2018 third-quarter forecast

Countries to Watch in Q3

8 MINS READJun 7, 2018 | 23:12 GMT
section Highlights

When we step back and assess the main sources of geopolitical risk to the global economy for the quarter, it's a mixed bag. Trade frictions will be high on multiple fronts, but they are unlikely to spiral into a trade war. There will be dramatic episodes in the U.S.-North Korea negotiation, but the risk of a military scenario will be low. Iran's risk to oil markets is largely known and underway. The election of a Euroskeptic government in Italy is driving up financial risk in Southern Europe. A confluence of macroeconomic factors is at the same time creating a perfect economic storm over several spots on the map.

The U.S. Federal Reserve appears to be on course for further monetary tightening this year, while other major central banks are proceeding with caution, creating upward pressure on the dollar. Combined with higher oil prices, the dollar's rise will compound pressure on countries that have large energy needs. The pain will be more acute for those countries with high amounts of dollar-denominated debt that are more vulnerable to swift capital outflows when spooked investors take cover under safer assets. The resulting currency pressures will stoke inflation and aggravate political problems in many countries, including Turkey, Argentina, Brazil, Colombia, Mexico, South Africa, India and Venezuela.


Turkey will hold presidential and parliamentary elections June 24, a year and a half ahead of schedule. Turkish President Recep Tayyip Erdogan has a lot riding on the vote after narrowly winning a referendum to enhance the powers of the presidency; if he wins, he could remain in the presidency until 2029. By holding the election so early, Erdogan is trying to head off both a nascent opposition coalition and an economic hailstorm pelting his voter base. Turkey's electorate is essentially split down the middle, and a diverse set of opposition parties are forming a coherent argument against Erdogan and his handling of the economy. An election that could yield narrow margins and end in a runoff raises the potential for vote rigging and public outcry, but Erdogan will have the benefit of power working in his favor.

The incumbent president can rely on the country's state of emergency to manage any fallout, all the while spinning any criticisms from Europe into nationalist propaganda. Turkey's hefty dollar-denominated debt, together with Erdogan's attempts to strong-arm the central bank to defy market pressure, will make this a particularly stressful quarter for the Turkish economy. On top of the country's political and economic woes, Turkey is facing stiff headwinds in its strained relationship with the United States as Washington tries to leverage secondary sanctions against Russia and Iran to constrain Ankara's relations with them.

Charting the course of the Turkish lira.


Argentina, under currency pressure from a rising dollar and a mountain of dollar-denominated debt, faces a story similar to Turkey's. But in Argentina, the political damage is likely already done: As the weak peso continues to feed stubbornly high inflation, it will further erode President Mauricio Macri's support base. What's more, under the conditions of a deal with the International Monetary Fund for credit lines, Macri's government will probably have to cut public spending, including transfers of funds to provincial governments. The cutback will cause opposition governors to pressure the national government for more money by pulling back congressional support for Macri's proposed legislation, such as labor reform. Coupled with Argentina's growing trade and current account deficits, voters' economic pain will push the next government toward greater protectionism. It will likely resist moves from the Common Market of the South, better known by its Spanish acronym, Mercosur, to explore additional trade agreements, though deals that are already well underway — such as the EU-Mercosur trade agreement — are safe. In time, Argentina will be out of step with other Mercosur members, such as Uruguay and Paraguay, on foreign trade.

A chart showing argentine currency values.


In Mexico, the strong U.S. dollar is already hitting the peso hard. Prolonged uncertainty over the North American Free Trade Agreement renegotiation and a potential populist victory in the presidential election this quarter threatens to create more economic turmoil. Mexico will hold elections for the presidency and for Congress on July 1. Among the presidential contenders, populist candidate Andres Manuel Lopez Obrador leads the pack. Lopez Obrador's political influence, should he become president, will depend on whether he controls a congressional majority. Much of his policy agenda, which includes a rollback of education reform, fuel price freezes and cuts to the federal budget, will be virtually impossible to implement without congressional consensus. Mexico's historically dominant parties, the Institutional Revolutionary Party (PRI) and the National Action Party (PAN), will form a tactical alliance in Congress to try to block Lopez Obrador. In the event that Lopez Obrador picks up a majority in both houses, PRI and PAN would have to rely on the courts to resist the president's more controversial policies.

At this point, the odds are looking slim that the United States will reach its goal of closing a NAFTA deal ahead of the Mexican elections. Canada, Mexico and the United States still have yet to agree on overall rules of origin requirement or on regional content quotas for individual automotive components. While Canada could adapt to the U.S. demand to shift a portion of vehicle production to higher-wage areas, Mexico, which relies on lower wages for competitiveness, would find it more difficult, if not impossible. And even if NAFTA's parties come to an agreement in time, the White House is likely to face resistance from the U.S. Congress if a deal lacks strong protections for investors and labor. Trump could try to break the stalemate by threatening a withdrawal from the agreement or by breaking the negotiation down to the bilateral level, but such extreme moves on NAFTA would likely galvanize Congress to take legislative action to prevent or nullify them.


The Colombian peso has fared far better than its regional peers, but there are still lingering risks to the country's peace agreement with the Revolutionary Armed Forces of Colombia (FARC) that will bear close watching this quarter. A pending investigation into high-level FARC leaders by Colombian and U.S. authorities will complicate things for the next government if a centrist or leftist candidate comes to power in the June 17 runoff election. Depending on how far the investigations go, the peace deal with the FARC could falter and put oil companies and other businesses in northeastern and southwestern Colombia in danger of extortion or attack. Colombia's next president will also be more reluctant to sign new trade agreements as domestic industries come under greater pressure. Pending trade agreements, particularly those with Turkey and Japan, will be at risk unless their proposals for agricultural trade improve significantly for Colombia.


As presidential campaigning picks up this quarter in Brazil for the October elections, the pace of economic reforms will slow. Higher fuel prices are inspiring protests and feeding a growing anti-establishment current in the country. In Congress, lawmakers won't have the appetite to approve controversial measures like pension reform. The traditional parties that back the current government, such as the Brazilian Democratic Movement, will try to seal an alliance with as many other parties as possible to try to fend off the anti-establishment threat coming from right-wing lawmaker Jair Bolsonaro, environmentalist Marina Silva and center-left nationalist Ciro Gomes.


For India, the world's third-largest oil consumer, rising oil prices and a strengthening dollar mean a wider trade deficit and investor outflows from the country's equity and debt markets. These global developments are happening as the ruling Bharatiya Janata Party is ready to fund populist measures to win votes ahead of the 2019 elections, suggesting that the fiscal consolidation drive in the world's fastest-growing major economy will slow through next year, while job creation stays sluggish.

India is walking a tightrope among China, Russia and the United States. Prime Minister Narendra Modi wants to avoid another politically costly standoff with China as he campaigns for a second term in office. With that in mind, he's embarking on a tactical recalibration with Beijing, suggesting the relationship between the two nuclear giants will return to a state of managed tension, even as each side quietly continues military and infrastructure buildups on the border. Facing the threat of U.S. sanctions for its economic ties to Iran and its defense ties to Russia, New Delhi will begrudgingly bargain for exemptions while balancing with Russia. The U.S.-India relationship will be strained as a result. The degree to which these irritants undermine the growing strategic defense partnership between the two countries will become more evident when their foreign and defense chiefs meet in July.

South Africa

As the 2019 elections draw closer, South African President Cyril Ramaphosa is trying to have it both ways: He needs to push a pro-business agenda to stimulate the economy while pursuing populist measures to shore up the African National Congress's electoral defenses. Ramaphosa will be focused mostly on winning over investors in the next quarter before the 2019 campaign season gets into full swing, though downward pressure on the rand threatens to ratchet populist pressures up. Steadily rising investor confidence is likely to extend to the mining industry as the new administration tries to streamline regulation and increase transparency through a new mining charter. Anti-graft efforts, moreover, will continue apace under Public Enterprises Minister Pravin Gordhan, who plans to target South Africa's state-owned enterprises — a hotbed of corruption.


Venezuela is too far gone for higher oil prices to alleviate its troubles this quarter. In fact, its cratering oil production — already down by 500,000 barrels per day this year, is a big factor behind the global shortfall. Production will fall further as inflation worsens, currency shortages at state oil company Petroleos de Venezuela become more acute and workers desert their posts. The Venezuelan government, meanwhile, will try to keep local transport ships from docking at oil terminals where creditors could seize the oil as payment for arbitration awards and disrupt the country's energy export activities. Along with possible U.S. sanctions on the energy sector, the threat of large-scale asset seizures — which would raise the risk of unrest or even a coup — will loom large in Venezuela this quarter.

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