustainable spending in areas deemed politically popular coupled with paralysis in sensitive policy areas.
Tortuous political transitions could emerge in several states
0
10
20
30
40
50
60
70
Sub-SaharanAfrica
Oilexporters
Other resource-intensive
economies
Non-resource-intensive
economies
201620152011-14 average
Source: IMF
Sub-Saharan Africa: Government debt (% of GDP)
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Global Horizons 2017 25
Displacement dangers
However, vulnerabilities will continue to weigh on Africa’s poorest. As 2017 ends, a relentless drought cou-pled with rising food prices is driving a food security
crisis in several areas across the continent. The UN has warned of the risk of fam-
ine in three African countries – Nigeria, Somalia and South Sudan. In only one (Somalia) is drought a factor, highlighting the extent to which food insecurity is also
a human-created concern.Across the continent, the number of displaced has
doubled over the past five years. Africa now hosts almost 20 million refugees, internally displaced persons, return-ees and stateless people – more than a quarter of global totals. Conflict, not disaster, is the primary driver.
With no end in sight to Africa’s major conflicts, these numbers – and the pressures they bring – will grow.
Kenya’s new president must now balance the need to rein in the fiscal deficit with a desire to fulfil campaign promises.
Angola’s long-serving President Jose Eduardo dos Santos stepped down from power following the August 23 election, yet his family’s influence permeates the state. New President Joao Lourenco will face for-midable challenges in imposing his author-ity over key institutions while outgoing regime elements seek to consolidate control.
A timely transition is less likely in Democratic Republic of the Congo. President Joseph Kabila continues to cling to power amid increasing political isolation, escalating conflict and an economy in ruins.
Opening opportunities
Despite challenges, Africa remains a region with vast untapped potential.
Ethiopia’s much-vaunted economic progress may take a new turn. With new industrial parks opening – and more investment in the pipeline – the country’s apparel and textiles industries look set to take off, driven by affordable labour, social and environmental compliance, and government investment in transport infrastructure.
In Senegal, growth accelerated last year, due in part to reforms and public-sector investment. With the discovery of significant off-shore oil and gas reserves, growth could accelerate beyond the government’s targets if accompanied by the right regulatory reforms.
Conflict, drought and rising food prices raise the risk of famine
Niger289,000
Mali69,000
Chad521,000
Burkina Faso5,000 36,000
Nigeria73,000 1,754,000
Central African Republic606,000
Cameroon9,000 547,000
Republic of the Congo93,000
Democratic Republicof the Congo
2,000 4,273,000
Angola14,000 45,000
Senegal16,000
Sudan143,000 2,721,000
Ethiopia468,000 1,432,000
South Sudan2,275,000
Somalia800,000 1,127,000
Uganda2,500 1,351,000
Kenya400,000 781,000
Burundi139,000 131,000
Tanzania306,000
Mozambique15,000 17,000
Conflictdisplacement
Disasterdisplacement
Source: UNHCR, IOM, OCHA, IDMC, ECHO, ACAPS
Sub-Saharan Africa: Major sites of displacement, July 2017 (number of people)
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The region faces some of today’s most pressing global geopolitical challenges,
but also opportunities
South-east Asia
Pivotal times and policy tests
The election of Donald Trump as US president was piv-otal for South-east Asia, quite literally, as the region had seen increased US economic, diplomatic and security engagement under the ‘Asia pivot’ of Trump’s predeces-sor, Barack Obama.
ASEAN states’ leaders used this policy trajectory to ‘hedge’ against Beijing, although some – Cambodia and Laos especially – were closer to China than Washington. With Trump in office, the question became what would become of this pivot. The answer is forthcoming.
Trump’s team still sends US military assets through international waters and skies, challenging Beijing’s ‘nine-dash line’ claim in the South China Sea.
It has also started to reinvigorate US relations with South-east Asian countries whose links cooled under Obama, notably Thailand, largely shunned by Washington after its 2014 coup. Trump's Secretary of State, Rex Tillerson, visited in August. Thailand’s former military leader turned politician, Prime Minister Prayuth Chan-ocha, will visit Washington in October.
However, Trump’s team has also questioned whether some of the ASEAN countries (Malaysia, Indonesia, Thailand and Vietnam, in particular) are trading fairly with the United States. It has also taken a somewhat tougher line on US defence and security aid to South-east Asia.
Concerning China
Washington is, therefore, not necessarily an automatic backstop for ASEAN states. ASEAN’s leaders’ want
backers – which increasingly include Japan, Australia and to a lesser extent Russia – in managing their relation-ships with their economically and militarily burgeoning northern neighbour, China.
Such external partners provide future alternative trading, arms-buying and investment.
On the one hand, China’s economic development is a boon to South-east Asia, most of which counts China as its largest trading partner. As China’s economy devel-ops, lower-end manufacturing jobs are being relocated to
South-east Asian countries with cheaper labour, bringing new capital and employ-ment. Chinese firms are also investing decisively in the region.
However, China also maintains its maritime claims in the South China Sea, to Vietnam’s particular consternation.
China could also rent South-east Asia’s social and eco-nomic fabric: as it invests, China often deploys Chinese labour on large-scale infrastructure projects, often to local labourers’ irritation.
Given that ASEAN governments want to benefit from Chinese infrastructure and trade investment through Beijing’s Belt and Road Initiative, this ‘anti-China’ trend could be a problem.
Domestic demands
South-east Asian domestic politics are no less dynamic. All ASEAN governments must ensure a sufficiently well-educated population to meet the demands of their economies, which are rapidly automating and becoming
Trump’s election has shaken the geopolitical dice in South-east Asia as elsewhere
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most likely be comfortably above 4% in 2017, though sluggish global demand and depressed commodity prices still weigh.
Regional leaders also face serious terrorism threats. These are particularly acute in the southern Philippines where home-grown and internationally recruited ter-
rorists congregate to take advantage of the archipelago’s porous land and mari-time borders, as well as the relatively con-strained security capacity.
Other ASEAN countries have similar problems. This means higher expenditure
and reliance for counterterrorism support on external partners including Russia, China, Japan, Australia and Trump’s United States.
Poll positions
Preparations, and sparring for, the Malaysian, Cambodian and Thai general elections in 2018 are already underway. In the first two countries, long-established governing parties hope not just to win again, but to reverse disap-pointing results of 2013.
In Thailand’s case, the election may well be delayed and is rapidly becoming less about the country’s return to civilian rule than the legislative architecture that the military is assembling to assure its long-term political influence.
increasingly technologically specialised. However, the disparities in the quality and extent of education avail-able are vast.
Equally, South-east Asian leaders must manage the sheer diversity of their region; for all that its economies are increasingly tech-savvy, there remains an immense gap, between the largely unelectrified a hin-terland of Myanmar and the globally con-nected central business district in Singapore.
All South-east Asia’s leaders also face the challenge in bridging the gaping voids in infrastructure. To close them will require mil-lions of dollars of investment and development aid – and commensurate updates of investment, planning, environ-mental and construction regulations each year.
This is especially important if the ASEAN countries are to take advantage of the ASEAN Economic Community and the potential Regional Comprehensive Economic Partnership. South-east Asian economic growth will
Overall, South-east Asian countries are managing strong growth
Brunei
Cambodia
Indonesia
Laos
Malaysia
Myanmar
Philippines
Singapore
Thailand
Vietnam
Averages
Urban areas Rural areas
Di�erences between urban and rural electrification rates
100.0
97.0
95.5
96.6
99.8
59.5
94.1
100.0
99.7
99.5
94.2
98.6
18.2
71.0
81.5
98.7
18.3
84.6
100.0
98.3
97.3
76.7
Indonesia 40.7mn Myanmar 36.3mn
Philippines 11.1mnCambodia 10.1mnOther
Population without electricity, 2016
Brunei
Cambodia
Indonesia
Laos
Malaysia
Myanmar
Philippines
Singapore
Thailand
VietnamAverage
99.7%
34.4%
84.0%
87.2%
99.5%
32.1%
88.8%
100.0%
99.0%
98.0% 82.3%
National electrification rate, 2016 (% of population)While some South-east Asian countries have total or near-total electrification, others lag far behind
Source: International Energy Agency -- World Energy Outlook 2016; World Bank (including UN, Eurostat, US government and Secretariat of the Pacific Community data); Oxford Analytica
Source: National Statistics O�ces and Central Banks, Oxford Analytica
South-east Asia: Annual growth in exports(%, 3-month-moving-average)
-20
-10
0
10
20
30
2014 2015 2016 2017 2014 2015 2016 2017
Indonesia
Malaysia
Thailand
Philippines
Singapore
Vietnam
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Oxford Analytica Global macro diligence
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David Samuel Friedman
Thomas Glocer
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An insurgent campaigner is struggling to adjust to the requirements of government
United States
The outsider in the White House
Last year’s election upset delivered Donald Trump the presidency with enviable political circumstances: majorities in both the House and Senate; a demoralised Democratic opposition; a favourable outlook for judicial appointments; and a demonstrated personal electoral victory despite the misgivings of his Republican sceptics.
However, Trump’s status as a political outsider with-out strong connections to his adopted party and disen-gagement from detailed policy questions have hindered his ability to build a viable coalition for passing legisla-tion, as demonstrated by the party’s repeated failure to advance healthcare legislation.
Legislative logjam
As Congress returns from the summer recess, the peren-nial challenges of writing a budget and averting a gov-ernment shutdown will dominate the legislative calen-dar, alongside the more daunting task of rewriting the 31-year-old US tax code.
However, a White House bruised from the failed Obamacare repeal push is likely to lobby for a new attempt on healthcare, to the chagrin of the Republican congressional leadership eager to cut their losses and move onto more fertile legislative ground.
It is unlikely that the Republican majorities will complete an ambitious simplification of the US tax code as promised on the campaign trail, with a modest programme of tax cuts a more likely outcome.
Another stimulative measure sought by investors, corporates and sub-national governments – but stranded on Capitol Hill – is Trump’s much-discussed proposal to spend “1 trillion dollars” on infrastructure. A smaller sum dependent on private investment perhaps emerging in 2018 seems more likely than action this year.
Intra-Republican battles over federal borrowing and spending priorities pose the risk of a government shut-down on October 1; negotiations over the debt ceiling are equally fraught and threaten a credit downgrade over congressional delays to authorise further US borrowing.
However, Trump will continue to see success on his deregulatory agenda via his ability to obstruct adminis-trative actions by the federal bureaucracy. Further roll-backs of consumer, environmental and labour protections via non-enforcement or presidential fiat are likely, though judicial challenges could slow the process.
Twitter tattle
Trump sits at the centre of the vast US foreign policy apparatus, and every president has struggled to maintain a unified line out of Washington on international developments.
However, the current White House seems especially challenged in signalling its foreign policy priorities clearly. For US
adversaries and allies seeking to anticipate Washington’s next move, the positions of senior US national security officials – particularly Secretary of Defense Jim Mattis and National Security Advisor HR McMaster – are likelier
The current White House seems especially challenged in clearly signaling its foreign policy priorities
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Combative confrontation
Trump appears intent on running for re-election in 2020 and battling rivals within the Republican Party in the interim, rather than engaging with the policy process.
However, this comes at an opportunity cost, as his influence will dwindle as the 2018 midterms come into scope and legislators grow more independent and risk averse.
While Trump can rely on partisan-ship and strong negative polarisation against the Democratic Party to keep his
party’s rank-and-file on side, persistent low approval ratings, Trump’s appetite for controversy and Special Counsel Robert Mueller’s investigations are likely to see Republican members of Congress become less likely to follow Trump’s direction.
However, Trump’s political style thrives on con-troversy and political combat, rather than deep policy knowledge or a commitment to stable governance. The NAFTA renegotiation talks are a likely field for presi-dential intervention should Trump feel that he is being marginalised in Washington.
barometers of the US intent than Secretary of State Rex Tillerson, UN Ambassador Nikki Haley or the president’s Twitter feed.
While these advocates of more orthodox foreign policy positions are currently dominant, an unpredict-able president who focuses on his public image and personnel politics could see them marginalised.
As his legislative agenda stalls, Trump is likely to seek high-profile demonstra-tions of strength and resolve on the inter-national stage for domestic audiences. However, this brand of personality politics will lead to contradictions of senior administration officials engaged with the day-to-day detail of US foreign policy, a prob-lem exacerbated by outstanding vacancies for important national security positions and retrenchment of the fed-eral bureaucracy.
Trump will engage in personality politics as his legislative agenda stalls
Sources: Media Reports, Cook Political, Federal Election Commission, Oxford Analytica
Divisions in the the 115th House of Representatives
*The Tuesday Group or Main Street Partnership
M M M M M M M M M
FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC FC
MModerate caucus members*
Freedom Caucus members
No formal a�liation
Republican healthcare bill rebels… Competitive districts Reliable districts Safe districts
“Bill went too far”
“Bill didn’t go far enough”
Cook PVI <5
Safe districts
Reliable districts
Competitive districts
Competitivedistricts
Reliabledistricts
Safedistricts
115 47 31 52 60 126
27% 11% 7% 12% 14% 29%
Democrats representing… Republicans representing…
Democrats inTrump districts12 Republicans in
Clinton districts 23
Most House members represent districts where they do not face competition from the opposite party...
…leaving more scope for Trump to alienate House allies than peel o� vulnerable Democrats.
...which entrenches internal party divisions at the expense of a uni�ed party line...
Cook PVI 5-10Cook Partisan Voter Index of 10+
Composition
Republicans who obstructed Trump’s Obamacare repeal bill
Split tickets in the 2016 elections (where districts supported a Republican president and Democratic representative, and vice versa)
Sources: Bureau of Economic Analysis; *IMF WEO forecasts, April 2017
United States: GDP growth (%)
-3 -2 -1 0 1 2 3
Average of 1976-2005
2006
2007
2008
2009
Average of 2010-2015
Average of 2018-2022*
2016
2017*
Trumpteam’sstatedtarget
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The election of Donald Trump as US president prompted leaders across East Asia to question old certainties, not least the commitment of the United States to defend its allies in the region.
Trump during his election campaign questioned the value of these alliances, sparking fears of abandonment in Tokyo and Seoul. However, as in many other areas, Trump's words have proved to be no guide to his actions.
They have, though, prompted efforts by both allies to tighten alliance ties – even as they reinforce long-standing arguments in Tokyo and Seoul that they may one day have to see to their defence and should develop the capability to act independently if needed.
The most extreme and dangerous manifestation of this is the growing calls in South Korea to respond to Pyongyang's nuclear programme by developing nuclear weapons of its own.
For now, however, the threat from North Korea is bringing Washington and its allies closer.
Nuclear North
Japan and South Korea have long been within range, but with Pyongyang's successful tests of intercontinental ballistic missiles capable of hitting the United States, the stakes have risen for Washington, too.
Pyongyang has now crossed nearly all the possible 'red lines' the United States might have drawn. As its capabilities grow, the feasibility of a preemptive US strike falls and the potential cost rises should one be attempted.
North Korea is also sowing seeds of conflict between the United States and China. Washington's decision to deploy the THAAD missile defence system in South Korea in the face of Beijing's public objections that the system threatens China has prompted Beijing to impose unprec-edented economic pressure on Seoul.
Despite South Korea's election of a centre-left government under President Moon Jae-in – previously seen as dovish on North Korea – Seoul has failed to achieve a 'reset' with either Pyongyang or Beijing.
Beijing rejects what it sees as Washington's demands that China solves the North Korea nuclear issue and assume a disproportionate share of the risk and with-out Washington making any concessions.
Pyongyang has crossed nearly every red line already
The world's attention is focused on North Korea's nuclear weapons, but the Trump era has brought
other dangers too
East Asia
Regional reordering
Military expenditure in 2016
Billion dollars at current prices
% of GDP
Sources: SIPRI Military Expenditure
Database 2017 except * North Korea: US State Department estimates
3.5
9.9
36.8
46.1
215.2
611.2
North Korea*TaiwanSouth KoreaJapanChinaUnited States
1.0
1.9
1.9
2.7
3.3
23.3
JapanTaiwanChinaSouth KoreaUnited StatesNorth Korea*
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Global Horizons 2017 33
Economic Partnership, billed as a 'China-led' alternative to the TPP that also includes India and promises terms that are easier for developing countries to accept.
The collapse of the TPP is not the only setback that Abe now faces. The Abenomics brand has lost its sparkle. Abe’s once unas-sailable position as Japan's leader has for the first time in five years come seriously into question amid a series of scandals and
unpopular legislation. Potential rivals have begun posi-tioning themselves to succeed him.
That may have to wait, but Abe's cherished plans to revise Japan's Constitution have suffered a setback – potentially defusing for the time being at least one point of tension with Beijing and Seoul.
Despite Trump's earlier talk of a 'new approach', Washington has not softened its position vis-à-vis North Korea but instead has hardened its position vis-à-vis China, moving from asking Beijing to apply more pressure to sanctioning Chinese busi-nesses that deal with North Korea.
In contrast, the unpredictable early actions of President Trump found an unusu-ally warm welcome in Taipei. By calling into question Washington's decades-old 'one-China policy', Trump raised hackles in Beijing and hopes in Taipei that US support for Taiwan's autonomy would undergo a step change – hopes that were to be disappointed but that added to cross-Strait tension just as Taiwan-China ties reached their chilliest in a decade.
Trade turmoil
One area where Trump has followed words with action is trade diplomacy. US withdrawal from the hard-won Trans-Pacific Partnership (TPP) free trade agreement sank the entire project, to the chagrin in particular of the Prime Minister Shinzo Abe, for whom it was a centrepiece of Abenomics.
Japan has responded by seizing the initiative, lead-ing an effort to establish a new TPP that does not include the United States in the hope that this will strengthen its position in bilateral trade negotiations with Washington – and perhaps force a later US administration to sign up to the TPP after all.
A distinct second-best for Japan – though the two are not mutually exclusive – is the Regional Comprehensive
The Trans-Pacific Partnership may yet survive Trump
1,000
Seoul Guam Los Angeles ChicagoTokyo Okinawa, Japan Anchorage, Alaska Juneau, Alaska
2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000
4,000
0
1,000
2,000
3,000
Altitude (km)
Distance (km)
Hwasong-14 (July 26, 2017)This launch reached an altitude of nine times that of the International Space Station. The trajectory indicates a level of performance never seen from a North Korean missile.
Hwasong-14 (July 4, 2017)
Hwasong-12 (May 14, 2017)
Musudan (June 22, 2016)
Major US military bases
Projected reachIf the power displayed in the four lofted launches were translated into regular trajectories, the missiles could have flown much further.
Source: Reuters
North Korea: Missile lauches under Kim Jong-un for which trajectory data is available
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One year after the Brexit referendum, EU leaders have regained their optimism
The EU seemed at a tipping point last summer: the United Kingdom had voted to leave the bloc, and some feared that the Eurosceptic contagion would spread, resulting in further exits.
This fear has not materialised. The EU has emerged stronger. Only in the United Kingdom is Brexit seen as a shambles.
Brexit blowback
The early UK election on June 8 – called to increase Prime Minister Theresa May’s majority in parliament – was a surprising setback. It left her still in office, but leading a minority government dependent on sup-port from Northern Ireland’s Democratic Unionist Party. A leadership challenge later this year is a credible prospect.
The United Kingdom hopes to move on to negotia-tions about its future political and economic relationship with the EU in autumn, but Brussels will only agree if it deems that “sufficient progress” has been made on the divorce issues – citizens’ rights, the Irish border and the financial settlement.
It seems unlikely that a trade agreement and, pos-sibly, even the ‘divorce’ deal can be negotiated by March 2019; a transition period will, therefore, be necessary.
May’s tenuous position limits her ability to make compromises that are politically unpopular but neces-sary to advance negotiations, raising the likelihood of a chaotic ‘cliff-edge’ Brexit.
Plummeting populism
The last year has seen setbacks for Eurosceptic populists in Austria, the Netherlands and France, and in the German general election on September 24 the right-wing Alternative for Germany is likely to play only a marginal role.
Italy is a larger threat. The risk of a Five Star Movement victory under a reformed, majoritarian electoral system in next year’s election has been seen off, but a grand coa-lition between the country’s two largest moderate par-ties – the governing Democratic Party and the centre-
right Forza Italia – could aggravate voter alienation and the perception of deadlock. Anti-EU rhetoric by all parties is likely to fuel Euroscepticism.
June proved a surprising setback for May
Europe
A comeback of sorts
EU and selected member states: Major macroeconomic indicators
EU 1.5 2.1 2.3 1.4 7.7
Euro-area 1.4 1.9 2.2 1.3 9.1
Germany 0.9 1.7 2.1 1.5 3.8
France 0.8 1.0 1.8 0.8 9.6
Italy 1.1 1.2 1.5 1.2 11.1
Spain 3.1 3.0 3.1 1.6 17.1
Greece 0.4 0.4 *** 0.9 21.7
Ireland 4.2 6.6 *** -0.6 6.3
Portugal 1.7 2.8 2.8 1.0 9.0
Poland 2.8 4.2 4.4 1.3 4.8
Sweden 1.9 2.2 3.9 1.8 6.6
UK 1.1 2.0 1.7 2.6 4.4
Q1 Q22016 2017
GDP (% change y-o-y)*
Inflation rates (HICP)
(% change y-o-y)**
Unemployment rate (%)**
MAJOR EURO ECONOMIES
BAILOUT STATES
NON-EURO STATES
*Seasonally and workday adjusted ** Latest available data *** Not yet available
Source: Eurostat
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Global Horizons 2017 35
fundamental standards. However, the pair seems ready to exercise their veto on each other’s behalf.
Germany and France have suggested tying the next EU budget round to member states’ conduct. That would go to the European Parliament, where feeling seems to be running against the Central Europeans.
Balkan business
EU membership has been a strong inducement to reform for the six Western Balkans states still outside the Union. The diminishing likelihood of enlargement, in the medium term at least, is prompting a search for new EU approaches, including tougher scrutiny of polit-ical and institutional deficiencies, and the suggestion that more emphasis is placed on accelerating economic
convergence.
Turkey’s turn
Turkey has turned its back on joining the EU, which, for its part, questions Turkey’s
democratic credentials for membership. President Recep Tayyip Erdogan’s long-term goal seems to be to sever ties gradually with the non-Muslim West. Rows with Germany and the Netherlands can be played to great domestic effect as proof of European hypocrisy and Islamophobia. That plays upon widespread public anti-Westernism; business wants trade relations strengthened
Union upgrade
Brexit has raised the question of what path the EU is going to pursue over the next decade. Rather than picking and executing a single scenario – for example, a clear bifur-cation between a core and a periphery – the EU is likely to continue to integrate by ‘failing forwards’ in reaction to crises.
This process, such as it is, will likely be driven by a revived French-German axis, which has been given fresh impetus by Brexit and Emmanuel Macron’s victory in the French presidential election.
In July, the completion of EU lenders’ review of Greece’s bailout programme and the Tsipras govern-ment’s bond issue after three years’ exclusion from com-mercial borrowing are notable successes. However, the latter is largely due to investors’ search for high yields in a low-interest environment. Political risk is still high, and Greek commercial banks are still outside the corporate bond market.
Eastern engagement
Central-East European EU member states profit from membership, as net recipients of EU funding. Between 2005 and 2016, Romania, Lithuania, Poland and Slovakia, in particular, have narrowed the economic gap with the EU average. For this reason, they will not follow the United Kingdom out of the EU.
EU proceedings against Poland and Hungary have begun over whether they meet membership’s
Erdogan relishes fights with the EU but will not force an immediate rupture
2005 2010 2016
Central-East European convergenceGDP per capita index (at PPS; EU28=100)
Source: Eurostat
0
10
20
30
40
50
60
70
80
90
Bulgaria Romania Croatia Latvia Hungary Poland Estonia Lithuania Slovakia Slovenia Czech Republic
Source: Eurostat
EU: GDP growth (year-on-year, %)
-6
-4
-2
0
2
4
2006 2010 2014 Q1 Q2
20172006 2010 2014 Q1 Q2
2017
Germany
Spain
France
Italy
United Kingdom
EU-28
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Financial markets are unnervingly calm given the volatility of geopolitics
Global markets and economy
Sanguinity amid uncertainty
A decade on from the start of the global financial cri-sis, economic expansion has, at last, taken on moderate momentum in the United States, EU and Japan. However, growth, trade and productivity may be settling into a sluggish ‘new normal’ below pre-crisis trends.
Monetary tightening remains fraught with uncer-tainty and could disrupt the sanguinity with which investors have borne copious geopolitical stress since the election of US President Donald Trump last November.
Problematic policy
US policy inertia and lower inflation have dampened expectations of the pace of Federal Reserve tightening. High public and private sector debt across the world mean any global tightening, however gradual, will pose a finan-cial stability risk, particularly in the euro-area.
Expansionary fiscal policy would boost global growth, but countries that have the scope to raise public spending have shown little appetite for it.
Trade threats
There are signs that, having sped up in the first half of 2017, global trade and manufacturing are again slowing.
Trade policy is as uncertain as monetary policy. Having pulled the United States out of the Trans-Pacific Trade Partnership and the Paris climate accord, President Trump has stealthily increased protectionist measures against US trading partners while threatening more severe action to reduce bilateral trade deficits that he
says destroy the domestic manufacturing jobs he cam-paigned to restore.
A deterioration in US trade relations could plunge the world into recession. However, the importance of trade to the US economy implies Washington will seek to avoid worst-case scenarios.
Shale supply
The potential for higher oil prices is limited regardless of the agreement to extend the OPEC-non-OPEC output cuts to March 2018. Potential supply is plentiful. US
Source: globaltradealert.org
G20 member states: Protectionist activity compared to country average (activity reported by 31 December of same year)
0 1 2 3
2009 2010 2011 2012 2013 2014 2015 2016
Argentina
Australia
Brazil
Canada
China
France
Germany
India
Indonesia
Italy
Japan
Mexico
Russia
Saudi Arabia
South Africa
South Korea
Turkey
United Kingdom
United States
2017
Global Horizons 2017 37
slower to pick up. If it trends upwards through the rest of the year, the ECB is likely to end its quantitative easing programme at the end of December as planned.
Financial risks are high, particularly in Italy, one of the largest beneficiaries of the ultra-accommodative policy.
Indiscernible inflation
Consumer spending, investment, employment and exports are improving but wages are not yet rising at the same pace. The chances of reaching 2% inflation in the next Bank of Japan Governor’s five-year term, which will begin in the next year, seem as slim as they have been for the past five years.
US rates are rising, and the ECB may start tightening policy next year although Japan is expected to maintain ultra-loose policy for longer. Diverging US, ECB and Japanese monetary policies pose a risk to the global financial system.
Zeroing zombies
Once the five-yearly Communist party congress to be held in October or November is concluded, policy action to reduce China’s debt, particularly in state-owned and 'zombie' enterprises, is likely.
China grew by close to 7% in the first half of the year but is likely to slow towards 6% in 2018.
The longer authorities prioritise growth targets, the longer it will take to reduce unsustainable debts and to rebalance the economy towards greater domestic consumption.
shale is profitable at 50 dollars per barrel and Libya, Nigeria and Iran are exempt from the agreement.
Qatar’s decision to increase its liquified natural gas production by 30% will destabi-lise many projects, particularly in East Africa.
Policy paralysis
The US economy grew by an annualised 1.9% in the first half of 2017, in line with estimates of 2% trend growth but lower than initial avowals by Trump's administration that it would lift growth this year above 3%.
Unemployment is below 5%, but nominal wage growth remains modest, constraining consumer spending.
Policy paralysis has delayed and will likely water down Trump's tax reform and infrastruc-ture spending plans. Risks have shifted to the downside. Growth this year is now more likely to undershoot 2% than overshoot.
Brexit brakes
Since the Brexit vote, the United Kingdom has gone from being one of the fastest growing G7 economies to the slow-est; sterling has fallen and inflation risen as predicted. The Bank of England cut its forecast for 2017 growth to 1.7% from 1.9% and for 2018 to 1.6%. Downside risks remain high given political and Brexit uncertainties.
Expanding EU
The euro-area grew at twice the pace of the United Kingdom in the second quarter of 2017. However, inflation has been
ECB tightening is supplanting US tightening in investors’ thoughts
US GDP growth may struggle to reach 2%, short of Trump’s 3% goal
Sources: Thomson Reuters Datastream
Central bank balance sheets (trillion dollars,rebased to $1tn in January 2003)
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20170
1
2
3
4
5
6
7
Bank of Japan
US Fed
ECB
The Fed has unveiled plans to reduce its balance
sheet; next year the ECB is likely to stop expanding
its balance sheet
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