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quarterly forecasts

Mar 28, 2016 | 08:45 GMT

51 mins read

2016 Second-Quarter Forecast

It's tempting to blame Syria for all the geopolitical intrigue that will characterize the second quarter of 2016. It is the home of a protracted civil war, the source of Europe's migrant crisis and a major complication in Turkey's struggle with the Kurds. But in truth, Syria is merely a pawn in a larger game played by more powerful countries, each with their own designs in the Middle East.
(STR/AFP/Getty Images)

Overview

It's tempting to blame Syria for all the geopolitical intrigue that will characterize the second quarter of 2016. It is the scene of a protracted civil war, the source of Europe's migrant crisis and a major complication in Turkey's struggle with the Kurds. But in truth, Syria is merely a pawn in a larger game played by more powerful countries, each with its own designs in the Middle East.

Chief among them is Russia, which recently withdrew most of its troops from Syria. The military drawdown will not fundamentally alter the civil war, but it will certainly shape the political considerations of the countries invested in the conflict's outcome. Perhaps that was Moscow's intention all along. The Kremlin likely left, in part, to influence negotiations in Geneva and to extricate itself from a potentially long and costly military commitment. But it also left to try to shape Western perceptions of its actions in the Middle East, particularly before the Europeans decide in July whether they will lift their sanctions against Russia. (NATO members will also discuss plans to expand their presence on Russia's western flank.) Compelling the Europeans, however, will be easier said than done. Even the countries that are amenable to easing the economic pressure on Russia — Italy, Greece and Hungary, for example — would rather use the sanctions issue to bargain with Brussels for leniency on budget deficits, aid, bailout terms and bad bank deals.

The Russian drawdown will also complicate Turkey's negotiations with Europe on migration policies. Ankara has little intention of taking hundreds of thousands of migrants off Europe's hands, but it has tried to use the Continent's desperation to elicit a number of concessions. The most important is coalition support for Turkey's military incursion into northern Syria, where Kurdish militants have steadily extended their territory. As Russia scales down its role in the Syrian conflict and calls for the Kurds to be included in peace talks, Turkey will have a greater incentive to insert itself in northern Syria. But it will probably not have the support it needs to do so.

In fact, everyone involved in the Syrian conflict — and its associated conflicts — should manage their expectations. Russia has not yet left Syria, and even though its reduced presence could breathe some life into peace negotiations, few believe it will lead to a sudden and lasting breakthrough. In the meantime, attempts to impose a cease-fire in Syria will be limited, and Europe will keep searching for a viable solution to its immigration crisis as Euroskeptic voices grow louder. Turkey will not be able to get the support it needs to launch an effective offensive into northern Syria, and Kiev, fragile as it is, will be unwilling and unable to make political concessions in eastern Ukraine to satisfy Russia.

As Eurasia struggles to address its issues, the United States and China will shape the global economic climate in the second quarter. The U.S. economy will continue to grow, and the Chinese economy will continue to slow. A stronger dollar will create problems for China, leading to uncertainty that will, in turn, disrupt the U.S. economy. The relationship between the two economies will make global markets more volatile, but the European Central Bank's monetary stimulus should somewhat shelter the eurozone from the fallout. The same cannot be said for Japan, where a stronger yen and declining asset prices will likely hurt the economy. If they do, the government in Tokyo may enact additional stimulus measures. Meanwhile, the United Kingdom's June 23 referendum on whether it will leave the European Union will become more important as the quarter progresses, leading to rising instability in the United Kingdom and putting downward pressure on the value of the euro. But things will quickly stabilize if the British decide to stay in the union, as we suspect they will. Elsewhere in the world, smaller, healthier economies may be motivated to loosen monetary policies and weaken their currencies to stay competitive.

The global oil market, for its part, will remain oversupplied in the next three months as Iranian output returns to the market. Coordinating a production freeze will be at the top of OPEC's agenda during its June meeting, but Iran will refuse to make any significant cuts, as will other major producers. Saudi Arabia and its Gulf allies would rather wait for the market to slowly correct itself as U.S. output declines over the coming six months, suggesting another difficult quarter ahead for oil exporters.

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Mar 28, 2016 | 14:27 GMT

7 mins read

Europe

To the west of Eurasia lays Europe, a region predisposed to division. It is surrounded on nearly all sides by islands and peninsulas that make it difficult for Europe to cohere. The northern half of the continent, moreover, sits on a plain whose short, meandering rivers tend to empower countries without forcing them to work with others. The southern half is situated on more mountainous terrain that has historically impeded the creation of strong, unified economies. As a result, Europe is a continent riven by pockets of distinct cultures whose differences are all too often irreconcilable.
Europe is a continent riven by pockets of distinct cultures whose differences are all too often irreconcilable.
section Highlights
  • Improved weather will make the Aegean Sea easier to cross, prompting migrants from the Middle East to continue to try to reach Greece despite the recent EU-Turkey agreement meant to reduce migrant flows.
  • The quarter will be marked by political and economic uncertainty in the eurozone. 
  • Stratfor expects the United Kingdom to stay in the European Union.
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Crossing Borders

Improving weather will make the Aegean Sea easier to cross, prompting migrants from the Middle East to continue to try to reach Greece despite the recent EU-Turkey agreement aimed at reducing migrant flows. In turn, EU members will drag their feet when it comes to accepting the relocation of refugees to their territories.

Unilateral measures such as fences, border controls and asylum quotas will continue. With the main Balkan route almost completely closed, some migrants will seek an alternate passage to Northern Europe, such as through Albania and Bulgaria. Should those countries encounter increased numbers of refugees, however, they will strengthen controls at their borders with Greece.

An increasing number of incoming migrants will head to Italy. Some of the asylum seekers entering Albania will try to reach Italy by crossing the Adriatic Sea. Better conditions on the Mediterranean Sea will reactivate the route connecting North Africa with southern Italy. Italy will react by backing efforts in Brussels for an EU-wide response to the crisis in order to defend the continuity of the Schengen Agreement and to back plans to strengthen the EU presence in the Mediterranean. Meanwhile, some of Italy's neighbors may decide to close their borders to prevent migrants from moving north.

To stem the migrant surge, the European Union will present plans to create a European Border and Coast Guard to coordinate operations with national border authorities. Countries on the European Union's external borders, such as Italy, Greece, Poland and Hungary, will support the idea but will resist proposals by the European Commission to give Brussels the authority to deploy the agency to a member state without its consent. The proposed guard force will not be established during the quarter.

The quarter will also be defined by debate over the future of the Schengen area. Countries along the Balkan migration route will lobby for the suspension of Greek membership in the Schengen Agreement and the continuation of existing border controls. But Germany and Italy will back Greece, and Greece will remain a member of Schengen zone. Even so, the European Union, especially with the Brussels attacks fresh in everyone's memory, will tolerate a prolongation of border controls on sensitive parts of the migration routes.

The migration crisis will have political repercussions in Germany. Chancellor Angela Merkel's position will not be at stake, but the weak performance by her conservative party in March regional elections and gains by the anti-immigration Alternative for Germany party will create dissent within the government. Merkel will continue to look for an EU-wide approach to the migration crisis, but she will not find one, relying instead on a reduced number of countries that still support a plan to relocate migrants to Turkey.

Brexit

The British referendum on EU membership will take place June 23. Prime Minister David Cameron and several members of his Cabinet, as well as a significant part of the Labor Party, will campaign to remain in the European Union. Rebel Conservative lawmakers and the anti-immigration party UKIP will campaign for leaving. Stratfor expects the United Kingdom to stay in the European Union. Should a Brexit occur, however, it would trigger a political crisis in London, where officials would want to keep negotiation channels open with Europe.

Regardless of the outcome, Cameron's negotiation with the European Union has opened the door for other governments to make their own demands of the union, backed by threats to hold similar referendums. The British vote has also made it easier for governments to refrain from participating in the effort to deepen the process of Continental integration. The full effect of these changes will be felt well beyond the quarter.

The Fate of the Eurozone

The quarter will be marked by political and economic uncertainty in the eurozone. The Greek government will reach a deal with its lenders and will receive the next tranche of its bailout program. This means a default and a Greek exit from the eurozone will continue to be delayed. But the deal will come at a cost: weakening popular support for Athens and the progressive erosion of social safety nets for Greek households. Accordingly, Greece will face the constant threat of political and social revolt.

In Spain, the main political parties will fail to reach an agreement on forming a government. Intense negotiations to strike a deal will occur, but Spain will nevertheless probably have to hold new elections in late June. This will not lead to a significant economic or financial crisis during the quarter, though the political turmoil and the prospect of a new government, which could backtrack on some of the reforms introduced during the previous administration, will weaken market confidence in Spain. Madrid is likely once again to miss its deficit reduction targets, which will create more problems for Spain. The situation is similar in Portugal, where a fragile government will struggle to convince financial markets of its ability to heal the Portuguese economy. Because the Portuguese government consists of a shaky multiparty coalition, early elections cannot be ruled out. The second quarter will also be eventful for Cyprus, which will hold legislative elections May 22. Should pro-unification forces win, the internationally recognized Greek government in Nicosia will seek to continue negotiations with the Turkish Cypriot government in the north. Although the north and the south are both interested in keeping the negotiations alive, we do not expect any significant developments in the quarter.

The Italian and Portuguese banking systems would likely bear the brunt of any global economic disturbances, such as bad news out of the Chinese or U.S. economies, that affect the European markets. Spain might be vulnerable, too, thanks to political uncertainty in Madrid. Any wobbles are unlikely to be dramatic at this stage, however, since the package of measures unveiled by the European Central Bank on March 10 should provide sufficient buoyancy to asset prices and stability for eurozone banks' balance sheets.

EU: Regional Blocs

Warsaw will take new steps to increase its control over Poland's political system and economy, which will lead to new frictions with the West. During the quarter, the Polish government will introduce a special tax on supermarkets, a sector with significant foreign investment. Warsaw's populist moves will also polarize Polish society, and anti-government protests during the quarter will be renewed. But the opposition is weak, and the current government will remain in control.

As the NATO summit approaches in July, Warsaw will continue to demand a stronger military presence by the alliance in Eastern Europe. The Polish government will also look for more political cooperation from fellow members of the Visegrad Group, which also includes Hungary, the Czech Republic and Slovakia. Poland will seek to coordinate its position on EU issues with that group.

Serbia will hold elections April 24, a vote that probably will not bring significant changes to the country's foreign policy. The next administration in Belgrade will not change Serbia's intent to join the European Union while simultaneously protecting ties with Moscow at a time of heightened EU-Russian tensions.

During the final weeks of the quarter, debate over the status of EU sanctions on Russia will grow louder. Some EU members, such as Italy and Hungary, will send signals suggesting that sanctions may not be extended when they expire in late July. But the European Union is not likely to lift sanctions in the second quarter, and will in fact probably keep them in place at least until the end of the year.

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Mar 28, 2016 | 14:36 GMT

6 mins read

Eurasia

Eurasia is the world’s most expansive region. It connects the East to the West, forming a land bridge that borders Europe, the Asia-Pacific, the Middle East and South Asia. Forming the borders of this massive tract of land are the Northern European Plain, the Carpathian Mountains, the Southern Caucasus Mountains, the Tien Shan Mountains and Siberia. At the heart of Eurasia is Russia, a country that throughout history has tried, to varying degrees of success, to extend its influence to Eurasia’s farthest reaches — a strategy meant to insulate it from outside powers. But this strategy necessarily creates conflict throughout Russia’s borderlands, putting Eurasia a near constant state of instability.
Eurasia connects the East to the West, forming a land bridge that borders Europe, the Asia-Pacific, the Middle East and South Asia.
section Highlights
  • This quarter will be defined by Russia's efforts to reshape the Syria crisis and, relatedly, to negotiate away EU sanctions.
  • The Kremlin's plan to stave off economic crisis is slated to go into effect in the next three months.
  • For Ukraine, a major political shake-up is probable this quarter -- and sooner rather than later.
  • The ripple effects of the standoff in Ukraine between Russia and the West will continue to manifest across the periphery of the former Soviet Union.
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Echoes of the Cold War

This quarter will be defined by Russia's efforts to reshape the Syria crisis and, relatedly, to negotiate away EU sanctions. As Russia draws down its forces in Syria and as the Geneva talks on the conflict continue, Moscow will attempt to look more like a partner for a Syrian solution than like an aggressive interventionist. Russia still has significant influence in Syria politically and militarily, however, and it can ramp operations back up if it deems necessary. All of this will frame Russia's talks with the United States and the European Union. Above all, Russia is trying to change the atmosphere in the lead-up to two important events in the third quarter: the NATO summit in Warsaw and the EU sanctions decision.

Any decision to lift or ease EU sanctions against Russia prior to their expiration at the end of July would require a unanimous vote from all 28 member states, which will not happen this quarter. But an extension of the sanctions once they expire would also require unanimity. Russia will use the next few months to lobby the countries that are most amenable to easing sanctions, such as Italy, Hungary and Greece, to vote in Moscow's favor come July. Moscow is also inviting important EU leaders and European business elites to the St. Petersburg International Economic Forum in June for the same purpose.

Germany is the country to watch. Voices within Germany, the European Union and the United States are calling on Berlin not to let Moscow off the hook for its actions in Ukraine. But Germany is also looking for a way to slow the flow of refugees from Syria, an issue Russia is tying to its withdrawal from Syria and to the Geneva talks. From bilateral visits to multilateral engagements in Minsk and Normandy, diplomacy between Russia and the European Union will dominate the second quarter. Russia will also maintain its presence in Ukraine, though no major military escalations — or political concessions, for that matter — are expected.

In the meantime, Russia's saber-rattling toward the West is likely to rise leading up the NATO summit, despite the drawdown of forces in Syria. Russia's threats will be motivated by countries such as Poland, Romania and the Baltic states, which are pushing for permanent forces and an increased NATO presence in their regions.

Russia and Japan will hold high-level meetings and summits this quarter in what will appear to be a warming relationship. But Russia will not budge on the issue of the disputed Kuril Islands, and Japan will probably not lift sanctions until others (such as the European Union) do. Moscow will invite Tokyo to participate and invest in some large investment projects, particularly in energy, along the Arctic and in the Far East. The United States is pressuring Japan to keep its money and technology out of Russia, but Japan seems open to finding compromise on economic matters this year.

Russia's Internal Struggle

The Kremlin's plan to stave off economic crisis is slated to go into effect during this quarter. The plan includes increased state investment into the Russian regions, the automotive sector and the banks. At the same time, the Kremlin will likely enact more budget cuts, and some large firms can be expected to sell assets at home and abroad. Though the Kremlin will move forward with plans to privatize some firms, such as Russian Helicopters and Alrosa, it will still struggle to do the same with larger firms, such as energy giant Rosneft. The most important privatization to watch this year concerns energy firm Bashneft; Lukoil may be looking to challenge Rosneft for the firm's acquisition, sparking a battle between the energy giants that would require the intervention of the Kremlin. Moscow will also debate whether to curb Gazprom's domestic and export pipeline monopolies, though it is unclear if a decision will be made on the issue this quarter.

Meanwhile, the Kremlin will prepare for parliamentary and regional elections that will be held in the third quarter. The Kremlin is designing deals with opposition groups to try to bolster ruling United Russia's position come September, pressuring (and possibly reshuffling) the governors, and circumventing plans for protests. The Kremlin's biggest conundrum this quarter will be what to do with Chechen President Ramzan Kadyrov, who announced in the first quarter that he will not seek re-election. Thus far, it looks as though Kadyrov's announcement was intended to force Russian President Vladimir Putin to give him support and a mandate to continue ruling Chechnya.

The Ukraine Conflict

For Ukraine, a major political shake-up is probable this quarter (and sooner rather than later), including overhauls of the Cabinet and ruling coalition, though early elections are unlikely to be called or held. Despite surviving a no-confidence vote in the first quarter, Prime Minister Arseniy Yatsenyuk is likely to step down in favor of a new government led by parliamentary speaker Volodymyr Groysman. As long as early elections are avoided, much-needed financial assistance from the International Monetary Fund is likely to resume this quarter, and Ukraine should stay financially afloat.

Given Ukraine's political volatility, Kiev is unlikely to follow through on key political aspects of the Minsk agreement, such as granting autonomy to the separatist regions and recognizing elections in the Donbas region. The conflict in eastern Ukraine is not going away, though major offensives by the separatists are unlikely. Kiev will continue to confront pro-Russia separatists on one hand and far-right ultranationalist groups on the other, but the Ukrainian government will not fall.

The Fight for Russia’s Borderlands

The ripple effects of the standoff in Ukraine between Russia and the West will continue to manifest across the periphery of the former Soviet Union. In Belarus, the government will deepen economic ties with the West to offset lingering financial issues, but it will maintain strategic military and security ties with Russia. Moldova, which has been in the midst of a political standoff between pro-Russia opposition parties and the pro-EU government, will stabilize somewhat in the quarter. The frequency of anti-government protests will drop off, but Moldova's foreign policy will remain deadlocked. The Baltic states will keep pursuing alternative energy sources and will diversify away from Russia while seeking a stronger commitment from NATO, but no permanent NATO presence will be established in the area this quarter.

In the CaucasusGeorgia will build economic ties with Russia while looking for greater commitments from NATO in the lead-up to the Warsaw Summit; full NATO membership will elude Georgia this quarter and beyond, however. Azerbaijan will escalate the Nagorno-Karabakh dispute between itself and Armenia as it tries to divert attention from domestic economic difficulties. Still, major military hostilities are unlikely to break out. Russia and Turkey will try to influence talks between the two countries through their respective allies.

In Central Asia, economic issues stemming from falling remittances and growing unemployment will provoke protests and political instability in the region. Kazakhstan and Uzbekistan have plans to alleviate the pressure by privatizing firms, but they will have trouble finding international buyers. The threat of militant spillover along the Afghanistan-Central Asia border will be a concern, so Russia and the United States will continue to compete for security partnerships in the region. Tajikistan will increase security cooperation in areas such as counterterrorism with other countries, especially China, but will remain strategically aligned with Russia.

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Mar 28, 2016 | 14:58 GMT

10 mins read

Middle East and North Africa

The Middle East and North Africa is the world's crossroads. It encompasses the Arabian Peninsula, the mountains of Iran, the plains of Turkey, the deserts of the Levant, the lands north of the Sahara and all coasts in between. The story of the region, as is so often the case of places stuck between foreign players, is the story of trade, exchange and conflict. The traditional powers of the region are Turkey and Iran — Saudi Arabia and Egypt are the current Arab powers — and their competition for influence over the region's weaker states makes the Middle East and North Africa an arena of violence and instability.
The Middle East and North Africa encompasses the Arabian Peninsula, the mountains of Iran, the plains of Turkey, the deserts of the Levant, the lands north of the Sahara and all coasts in between.
section Highlights
  • Turkey's priority in the second quarter will be to address the existential threat it perceives from the territorial expansion of the Kurdish People's Protection Units in northern Syria. 
  • Although OPEC members may agree to freeze production at already high levels, some of the largest producers will not cut production to stabilize prices. 
  • In Yemen, there is a possibility for a truce between the Saudis and the Houthi militants along the northern border to turn into something more. 
  • Continued instability in Libya will be detrimental to the country's neighbors in North Africa.
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Turkey's Resurgence

Turkey's priority in the second quarter will be to address the existential threat it perceives from the territorial expansion of the Kurdish People's Protection Units (YPG) in northern Syria. Despite its drawdown, Russia can still block military advances — primarily through airstrikes — which could still deter Turkey from sending forces into northern Syria to establish a safe zone. In lieu of a full intervention, Turkey will use the opening as an opportunity to, with Gulf Cooperation Council support, provide northern rebel forces with weapons, funds and artillery support to try to weaken the YPG. The Turks will also use European anxiety over migrants to exact concessions on funding, visa liberalization and EU accession. NATO will be willing to negotiate with Turkey about increasing the alliance's surveillance and air defenses on the Syria-Turkey border, but it will stop short of participating in a ground offensive. Meanwhile, the United States will keep working with the YPG to fight the Islamic State, particularly east of the Euphrates River. To mitigate Turkish concerns, Washington will step up its support for rebels under Ankara's influence as well. 

Russia will promote negotiations in Geneva to show its utility in the Syrian crisis, but the talks will not bring about an end to the fighting this quarter. In recognition of the country's divisions, federalism will gain momentum as a potential model for a solution. Turkey will resist this solution and any plan that would give the Kurds more autonomy for fear that it would strengthen the YPG and its connections to the Kurdistan Workers' Party. Russia and Iran can use Syrian parliamentary elections in April to reinforce their argument that a solution must come from the elected government in Damascus, even though the civil war and President Bashar al Assad's government will greatly restrict voter turnout.

Loyalist forces, having consistently focused their efforts on the rebels, will now shift their operations toward retaking territory from the weakened Islamic State. The Syrian Democratic Forces will concentrate their efforts against the Islamic State in this quarter as well, with an emphasis on Raqqa and Deir el-Zour. Continued support from Turkey, the United States and the Gulf states to the rebels will not match Iranian and Russian involvement with and assistance to the loyalists, but it will be enough to help the rebels avoid defeat. 

Refugees fleeing from southern Syria will threaten Jordan's security. Though Jordan has tightened its border security with the help of the United States and other allies, the potential for militant attacks will continue to be a danger for the country.

Broken Contracts in the Middle East

Speculation will abound ahead of the June OPEC meeting. Although OPEC members may agree to freeze production at already high levels, some of the largest producers — Saudi Arabia, the United Arab Emirates, Kuwait and Qatar — will not cut production to stabilize prices. Moreover, another of the major producers, Iran, will not freeze or cut production now that sanctions have been eased. In fact, Iranian production will gradually rise throughout the quarter, and by year's end it will exceed pre-sanction production levels by 250,000-500,000 barrels per day. Saudi Arabia and its Gulf allies will prefer to see a market correction play out in the next few months.

Saudi Arabia and the Gulf countries will slowly and carefully unveil economic structural reforms throughout the quarter. The effects of subsidy pullbacks will be most visible in Bahrain and Oman. Though balancing controls, such as cash payments, will shield locals from the harshest effects, some social unrest is expected. In Bahrain, security forces — with Saudi and Gulf Cooperation Council (GCC) support — are well prepared to keep widespread unrest at bay should it start up in poorer or minority neighborhoods.

Financially, most GCC states will pursue international financing this quarter. Saudi Arabia, Kuwait and Qatar are all seeking billions of dollars to cushion the outflows from their reserves. Bahrain just canceled a bond issuance after S&P downgraded the country's debt level, so it is unlikely to try to issue another bond in the next few months, instead relying on Saudi Arabia for any immediate financial and security needs. A June GCC meeting will conclude discussions on the potential implementation of a value-added tax in 2018, setting a new precedent for the Gulf states, which are all reluctantly beginning the process of revising social contracts with their citizens.

In Iran, President Hassan Rouhani will use the momentum he gained from recent parliamentary and Assembly of Experts elections to formalize parts of the economic stimulus package proposed in October. Negotiations with foreign oil companies over the next few months could lead to the signing of large investment deals into Iran's oil sector. The Oil Ministry has set a target of a full year to sign all the contracts it seeks — contracts that could be worth $10 billion to $15 billion.

The Saudi Survival Strategy

With its financial pressures mounting, Riyadh will want to ensure that its investments are buying it the intended influence in the region. As demonstrated in Lebanon in the first quarter, Saudi Arabia is signaling to current and potential allies that it will financially reward only those countries that align their policy with its own. For countries as fragmented as Lebanon, this sort of fundamental shift in policy is impossible. Saudi Arabia will not abandon proxy battlegrounds such as Lebanon, but it will work to develop new and more reliable allies; in Lebanon, it will try to raise a Sunni militia to counterbalance Hezbollah. Meanwhile, to prevent Iran from exploiting Riyadh's absence, the United States and France will fill any void left by the Saudis in Lebanon when it comes to military assistance and financial aid. Other Gulf states, such as Kuwait, will opt for nuance over the Saudis' aggressive approach to relations with Lebanese factions. The intensifying Iranian-Saudi competition there ensures that the political stalemate over Lebanon's presidency will persist through the quarter.

The Yemen Civil War

In Yemen, there is a possibility for a truce between the Saudis and the Houthi militants along the northern border to turn into something more. The Saudi-led coalition's successful advance into the outskirts of Sanaa has tilted the balance toward a negotiated resolution, with new talks set to start in Kuwait in mid-April. But whatever peace deal could emerge this quarter, complete peace in Yemen will not be the result. Recent military movements and diplomatic actions have laid bare the rifts in the alliance between the Houthis and the forces loyal to Ali Abdullah Saleh; the former president will probably be left out of any political solution that should emerge. Were that to happen, Saleh's fighters would remain as opponents of the Saudi coalition's forces, but they would be too weak to put up much resistance — on the battlefield or at the negotiating table. 

An end to the Saudi coalition's campaign would do nothing to ease fighting between southern separatists, pro-government forces and extremist elements all vying for control in Yemen, particularly in the south. The Yemeni government will find it difficult to consolidate its control. Stronger than before, the southern separatists will stand firm against the central government. Meanwhile, the threat from jihadist factions affiliated with the Islamic State or al Qaeda will persist regardless of any peace agreement. Considerable time will be needed to repair the Yemeni security apparatus and rebuild its cooperation with foreign governments, which had been and will be instrumental in containing the militant threat.

Rebalancing Power in the Middle East

Preparations for a long-awaited offensive in Mosul will continue to take shape; Iraqi and international coalition forces have been increasing their numbers in the city's surrounding areas. Iraqi security forces will make gains in Anbar province as they proceed toward Fallujah, parts of which they could even capture this quarter. The participation of Shiite militias in these efforts will grate on local Sunni forces, particularly in Diyala province, where there will be violent clashes. Demonstrations against the government of Prime Minister Haider al-Abadi will probably escalate and could lead to calls for the president's resignation, while the prime minister struggles to implement anti-corruption reforms and to install a technocratic Cabinet. Should protests overwhelm the government, Iran will not hesitate to ditch al-Abadi and support popular replacements. Tehran will be actively shoring up alternative Shiite leaders to preserve its influence in Iraq and will work closely with political allies such as the Badr Organization to find a replacement premier who is both popular in Iraq and is pro-Iran. At the same time, Baghdad and Tehran will both be hesitant to back a candidate who would lead Western partners to withdraw their security support for Iraq. In addition, Tehran will insist on the involvement of the Shiite Popular Mobilization Forces in preparing for the offensive in Mosul.

Social unrest will get worse for the Kurdistan Regional Government, which is struggling to pay public sector employees. President Massoud Barzani will try to deflect attention from the protests and the challenges of his political rivals by calling for an independence referendum, but his calls will do little to reduce tensions. Turkey, though unnerved by the referendum talk, will continue its relationship with Barzani and will work to advance a natural gas pipeline project linking the Kurdistan Regional Government and Turkey. As Turkey's own military campaign against the Kurdistan Workers' Party militant group persists, tension between the Kurdish militants and Barzani's Kurdistan Democratic Party in northern Iraq will also grow and will raise the threat of attacks on the Kurdistan Regional Government-Turkey oil pipeline.

The Difficulties of North African Reform

Continued instability in Libya will be detrimental to the country's neighbors in North Africa. Even if the House of Representatives in Tobruk approves the Government of National Accord, a U.N.-backed unity government plan, intense competition among political factions will continue to wrack the country. The foreign military presence in Libya will expand to combat concentrations of the Islamic State through airstrikes and on-the-ground training and advising, particularly from U.S., French, Italian and British special operations forces. Continued political jockeying between the House of Representatives, the General National Congress in Tripoli, the unity government and the "Libya-Libya" dialogue means there could eventually be three or four governments in Libya claiming legitimacy in this quarter.

Tunisia will request further assistance from the United Kingdom and the United States in securing its borders from the Islamic State threat emanating from Libya. It will continue to court European, U.S. and Gulf financial support to stem domestic unrest, and it will be successful in containing protests this quarter. The surge of resignations from President Beji Caid Essebsi's ruling party, Nidaa Tounes, has subsided, and Nidaa Tounes is emerging from the ashes as a new party, Nidaa Al Horra, led by parting Secretary-General Mohsen Marzouk. The party and other emerging coalitions will gain a lot of attention and followers, while police and civilian protests against unemployment and low salaries will continue.

While Tunisia is fracturing, Algeria is consolidating. Security and constitutional reforms aimed at strengthening the role of civilian government and reducing the power of the presidency will proceed. Political opposition to these changes will be contained. Algeria will try to secure partners for its energy exports and reassure allies and trade partners of the stability of the president's political succession. Finally, the unveiling of a revised economic plan and a bond sale is expected in April in an effort to shore up the country's stagnant economy.

The Eastern Mediterranean

There is a higher threat of social unrest in Egypt in the second quarter than there was in the first quarter because of the country's severe dollar shortage and import interruptions. On the heels of currency devaluation, Egypt will also experience a rise in inflation. We expect to see greater counterinsurgency training and a surge of security forces in the Rafah-El Arish-Sheikh Zuweid triangle to counter increasing militancy in the Sinai Peninsula.

With Saudi prodding, incremental progress will likely be made in the Egyptian-Turkish rapprochement this quarter. Egypt's presence at the Organization of Islamic Cooperation summit in Istanbul in April will be a step in this direction. The gradual Egyptian-Turkish warming will take place at the same time Turkey is slowly improving its relations with Israel. Diplomatic relations between the two countries could be restored in the second quarter. As part of the negotiation, Turkish aid will be delivered to Gaza in the easing of the Gaza blockade and Fatah will likely regain control over the Rafah border crossing.

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Mar 28, 2016 | 15:15 GMT

12 mins read

Asia-Pacific

The Asia-Pacific is home to more people than any other region. Centered on the western rim of the Pacific Ocean, this region includes the easternmost countries of continental Asia as well as the archipelagos that punctuate the coast. Several of these countries, most notably China, experienced rapid economic growth in the second half of the 20th century, giving the region a new sense of global economic relevance that continues today. That relevance, however, depends largely on China, a power in transition whose rise is testing the network of U.S. alliances that have long dominated the region. How effectively Beijing manages its transition will shape the regional balance of power in the decades to come.
Centered on the western rim of the Pacific Ocean, the Asia-Pacific region includes the easternmost countries of continental Asia as well as the archipelagos that punctuate the coast.
section Highlights
  • An economic slowdown in China will pressure authorities to implement structural reforms.
  • The focus in Japan in the second quarter will center on preparations for the upper house elections in July.
  • Tension will persist between North Korea on one side and South Korea, the United States and Japan on the other.
  • Southeast Asian economies will continue to feel the pain of China's economic slowdown.
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China in Transition

In China, where efforts were already underway to rebalance the economy, an economic slowdown will pressure authorities to implement structural reforms. But authorities will meet resistance on both local and central levels, and how to pass reforms while mitigating short-term negative effects will be an important question for Beijing. The result will be inconsistent policy-making in planned economic policies such as industrial overcapacity cuts and yuan internationalization. President Xi Jinping and his loyalists will seek to tighten their grip on power and on the government's propaganda system, emphasizing the need for officials to toe the Party line and for local governments to address socio-economic issues.

Efforts to reach the targets set at December's Central Economic Work Conference will begin in earnest following the passage of the new government budget at the recent National People's Congress. To begin with, authorities will proceed with cuts to production and overcapacity in heavy industries, particularly steel and coal. Layoffs, furloughs and labor demonstrations will follow, especially in provinces that host major concentrations of coal and steel production, mainly in northern China. Meanwhile, heavily indebted local governments will bargain with the central government to foot a larger share of the fiscal burden of managing the resulting unemployment. Local administrations will also compete against one another for a larger share of central government resettlement funds, worth 100 billion yuan (around $15.5 billion), that will be allocated over the next two years. All the jockeying at the local level will make implementation of capacity trimming and worker relocation highly uneven. Jobs are likely to be slashed whether or not the policies to address unemployment are fully implemented.

Moves to reduce overcapacity will also encourage the expansion of local government bond programs inaugurated a year ago. The economic fundamentals of most local governments do not appear to have changed much since the rollout of the debt swap initiatives in 2015, so commercial banks likely will again be compelled to buy these bonds.

China will also begin to implement a program to allow banks to swap nonperforming loans for equity. This will reduce bankruptcies and clean up the balance sheets of underperforming companies. The program will also enable some "zombie companies" to take out more loans to stay afloat in the near term, partially mitigating rising unemployment in China but also increasing the long-run stresses on the country's financial institutions.

Meanwhile, local authorities in third- and fourth-tier cities, home to 70 percent of China's unsold housing stocks, will lower barriers for home purchases in order to reduce excess inventories. Demand will be low, however, as China's smaller cities face an uphill battle in convincing citizens to buy surplus housing. Moreover, lower purchasing barriers will encourage property developers to continue housing construction in these cities, albeit at a slower pace than in previous years. Meanwhile, looser restrictions on home-buying will also fuel property speculation in first-tier cities (long seen as safe investments), necessitating efforts to manage overheated local property markets through new regulatory measures, such as restrictions on the use of loans for housing down payments.

The economic slowdown will also prompt China to prop up its credit market through monetary easing to stimulate economic growth. However, the move will undermine Beijing's longer-term effort to reduce growing corporate debt levels. Defaults on bond repayments, especially in the metals, mining, property, transport and construction sectors, will climb during the quarter. Overall, the government will pump credit to allow some companies to refinance and stay afloat, while also tolerating a bigger share of defaults to help address the debt issue.

Beijing's focus on keeping the yuan stable, internationalizing the currency and opening its markets to foreign capital will run up against its interest in stemming capital outflows. Inconsistent policy will be unavoidable. In the second quarter, authorities are unlikely to allow a significant devaluation of the yuan, considering how two previous major devaluations negatively affected domestic and global markets — not to mention concerns that another steep drop in the yuan would accelerate capital outflows just when Beijing is trying to signal stability in policy. The country's substantial exchange reserves will provide the government a cushion with which to maintain the currency at acceptable levels.

China will work to consolidate its regulatory structure in the financial system, either under the Chinese central bank or via a new regulator merging the China Securities Regulatory Commission, the China Banking Regulatory Commission and the China Insurance Regulatory Commission. The effort will attempt to make Beijing's policies more coherent and prevent repeats of its recent struggles to stabilize the stock markets. The targeting of the financial sector in the ongoing anti-corruption campaign may have quieted overt resistance to regulatory consolidation, and there may be a nominal merger of its regulators during the quarter. Nonetheless, the logistical difficulties of untangling overlapping fiefdoms will hinder China's ability to coordinate its economic policies.

The Communist Party will centralize power to manage social tensions and to intimidate upstart factions vying for power.

The pursuit of economic stability will be accompanied by continued efforts by the Communist Party to centralize power, both to manage social tensions and to intimidate upstart factions vying for power ahead of the 2017 Party Congress. For example, the Party will use its latest wave of corruption investigations (government propaganda organs are prime targets) and the implementation of tough new restrictions on foreign nongovernmental organizations to tighten its control over the news media, state-owned or otherwise, as well as social media.

Neither China nor Taiwan will be interested in destabilizing their relationship while Taiwanese President-elect Tsai Ing-wen's administration is still trying to find its footing. Tsai will take office in May.

A Japanese Awakening

The focus in Japan in the second quarter will center on preparations for the upper house elections in July. Security and economic issues will dominate the agenda; Prime Minister Shinzo Abe's administration is seeking a constitutional change to facilitate an expanded security role for Japan and is struggling to stimulate economic growth.

The ruling coalition, led by Abe's Liberal Democratic Party, will attempt to build support to secure the two-thirds majority necessary to pass the constitutional amendment. Japan's Diet will also spend the quarter debating the Trans-Pacific Partnership bills submitted by the government in early March, potentially leading to ratification in the coming months. Meanwhile, the opposition, including a new party formed by the merger of the Democratic Party of Japan and the Japan Innovation Party, will coordinate efforts to try to deny the ruling coalition a supermajority in the upper house. Zeroed in on July elections, the Liberal Democratic Party will not want to do too much to fuel accusations that it is flouting Japanese constitutional restraints on military action abroad. It will also compel the central government to press local administrations to ramp up fiscal spending in an effort to spark short-term improvement in the economy, which will continue to sputter anyway because of the limited effectiveness of Abe's "Abenomics" agenda.

Tokyo will feel pressure to undertake another stimulus package, given the failing monetary policy and the perceived need to rely on more government spending due to weak consumer spending. Pressures will mount for a second attempt to introduce negative interest rates in the second quarter, though such a cut would be unlikely to improve the economic situation.

In May, Japan will host the G-7 summit, which will focus on the conflicts in Ukraine and Syria, security issues and tensions in Asia, and coordinating efforts to address the global economic slowdown. Ahead of the summit, Japan may try to bring together the G-7 members and Russia, potentially facilitating a visit by Russian President Vladimir Putin. Russia, a key party to efforts to resolve the conflicts in Syria and Ukraine, is also interested in attracting Japanese investment in Siberia. Tokyo appears open to these deals, but talks on a bilateral peace treaty are likely to remain gridlocked during the quarter.

Coping With a Nuclear North Korea

Tension will persist between North Korea on one side and South Korea, the United States and Japan on the other, with additional provocations by Pyongyang likely. In May, Kim Jong Un will preside over the Workers' Party of Korea's first congress since the 1980s. Kim will probably outline new policies and initiatives that mark the solidification of his and his party's rule and resolve in the face of external pressure, such as the new U.N. sanctions. Kim will also appoint trusted aides to positions once held by caretaker officials chosen by his father's administration. The North Korean leader will probably take the opportunity to demonstrate the pre-eminence of the Workers' Party over the military, whose power surpassed the party's during Kim Jong Il's rule. In the lead-up to the congress, China may begin to implement the newly passed U.N. sanctions more vigorously, reminding Kim of China's indispensability to North Korea. Nonetheless, Pyongyang has pledged new nuclear weapon and ballistic missile tests in spite of the new sanctions; it appears to have taken concrete steps to advance its nuclear weapons program, including by carrying out re-entry simulations. This increases the likelihood of additional nuclear and ballistic missile tests within the quarter, which may lead to more hostile relations with South Korea and the United States.

In South Korea, meanwhile, the fragmented political opposition will struggle to defeat the ruling conservative Saenuri Party in parliamentary elections in April. Saenuri remains unpopular, however, and may be the target of labor unrest in the wake of the closure of the Kaesong industrial complex and restructuring attempts in sectors such as shipbuilding. The decline in exports over the past 14 months will sustain pressure on South Korean exporters, though low oil prices will offset some of the related losses. Compared with China or Japan, South Korea enjoys relative economic stability and has room to initiate rate cuts without going into negative territory, which should make it easier to push for structural reforms in the next few months. But progress will be slow given the controversial nature of the proposed reforms, including reduced state support for the shipbuilding and construction industries and efforts to develop the services sector and small and medium-sized businesses. Labor reforms will especially be at risk of generating stiff opposition; though related protests have subsided in recent weeks, they are likely to grow in frequency and size closer to the April polls.

Southeast Asia: Burdened by Consensus

Across Southeast Asia, economies will continue to feel the pain of China's economic slowdown, which shows no signs of abating during this quarter. China's dumping of exports will pressure regional exporters and may emerge as a stronger point of friction. That said, the downward pressure on the yuan will be paired with similar pressure on Southeast Asian currencies, helping the others stave off competition from Chinese exports. Meanwhile, Japanese and Chinese firms will maintain their brisk pace of investment in the region. Recipients of that investment will play Beijing and Tokyo off one another and explore what opportunities the newly launched, China-led Asian Infrastructure Investment Bank might bring. However, the bank probably will not begin operations in earnest — certainly not at full scale — in the next three months. Some large infrastructure projects in Southeast Asia will be delayed until the bank is fully functional in order to secure more favorable terms. Indonesia and others are already submitting proposals for loans from the new bank, with Jakarta in particular looking for additional sources of funding to better shield itself from weak global demand and China's economic slowdown.

As the region copes with economic uncertainties, members of the Association of Southeast Asian Nations (ASEAN) will work to realize the opportunities of the newly launched ASEAN Economic Community and of a recently created trade mechanism with the United States. For example, Washington and ASEAN will start the process of establishing three regional centers (in Bangkok, Jakarta and Singapore) to enhance trade with and within the regional bloc and to launch technical discussions with members considering joining the Trans-Pacific Partnership. These efforts will focus on organizational issues, however, and no immediate, significant impact on trade facilitation is likely in this quarter.

Asia-Pacific: Among Great Powers

In the South China Sea, two U.S. freedom of navigation operations are scheduled to take place in the quarter. U.S. naval ships will sail near disputed, Chinese-held islands in a demonstration of Washington's commitment to protecting the sea's vital trade routes. Meanwhile, a Japanese P-3 Orion maritime patrol jet returning from anti-piracy missions off the Horn of Africa is expected to take the opportunity to conduct joint exercises in the South China Sea with an unspecified Southeast Asian claimant to the waters. Beijing will also probably continue construction work on these islands to facilitate civilian flights to and from the islands later in the year. Each of these events will heighten tension in the region. With Japan's ruling party distracted by upper house elections, however, Tokyo will likely refrain from actions that would support the opposition's narrative that the prime minister is violating Japan's self-imposed constraints on military activities abroad. China, for its part, will not want to jeopardize its invitation to join the U.S.-led RIMPAC multilateral naval drills in June and July.

The U.N.'s Permanent Court of Arbitration in The Hague, which has been reviewing whether partially submerged features in the South China Sea controlled by China give the country exclusive maritime rights, is expected to rule against Beijing and in favor of the Philippines in May. China will not accept the ruling and may choose to assert its claims by deploying additional military assets or sending fishing vessels to the disputed areas. China may also begin testing military flights over the Spratlys. The United States will probably undertake at least one freedom of navigation operation after the tribunal ruling to demonstrate its support for the decision. Washington will also continue encouraging individual and joint patrols involving Australia, Japan and India in the waters, but progress will remain slow because of domestic political constraints in all three countries. The United States and Japan will also seek to conduct joint naval or coast guard drills with Southeast Asian claimant states and make progress on new defense equipment deals. For example, the United States and the Philippines will work toward holding joint patrols in the South China Sea, while a convoy of Japanese warships (including a submarine) will pay a "good will" visit to the Subic Bay naval base in the Philippines in April and will make the first-ever visit by Japanese warships to Vietnam's strategic port at Cam Ranh Bay.

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Mar 28, 2016 | 15:27 GMT

5 mins read

Americas

The Americas stretch from the Arctic Circle in Canada to the southern tip of Chile. This geographically, culturally and politically diverse region is home to the United States, a nation whose geography helped it become the foremost economic and military power in the world — an ascendance aided in part by bringing Mexico and Canada into its sphere of influence. Farther south, the nations of South America are like islands, separated by vast spaces of impenetrable mountains, rivers and jungles. Try though these countries may to integrate more closely, deeper ties such as those that characters North America will prove elusive.
This geographically, culturally and politically diverse region is home to the United States, a nation whose geography helped it become the foremost economic and military power in the world
section Highlights
  • Venezuela will become less politically stable in the coming months.
  • The Colombian government and the rebel Revolutionary Armed Forces of Colombia will continue peace discussions aimed at reaching a final agreement this year.
  • The Brazilian opposition will push for the president's impeachment.
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Venezuela's Unraveling

Venezuela will become less politically stable in the coming months. During the second quarter, the Venezuelan opposition coalition will advance several legal and informal processes aimed at removing the president, including a recall referendum, a constitutional amendment and demonstrations. Institutions controlled by the ruling party could greatly delay the referendum and amendment. But even if the opposition fails to oust Venezuelan President Nicolas Maduro, he may not be safe from a growing movement within his own party.

After successfully making debt payments due in the first quarter, Caracas will have two more quarters in which to raise and save as much cash as possible ahead of large debt payments due in October and November. Venezuela will probably continue attempting one-off measures (selling more gold or negotiating an individual debt refinancing deal, for example) to raise the cash and will try to restructure its debt that is due over the next few years. Even if Caracas manages to raise additional funds, avoiding default will be difficult given the current economic stresses. The country's already high inflation will worsen in the second quarter, and food shortages will occur throughout the country. Small demonstrations will persist nationwide in protest of inflation, shortages, rising public transit costs, and deficient public electric and water service.

If the demonstrations against Maduro become widespread, they could trigger the deployment of the armed forces to restore order, increasing the likelihood of violence between the military and civilians.

Colombian Peace Process

The Colombian government and the rebel Revolutionary Armed Forces of Colombia (FARC) will continue peace discussions aimed at reaching a final agreement this year, but numerous factors could delay a deal. Key aspects of the agreement have yet to be agreed upon. Even if a deal were signed in the second quarter, it would not be implemented for months, and voters would need to approve it. The process of disarming and demobilizing the FARC will therefore drag out beyond the quarter.

Meanwhile, the rebel National Liberation Army could begin its own peace talks with the government in the second quarter if there are enough incentives for the group's breakaway units to join a negotiation. If it decides not to negotiate with the government, the group will miss its window, and Bogota will target it along with other criminal groups.

The Importance of Mexico

Mexico's public finances will continue to feel the pressure of low oil prices. Major cost-cutting initiatives at state-owned energy firm Petroleos Mexicanos, such as firings and a slowdown in activities, will continue. But the diversified Mexican national economy will keep growing, albeit at a slower pace than in previous years.

Brazil and Argentina

During the second quarter, President Dilma Rousseff and former President Luiz Inacio Lula da Silva will try to fend off challenges to Workers' Party rule from the opposition and from the ongoing Lava Jato criminal investigation.

Segments of the country's political opposition will keep pushing for Rousseff's impeachment. For Rousseff to face a real threat of impeachment, parts of the government's main coalition partner, the Democratic Movement Party of Brazil, and smaller parties in the ruling coalition would have to defect to the opposition, and her opponents would have to begin a concerted effort to remove her. The continued loyalty of Rousseff's coalition partners would make it difficult for any pro-impeachment camp to begin substantive discussions on her removal.

Argentine debt negotiators and lawmakers will move to resolve the 15-year impasse between Buenos Aires and its foreign creditors. The Argentine legislature will vote on lifting a series of regulations and legislation collectively referred to as the "lock law" during the second quarter. Removing the lock law would enable Buenos Aires to offer its creditors a deal to restructure its debt payments. A deal on the debt payments, which Buenos Aires has been in default on for more than a decade, would grant Argentina increased access to foreign capital markets over the next few years. Whether the government can make payments to its creditors by April 14, the deadline given by the holdouts (creditors who opposed previous debt repayment negotiations and have only now reached a settlement with the Argentine government), will depend on the court ruling.

After the Argentine congress clears the way for a debt agreement, a U.S. court must rule in Argentina's favor in a lawsuit brought by dissatisfied creditors. The court's decision is essentially the last hurdle Argentina must clear for its debt problems to be over. Meanwhile, a U.S. federal appeals court will rule in early April on lifting the ban on Argentine debt payments to creditors. If it lifts the ban, Argentina can once again access capital markets.

At the same time, Argentine President Mauricio Macri's measures to reduce the central government's deficit, such as raising the price of electricity and natural gas, are likely to spur inflation as they are implemented. Though Argentina is implementing inflationary reforms slowly to reduce their effect on the population, the public will feel the effects of rising inflation in the second quarter.

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Mar 28, 2016 | 15:32 GMT

3 mins read

South Asia

Everything that informs geopolitics can be found in South Asia: challenging demographics, geographic diversity, and contentious, ill-defined borders. The Himalayan Mountains form the northern border of South Asia, whose two main rivers, the Indus and the Ganges, support the region’s great population centers. India is the region’s dominant country, home to the world’s fastest growing economy. But its rivalry with neighboring Pakistan, a fellow nuclear power and growing consumer market, has made South Asia one of the world’s most dangerous nuclear flashpoints. The region is also a testament to how militancy and militarism can undermine the regional integration needed to unleash higher economic growth.
Everything that informs geopolitics can be found in South Asia: challenging demographics, geographic diversity, and contentious, ill-defined borders.
section Highlights
  • India's legislative gridlock will define the second quarter. 
  • The precarious security situation in Afghanistan will deteriorate further as the Taliban launch their spring offensive.
  • The slow pace of the India-Pakistan Comprehensive Bilateral Dialogue as seen in the first quarter will continue into the second quarter.
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India's Own Worst Enemy

During the second quarter, social unrest will continue over the January suicide of University of Hyderabad student Rohith Vemula and the pending sedition case against student activist Kanhaiya Kumar. This will give the opposition Indian National Congress party ammunition to thwart Prime Minister Narendra Modi's land, labor and tax reform plans. Modi will be unable to overcome the challenge and get his goods and services tax passed before the end of the budget session on May 13.

Instead, this quarter the prime minister will focus on what he can do: implementing popular measures in the $289 billion annual budget aimed at helping the country's rural agricultural sector. The measures would extend $130 billion in credit to farmers and set aside $16 billion to spend on job creation, farmers' welfare and rural road construction. These are measures intended to win votes in this quarter's state assembly elections in Assam, West Bengal, Kerala, Tamil Nadu and Puducherry.

India will become a full member of the Shanghai Cooperation Organization at the Tashkent summit in June, marking a step forward in the country's efforts to expand its economic footprint in Central Asia. Yet, progress toward growing this footprint will be slow given India's differences with Pakistan and difficulties in constructing trade routes through Afghanistan. 

Meanwhile, now that the Nepal-India border blockade has ended after five months, the two nations will begin to renew ties. The process will be complicated by Nepalese Prime Minister Khadga Prasad Sharma Oli's effort to strengthen relations with China during his state-level visit to Beijing in March.

South Asian Militancy

The precarious security situation in Afghanistan will deteriorate further as the Taliban launch their spring offensive. Helmand province will continue to see some of the fiercest clashes. Afghanistan, Pakistan, the United States and China will hold more talks as part of the Quadrilateral Coordination Group, but the intensified fighting will likely thwart the countries' efforts to open negotiations with the Taliban. Even if the Taliban do agree to peace talks, the Quadrilateral Coordination Group's divisions, the mystery surrounding the fate of Taliban leader Mullah Akhtar Mansoor and the Taliban's insistence on pursuing negotiations solely through their political office in Qatar will limit the talks' promise.

The India-Pakistan Rivalry

The slow pace of the India-Pakistan Comprehensive Bilateral Dialogue as seen in the first quarter will continue into the second quarter. Both countries will continue to argue over how to assign blame in the pending investigation into the Pathankot air force base attacks that took place in January. Militants will carry out sporadic attacks in Pakistan during the second quarter as the security situation in neighboring Afghanistan deteriorates. Some of the attacks will also be in response to the government's prosecution of the final phase of its anti-militant Operation Zarb-e-Azb in North Waziristan along the porous Afghan border. Like India, Pakistan will join the Shanghai Cooperation Organization at the Tashkent summit in June.

Relations between Pakistan and Bangladesh will remain tense as Bangladeshi Prime Minister Sheikh Hasina continues to put dissidents on trial for war crimes that occurred during the 1971 war that transformed East Pakistan into Bangladesh. The ongoing spat will further undermine the economic integration at the heart of the South Asian Association for Regional Cooperation, which will host its annual meeting in Islamabad during the third quarter. Moreover, Jamaat-ul-Mujahideen Bangladesh will continue to wage sporadic attacks in Bangladesh.

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Mar 28, 2016 | 15:48 GMT

7 mins read

Sub-Saharan Africa

Sub-Saharan Africa is a study in diversity. Covering an area that spans the entire width of the continent beginning at the Sahara Desert and ending at the southernmost tip of South Africa, the region is home to countless cultures, languages, religions, plants, animals and natural resources. It’s no surprise that it captured the imagination of Europe’s earliest explorers — and that it continues to capture the imagination of current world powers eager to exploit it. And yet despite the region’s diversity, Sub-Saharan African countries have common challenges — transnational terrorism, rapid population growth, endemic poverty and corruption — that prevent them from capitalizing on their economic potential. The coming years will be critical for the region, especially as its political institutions mature in a rapidly globalizing world.
Covering an area that spans the entire width of the continent beginning at the Sahara Desert and ending at the southernmost tip of South Africa, Sub-Saharan Africa is home to countless cultures, languages, religions, plants, animals and natural resources.
section Highlights
  • Municipal elections in South Africa will help shape the future direction of the African National Congress.
  • Economically, Nigeria has a difficult quarter ahead.
  • West African petroleum producers will continue to experience financial stresses due to low oil prices.
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The Post-Apartheid Era Ends

South Africa is planning to hold municipal elections between May and August, which will help shape the future direction of the African National Congress (ANC) as it approaches its next general party congress in 2017. President Jacob Zuma and the ANC are coming under fire from middle-class South Africans, and the Democratic Alliance, South Africa's primary pro-business opposition party, could win in key urban centers, such as Pretoria and Port Elizabeth. The ANC also faces attacks from the Economic Freedom Fighters, an upstart far-left party that appeals to the poor black majority in rural and semi-urbanized areas.

The ANC fears that should it lose any of these municipalities, it will struggle to recover them. The next two quarters will make it possible to gauge the extent to which ANC control over South Africa has diminished. Though unlikely, the ANC could delay the election if it feels that the risk of losing too many municipal areas beyond Port Elizabeth, Pretoria and a few others is too high. Delay would spark widespread protests, some of which could turn violent. 

Meanwhile, low commodities prices are exacerbating structural problems that contribute to South Africa's economic decline and the ANC's apparently waning popularity. The end of the second quarter also marks the beginning of South Africa's strike season, typically the source of disruptions to its supply chain and mining sector. Unlike in 2012 and 2014, this year's strike season will be subdued since most wage agreements in the more contentious sectors do not expire until next year. Disruptions on the scale of the 2014 platinum strike would be a surprise.

Finally, South Africa's drought will necessitate continued imports of agricultural goods. The arrival of winter, however, will free the government from other financial commitments, such as supplying energy for cooling. Despite the fall in commodities prices, South Africa still has a reasonably healthy level of reserves given that it has chosen to let the rand float. This gives South Africa room to spend to offset some of the cost of increased imports. Rising food costs, however, will exacerbate inflation, which has been climbing because of the weakening rand and rising domestic energy prices.

Nigeria: Obstacles to Prosperity

In the Niger Delta, amnesty programs remain firmly in place after President Muhammadu Buhari extended them in February. Low-level violence in Warri district will continue but will not coalesce into a broader Niger Delta militant movement. We expect Buhari to continue to go after former militant leader Government "Tompolo" Ekpemupolo, who is the most influential of the holdouts to the amnesty deal. Tribal and ethnic leaders in the delta support the government's pursuit of Tompolo.

Economically, Nigeria has a difficult quarter ahead. The naira will continue to face deflationary pressures; its black market rate is now 320 to the dollar, compared with an official rate of 199 to the dollar. Though the Central Bank of Nigeria's current fiscal strategy is untenable in the long run, Nigeria has several options for sustaining its budget in the short term, and it will begin finalizing several agreements for international financing (through a combination of loans and issuing debt). Buhari and Deputy Oil Minister Emmanuel Ibe Kachikwu will continue overhauling the vital petroleum sector. Throughout the quarter, Abuja will continue implementing its structural changes and unbundling of the vast Nigerian National Petroleum Corp., which was split into seven independent operational units in March.

In the northeast, violence emanating from Boko Haram will persist but generally not spread in the second quarter. The ability of the Islamist group, formally known as Wilayat al Sudan al Gharbi, to attack farther-flung targets such as Abuja or even Kano or Kaduna has been and remains degraded. The Nigerian armed forces are similarly limited, however, in their ability to counter Boko Haram in remote hideouts in northeastern Nigeria.

Commodities: A Cautionary Tale

In general, West African petroleum producers — including Ghana, Gabon, the Republic of Congo, Cameroon, Equatorial Guinea and, of course, Africa's second-largest oil producer, Angola — will continue to experience financial stresses due to low oil prices. Angola will maintain its austerity budget, which it has already cut by 20 percent for 2016. We do not expect austerity to spark large protests — the ruling Popular Movement for the Liberation of Angola will see to that. 

The Popular Movement for the Liberation of Angola will spend the next few months preparing for its party congress in the third quarter. President Jose Eduardo dos Santos has announced that in 2018 he will leave politics. Whether he will try to retain the party's top position during the congress is unclear, but either way, jockeying among the party's most powerful members to become his successor will continue. This will inevitably lead some factions and individuals to be marginalized, such as Vice President Manuel Vicente, the former CEO of state-owned oil company Sonangol, who has become entangled in a Portuguese corruption scandal.

Terrorist attacks stemming from al Qaeda in the Islamic Maghreb and affiliated groups will continue to be a risk in West Africa. Although countries such as Senegal, Ivory Coast and Niger are at risk, the most likely targets for attacks remain Algeria, Mali and Burkina Faso. Al Qaeda in the Islamic Maghreb affiliates in the Sahara and Sahel still lack the capability to attack hardened targets, which means their most successful attacks will continue to be against soft targets, similar to the attack in March at Grand-Bassam, the popular Ivory Coast beach resort. Unlike the terrorist attacks in southern Mali and other parts of West Africa, attacks in northern Mali will more resemble insurgency, such as hit-and-run attacks against the military. 

East African Integration

In East Africa, Tanzania, Uganda and Mozambique will continue making progress in numerous energy projects. Financial interest disclosures on projects are not expected this quarter, though they may emerge on projects in Mozambique in the second half of the year.

In Mozambique, the rift between the opposition Renamo and the ruling Frelimo will persist, contributing to low-level violence in the middle belt of the country. Renamo is incapable of seriously threatening Frelimo, so President Filipe Nyusi and Frelimo have no need to accede to Renamo's demand that the opposition group be allowed to control provinces its presidential candidate won in 2014 elections.

Old Leaders in a New Africa

Two trends related to elections have emerged in the Republic of Congo and the Democratic Republic of the Congo. In the Republic of Congo, President Denis Sassou Nguesso won re-election in March despite protests over his overturning of term limits in 2015. We expect low-level protests in the aftermath of the elections, but the lack of a significant opposition in the Republic of Congo means they will not become more than a minor nuisance to Brazzaville. 

The Democratic Republic of the Congo, meanwhile, will spend the quarter preparing for elections that will be held in the second half of the year. President Joseph Kabila still has not announced whether he intends to stand for re-election; even if he decided not to run, he would not announce it this quarter. Opposition groups will keep trying to build a coalition against him; Kabila will try to prevent them from doing so. As fragmented as the political opposition in the Congo is, a coalition would be difficult to form this far from the elections.

No Solutions in South Sudan

Negotiations to close the rift between South Sudanese President Salva Kiir and rebel movement leader Riek Machar will continue. Although Kiir named Machar his vice president, the two are deeply divided over aspects of the August 2015 peace deal, such as the number of states South Sudan should have. A lasting solution will not happen this quarter, and steps toward any resolution will be small.

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