Emmanuel Macron’s election as president means France has defused the run of electoral bombshells that have buffeted geopolitical stability over the past year, says Verisk Maplecroft.
However, in its latest Geopolitical Risk Outlook, the business management consultancy warns that the global outlook remains rocky and it describes the Trump administration’s unpredictability in the foreign policy arena as “a major geopolitical wildcard”.
The firm suggests that recent elections in France and South Korea will delay the most immediate threats to global stability, but investors and business also remain exposed to multiple drivers of risk across other key markets.
Issues to watch identified in the latest Outlook include the following:
- Macron’s win stabilises Europe for now, but the popularity of anti-establishment parties leaves key European Union (EU) powers four years in which to reform – or the eurozone could ultimately collapse.
- Despite the restraint shown on international trade, president Trump’s unpredictability in foreign affairs leaves allies and traditional adversaries guessing.
- The election of Moon Jae-in as South Korean president will at best keep tensions with the North simmering below boiling point, and a nuclear solution will remain elusive.
- Tighter monetary policy from the US Federal Reserve is increasing political risk in those emerging markets with significant external credit liabilities
- Russia has adopted a ‘wait and see’ approach to Trump, but is likely to test US resolve in the foreign policy arena sooner than later
The Outlook predicts that strong support for Europe’s populist forces will remain a primary driver of geopolitical risk over coming years. The France election result offers greater short-term stability to the region and is a significant relief to investors, but the respite may be short lived.
European centrist governments will have to carry out painful reforms to address popular discontent before the next major election cycle begins in 2021. If they don’t, anti-establishment parties have the potential to seize the political initiative in key countries such as France, the Netherlands and Italy. If that happens, the days of the eurozone could be numbered.
The unpredictability of Donald Trump in the foreign policy arena and his flexible approach to US engagement is called “a geopolitical wildcard”, particularly as he struggles to stamp his authority on the domestic front, leaving foreign policy as the area where he can make his greatest mark.
So far, he has taken a more measured approach in foreign affairs than expected, especially on the trickiest trade relationships. Disruption to global trade – a central concern before Trump took office – has not materialised. The administration’s backtrack on China’s renminbi (RMB) manipulation and the growing clout of pro-business White House advisors suggests significant trade volatility is unlikely. The quickly struck trade deals between the US and China underline Trump’s pragmatism on this issue. North American Free Trade Agreement (NAFTA) reform, which will also be less radical than initially envisaged, was welcomed by Mexico.
Recent US policy decisions have also had less obvious impacts on the geopolitical landscape. Washington’s tighter monetary policy will restrict global credit conditions and hurt markets relying on US dollars to fund trade and investment – especially those with the largest external liabilities. Many emerging markets are at risk of greater political instability, with Turkey, South Africa and Venezuela among those particularly vulnerable to violent disruptions to their political landscape.
Middle East oil producers also remain exposed to the risk that greater stateside production stemming from Washington’s ‘America First’ energy policy will keep prices supressed, limiting their ability to stem popular discontent through social spending. Saudi Arabia faces the largest shortfall in breakeven costs, needing a price of US$90 per barrel to balance its budget – double the money of where it currently sits. Iran and Kuwait also face challenges, though both economies are better equipped to weather the storm.
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