Europe

While many of the trends identified in our annual forecast remain slowed down by COVID-19, their pace is picking up as countries carefully emerge from lockdown.

Quarterly

Global Trends 

<p>COVID-19 will dominate the world economy in Q3, just as it did in Q2. World output should contract somewhere between 5-8 percent in 2020, assuming no new major outbreaks. Global growth forecasts continue to be revised downward as we suggested in our Q2 forecast, and it&#39;s now clear that a deep global recession is unavoidable.&nbsp;</p><p>Lockdown measures are easing in major developed countries and economic activity is slowly beginning to recover. There is risk of a resurgence of COVID-19 cases in China and some U.S. states, and failure to cope adequately with the initial wave in emerging markets and developing economies will continue to be a drag on growth.&nbsp;</p><p>Disruption of supply chains, business closures, widespread unemployment and the need for income support will affect the global economy not just in Q3 and for all of 2020, but at least through 2021 and possibly into 2022.<br />&nbsp;</p>

Global Economy: Deep Recession, Shallow Recovery

<p>Emerging markets as a group will be vulnerable in Q3 to external financial pressures exacerbated by falling exports and a high level of exposure in foreign currency borrowing. In particular, several large countries have relatively high short-term debt due in 2020 as a percentage of foreign exchange reserves, leaving them at risk of a cessation of capital inflows. Countries most exposed to the risk are Argentina (312.4 percent), Chile (107.9 percent), Turkey (263.4 percent), Malaysia (123 percent) and South Africa (116.7 percent). Indonesia (51.2 percent) and Nigeria (49.2 percent) are not as exposed, but severe recessions resulting from unclear COVID-19 containment strategies and oil price declines that affect not only exports, but domestic investment, could have lingering effects on public finances and debt serviceability. Countries with a large share of local currency debt owned by non-residents are also subject to higher risks of capital flight, including Turkey (15 percent), Mexico (28 percent), Indonesia (nearly 40 percent), Malaysia (25 percent), Russia (30 percent) and Chile (20 percent). These indicators are not predictors of default, but do increase susceptibility to economic shocks deepened by the pandemic.<br />&nbsp;</p>

<p>In addition, Mexico and Brazil &mdash; which has yet to bring its first wave of COVID-19 under control &mdash; are expected to see GDP contractions of at least 5 percent in 2020. U.S. Federal Reserve swap agreements with Mexico and Brazil will ease funding pressures, but high unemployment and income inequality will continue to fester.</p><p>A generalized, systemic emerging market debt crisis is unlikely in Q3, even in environments that restrict capital flows and so possibly deepen COVID-related economic dislocations. Countries already in debt distress at end-Q2 include Angola, Argentina, Ecuador, Lebanon and Zambia, all of which are at various stages of default or attempting to restructure debt. Others could join that list in Q3 and later, although capital flight from emerging markets stabilized in Q2 after a precipitous net decline of about $100 billion in Q1. In general, countries vulnerable to external financing and debt difficulties prior to the pandemic are under increased liquidity pressure that will sap foreign exchange reserves and further slow economic growth, leading to possible debt or foreign exchange crises for individual countries, if only temporarily.&nbsp;</p>

Tight Financial Conditions for Emerging Markets

<p>The phase one trade deal between the United States and China will remain fragile in the third quarter and could fall apart entirely as U.S. President Donald Trump continues to take a hard line on China in the lead-up to presidential elections. Several triggers could lead to the deal&#39;s collapse, such as removing Hong Kong&#39;s separate customs union in retaliation for China directly implementing a national security law for Hong Kong, as well as concerns about Chinese compliance with the trade deal. Even if the phase one trade deal survives the quarter, China will remain well short of its $140 billion target for U.S. imports in 2020. And the closer the United States gets to the elections, the more likely Trump will be to press for greater compliance from China.&nbsp;<br />&nbsp;</p>

U.S.-China Phase One Trade Deal Faces Significant Tests

<p>The United States will demand that the U.N. Security Council pass a resolution to extend its arms embargo on Iran, which expires in mid-October. If it fails, then the United States will trigger the Joint Comprehensive Plan of Action dispute clause to extend the embargo, thereby undermining Security Council authority. Neither China nor Russia will respect the U.S. decision, and each could boost exports to Iran. France, the United Kingdom and other European allies of the United States will respect the arms embargo extension, and thus refrain from selling arms to Iran. Although its response may not happen this quarter, Iran will likely consider something equally drastic, including suspending the Additional Protocol agreement with the International Atomic Energy Agency, but will probably wait until after the U.S. presidential election to see who it will be dealing with in 2021.&nbsp;<br />&nbsp;</p>

The U.S. Plays Hardball With Iran at the U.N. Security Council

<p>The OPEC+ grouping will begin to unwind its deep production cuts in August in line with Russia&#39;s preference unless a COVID-19 resurgence produces a wholesale reversal of demand recovery. Saudi Arabia has agreed to this since Russia, which has over 2 million barrels per day of spare capacity, already could cheat if it so chose. This unwinding initially entails a reduction in the headline volume from 9.7 million bpd to 7.7 million bpd through the end of 2020. Laggards like Iraq and Nigeria agreed at the June 4 meeting to come into compliance, but will probably still fall short of their pledges to cut. The price impact of the initial phase of unwinding will be to prevent Brent from rising past $50 per barrel in Q3, in line with Russia&#39;s desire to keep U.S. drilling at a level where production will remain reduced.<br />&nbsp;</p>

OPEC+ Begins a Gradual Unwinding of Production Cuts

<p>During the first half of the year, arms control treaties have faced incremental challenges. Most notably, the U.S. withdrawal from the Treaty on Open Skies marked another major collapse, though Russia and European signatories are still expected to uphold the treaty. Meanwhile, Washington&#39;s return to negotiations over an extension for New START has offered some potential progress despite the continued U.S. desire to bring an unreceptive China into the treaty. While Russia openly seeks an extension or negotiations for a replacement treaty, its ability to achieve that will depend on Washington&#39;s insistence on Chinese inclusion. Meanwhile, growing multipolar tensions will continue to threaten other arms control treaties, such as the Comprehensive Nuclear Test Ban Treaty and the Missile Technology Control Regime.</p>

Hope for New START Amid a Continued Erosion of Arms Control Conventions

Asia-Pacific 

<h3>In Hong Kong, Key Elections Will Fuel Unrest</h3><p>A major upswing in protests against Beijing&#39;s imposition of greater <a href="/article/hong-kong-s-election-lights-fuse-another-wave-unrest">control over the city</a> will accompany the lifting of Hong Kong&#39;s COVID-19 restrictions and the period ahead of September Legislative Council elections, with pro-democracy lawmakers pushing to maintain the public furor in hopes of winning a majority. Losing patience with the chronic unrest in Hong Kong and with the Hong Kong government,</p>

<p>Beijing will put in place a <a href="/article/details-chinas-hong-kong-security-law-confirm-critics-fears">tight national security law</a> in hopes of weeding out the opposition, quieting protests and supporting a stable business environment. Such a move will fuel unrest, however, even as it empowers authorities to engage in crackdowns. If the pro-democracy camp wins in September, the central government will move to circumvent local control, eroding the city&#39;s political autonomy even as it safeguards the economic value of Hong Kong. The United States will pursue actions to <a href="/article/us-threats-overhaul-hong-kong-policy-intensify-china-confrontation">punish Hong Kong&#39;s government</a>, including potential shifts in tariff exemptions that erode Hong Kong&#39;s status as a neutral business hub. The United States is unlikely to substantially sanction the Hong Kong financial sector, but could proceed with plans to increase scrutiny for Chinese companies listed on U.S. stock exchanges.</p><h3>U.S. Elections Will Intensify China Tensions</h3><p>U.S.-China tensions will mount throughout the third quarter, with numerous fronts of competition roiling bilateral relations, such as Hong Kong, the South China Sea, Taiwan, Huawei and human rights issues. Domestic factors in each country will <a href="/article/covid-19-heats-us-china-competition">contribute to souring relations</a>, with the Trump administration facing headwinds in its November reelection bid and China dealing with a troubled economy &mdash; making rivalry politically expedient. Hong Kong will be the most dynamic driver of overall friction, and rising tensions overall will put the phase one <a href="/article/amid-rising-hong-kong-tensions-us-china-trade-deal-hangs-thread">trade deal increasingly in question</a>. Beyond trade, the United States will continue to move forward with plans designed to decouple parts of the Chinese and U.S. economies, <a href="/article/us-weaponizes-covid-19-anger-against-china-s-tech-sector-supply-chain-semiconductor">particularly for the tech sector</a> and parts of the financial sector. The United States will step up efforts to increase Taiwan&#39;s standing in international institutions as Beijing engages in policies to disrupt, <a href="/article/chinas-evolving-taiwan-policy-disrupt-isolate-and-constrain">isolate and block Taiwan</a> amid its loss of influence over the island&#39;s politics.</p>

<p>In the <a href="/article/even-pandemic-does-not-stop-south-china-sea-competition">South China Sea</a>, increasingly confrontational stances by claimants opposing China will lead to further Chinese buildups there, drawing U.S. condemnation and increased freedom of navigation operations. U.S. allies South Korea and Japan will find themselves increasingly squeezed between the two powers, putting in question their recent successes in fostering better links to China beyond their robust economic ties. Australia will see itself increasingly targeted by <a href="/article/covid-19-tensions-place-australian-farmers-chinas-crosshairs-argiculture-exports-economy-trade-tariffs">Chinese economic measures</a> in retaliation for its support of U.S.-led regional initiatives.&nbsp;</p><h3>With COVID-19 Easing, Cluster Outbreaks will Trouble Recoveries&nbsp;</h3><p>The staggered exit of most of the Asia-Pacific region from COVID-19 outbreaks throughout the third quarter will challenge any economic rebound. China will see a slow and <a href="/article/slow-uneven-return-economic-recovery-china">uneven economic recovery</a> amid sluggish domestic demand and investment, with growth further dampened by a slowdown in exports. This will compel the Chinese government to ramp up stimulus to shore up employment, infrastructure construction, consumption and ailing businesses. Continued clusters of infection in spite of intense disease controls will further challenge recovery and reopenings in China. Countries that have adopted a less restrictive approach, such as Japan, South Korea and much of Southeast Asia, will see an even greater risk of spikes in cases that will require selective reimposition of restrictions. Indonesia will continue to be the outlier in the region, with its sustained COVID-19 outbreak delaying the president&#39;s banner economic reforms, which will be needed for any hope of a post-outbreak recovery.&nbsp;</p><h3>U.S.-North Korea Dynamic Stagnates While Inter-Korean Tensions Mount</h3><p>The third quarter will see little to no progress between the United States and North Korea to roll back North Korea&#39;s nuclear program. Instead, North Korea will focus rhetorical and even <a href="/article/north-korea-and-south-korea-inch-closer-toward-low-level-military-confrontation">military pressure on South Korea</a> in hopes of compelling Seoul to help with easing sanctions and providing economic relief, taking advantage of rifts within the South and of U.S.-South Korea frictions. The looming U.S. presidential election will bring major questions as to whether the personal Trump-Kim relationship will endure beyond that point, neutralizing the primary reason for any hope of a breakthrough deal.<br />&nbsp;</p>

<p>North Korea will continue its efforts to perfect its missile systems, build out its nuclear arsenal and shore up regime finances. The wild card amid all of this is leader <a href="/article/north-korea-kims-rumored-ill-health-renews-succession-fears-political-transition-pyongyang">Kim Jong Un&#39;s health</a>, which could trouble the political balance enough to push North Korea toward a more aggressive posture that could erupt into an inter-Korean standoff or a testing cycle that sweeps away the remnants of the U.S.-North Korea outreach.<br />&nbsp;</p>

Key Trends for the Quarter

<p><strong>July (unspecified date):</strong> Possible primary for Hong Kong&#39;s pro-democratic opposition.<br /><strong>July 1</strong>: The 23rd anniversary of the British handover of Hong Kong to mainland China and the one-year anniversary of the protester takeover of the Legislative Council building.<br /><strong>July 14-Aug 31:</strong> Hong Kong summer student holidays.&nbsp;<br /><strong>Before August: </strong>Hong Kong&#39;s regulations empowering the government to restrict gatherings and business activity due to COVID-19 expire.<br /><strong>Before August:</strong> Rumored timeline for enactment of Hong Kong national security legislation.&nbsp;<br /><strong>Aug. 4:</strong> Deadline for U.S. Treasury to give recommendations to U.S. investors on Chinese companies.<br /><strong>Aug. 31:</strong> Hong Kong&#39;s powers to restrict movement due to COVID-19 expire.<br /><strong>Sept. 6:</strong> Tentative Hong Kong Legislative Council election date.&nbsp;<br /><strong>Unknown date:</strong> Possible visit of Chinese President Xi Jinping to Japan.</p>

Key Dates to Watch

Middle East and North Africa

<h3>COVID-19 and Low Energy Prices Continue to Take an Economic Toll</h3><p>Middle Eastern countries will suffer economically from the global COVID-19-induced recession in Q3, forcing governments to introduce yet more stimulus while also accelerating the timeline for some revenue-generating, but controversial, economic reforms. Major energy producers in the Gulf Cooperation Council plus Iraq, Iran and Algeria will continue to trim expenditures and take on debt to reduce budgetary shortfalls. For tourism-dependent economies in the region like the United Arab Emirates, Morocco, Egypt, Lebanon and Tunisia, the ongoing COVID-19 pandemic will dent national incomes during the <a href="/article/egypt-covid-19-aggravates-weak-start-2020-economy-political-risk">traditionally lucrative travel season</a>.<br />&nbsp;</p>

<p>This will contribute to economic stagnation, increased unemployment, and greater demand for costly state and international financial support for the tourism sector. Wealthier countries in the region, especially Saudi Arabia, the United Arab Emirates and Qatar, have the financial reserves to withstand the <a href="/article/arab-gulf-economies-cope-covid-19-conundrum-coronavirus-gcc-oil-gas-energy-economy">economic pressure in the quarter</a> without any political consequences. Countries without such reserves, by contrast, will face greater social and political pressure.&nbsp;</p><h3>Iran-U.S. Tensions Endure as Major Source of Regional Instability</h3><p>Iran will push back against U.S. containment efforts using its traditional asymmetric methods and links to allies in countries like Lebanon, Iraq, Syria and Yemen, keeping the risk of a <a href="/article/tweet-trump-ups-ante-iran-persian-gulf-us-conflict-navy-maritime">summer clash with U.S. forces</a> high.&nbsp;In retaliation against ever-increasing U.S. sanctions on Iranian shipping and nuclear and energy sectors, Iran will steadily increase its nuclear activities, including increasing stockpiles of low-enriched uranium. It will also engage in a more aggressive cyber strategy against commercial targets in the Persian Gulf and the broader region.&nbsp;<br />&nbsp;</p>

<p>The severity of the persistent COVID-19 outbreak in Iran will deepen the country&#39;s ongoing economic struggle, lessening the government&#39;s domestic political capital and pushing it to seek to shift blame for its missteps onto the United States and its allies. Meanwhile, since the expanding U.S. sanctions strategy seeks to cut off Iran&#39;s regional sources of financing, the strategy will consequently inflict <a href="/article/lebanon-impending-debt-default">economic and political damage on Lebanon</a>,&nbsp;whose Hezbollah-linked government is increasingly in Washington&#39;s crosshairs, and Iraq, whose <a href="/article/monumental-task-awaits-iraq-s-new-government">nascent government is struggling</a> with economic reforms.&nbsp;</p><h3>The GNA Offensive Continues, but Faces Increasing Headwinds</h3><p>The internationally recognized Government of National Accord&#39;s offensive against the Libyan National Army will struggle to make significant gains deep into central and eastern Libya in the second quarter, and any success by the GNA could lead to direct intervention by Egypt.&nbsp;<br />&nbsp;</p>

<p>The LNA will receive enough military and financial support from its foreign backers, including Egypt, Russia and the United Arab Emirates, to prevent its collapse. <a href="/article/russia-deepens-its-commitment-libya-s-war-and-political-future">Although Russia</a>&nbsp;and Turkey might broker a fragile cease-fire, implementation would be sporadic, and would be unlikely to yield substantial peace negotiations. As the war in Libya increasingly becomes a theater where regional and global powers like Russia, Egypt and <a href="/article/turkey-s-gains-libya-will-feed-hifter-s-fire-civil-war-libyan-national-army-government-national-accord">Turkey vie for influence</a>, progress on negotiations that could pave the way for the LNA to lift its blockade of eastern oil terminals is unlikely.&nbsp;</p><h3>Israel Will Annex Portions of the West Bank, Sparking a Backlash</h3><p>Taking advantage of an emergency unity government and fueled by an increasingly nationalist, right-wing electorate, Israel will begin to annex some of the <a href="/article/us-gives-green-light-israeli-annexation-bibi-netanyahu-trump-pompeo-palestine">West Bank&#39;s biggest settlements</a> starting July 1. It might also annex the strategic Jordan River Valley during the quarter. The backlash to annexation will be most immediate in the West Bank and Gaza, is likely to be violent, and is liable to undermine Palestinian Authority legitimacy. Negative consequences from Europe, Jordan and the Gulf Arab states will be milder. Europe is unlikely to impose sanctions, but rather will stick to symbolic diplomatic measures to express its opposition. Jordan will also take symbolic measures against Israel, reflecting its need to balance domestic anger at annexation against its alliance with the United States. And Gulf Arab states, which have quietly been developing ties with Israel, are unlikely to reverse this process, though they will likely slow it.</p>

<h3>No Early Election in Turkey</h3><p>Despite mounting economic strains in Turkey intensifying political pressure on President Recep Tayyip Erdogan, Ankara will not call an early election in Q3 since it does not want to give the opposition an opportunity to tap into anger over the economy. Instead, the president and ruling Justice and Development Party (AKP) will focus on economic recovery and stymieing the opposition via the manipulation of electoral laws. The AKP will meanwhile use its influence with the central bank to defend the Turkish lira, even at the expense of the country&#39;s dwindling foreign exchange reserves, to maintain the party&#39;s economic legitimacy among voters rattled by <a href="/article/turkey-akp-s-covid-19-strategy-could-be-its-downfall">COVID-19&#39;s economic effects</a>.&nbsp;<br />&nbsp;</p>

<p><strong>July 1:</strong> Israel&#39;s annexation process in the West Bank is set to begin.&nbsp;<br /><strong>July 2: </strong>Turkey&#39;s&nbsp;supreme court will rule&nbsp;on&nbsp;the status of Hagia Sophia in Istanbul, deciding whether it should be a&nbsp;mosque or museum.<br /><strong>July 28 - Aug. 2:</strong> The approximate dates the severely curtailed Hajj is set to begin in Saudi Arabia.&nbsp;</p>

<h3>The Economy Will Improve Slightly, but Political and Financial Risk Persists</h3><p>Economic activity will increase modestly as stimulus measures are implemented and lockdowns are softened, but financial and political risk will remain high. The softening of lockdown measures will allow for a timid improvement in <a href="/article/will-covid-19-be-eurozone-s-undoing">Europe&rsquo;s economy</a>, but consumption, investment and trade will remain below pre-crisis levels and unemployment will be high. Summer will provide some relief to Southern European countries heavily dependent on tourism, but a full economic recovery is unlikely. Financial risk will be particularly high in Southern countries, because their debt levels will increase and their deficits will worsen. The European Central Bank&rsquo;s bond-buying program will keep borrowing costs in member states within tolerable margins, but even if a financial crisis is avoided in the quarter, one will remain possible. Factors such as a downgrade in a country&rsquo;s creditworthiness or a spike in private loan defaults could trigger a domino effect across the eurozone. Social and political risk will also be high because lingering recessions and rising unemployment will create fertile ground for unrest.&nbsp;</p>

<p>EU institutions and national governments will pass additional stimulus measures to cope with the economic crisis, but their implementation will be slow and their impact on the economy will not be immediate. The debate between EU members over the budget for 2021-2027 will escalate because of conflicting views on issues such as national contributions and the future of agricultural subsidies and cohesion funds. Because of the complexity of the disputes, the final decision on the size and spending areas of the budget will probably be postponed until the fourth quarter. EU governments will likely approve a <a href="/article/how-covid-19-will-impact-eu-s-budget-priorities">coronavirus recovery fund</a> in the third quarter, but it could be months before it is implemented.&nbsp;</p><h3>EU-U.K. Negotiations Will Continue, but a Deal Will Be Elusive</h3><p>The trade negotiations between the European Union and the United Kingdom will intensify, but issues including fishing rights, environmental standards, state aid rules and workers&rsquo; rights will create obstacles to a deal during the quarter. Meetings between EU and British negotiators will become more frequent during the quarter despite occasional threats to abort them. The high number of obstacles to a deal, however, means no deal is likely in the third quarter, and negotiations are likely to continue well into the fourth quarter. A limited deal covering mostly goods and a few services is possible by the end of the year, but because the United Kingdom chose not to extend its membership in the single market beyond Dec. 31, a <a href="/article/despite-intensified-eu-uk-trade-talks-no-deal-brexit-remains-possible">no-deal exit in January 2021</a> cannot be ruled out.&nbsp;<br />&nbsp;</p>

<h3>Italy Will Be the Main Source of Financial Risk in the Eurozone</h3><p>Because of its deep recession, high debt levels and volatile politics, Italy will be the <a href="/article/downgrade-italys-creditworthiness-would-challenge-rome-and-eurozone">main source of financial risk</a> in the eurozone during the quarter. Political uncertainty will grow in Italy because the lifting of lockdown measures will weaken the sense of urgency that kept the coalition together, and preexisting disputes will return and threaten the continuity of Prime Minister Giuseppe Conte&rsquo;s government. Financial risk will also increase because debt markets will be sensitive to political and economic developments in the country. While a debt crisis is unlikely during the quarter, downside risks will increase. The banking sector will also be fragile as recession increases the probability of households and companies defaulting on their loans.&nbsp;</p><h3>Temporary Stability in Germany Will Not End Long-Term Political Turbulence</h3><p>Germany, the largest economy in Europe, will be politically stable in the third quarter, but the prospect of uncertainty in the long term will increase. The German government will be willing to introduce additional stimulus measures to <a href="/article/german-court-ruling-could-trigger-financial-crisis-europe-eu-covid-19-economy-debt">boost economic growth</a>, even if it comes at the price of higher debt and a worsening fiscal deficit. Berlin will also use its EU presidency to promote long-term policies to reduce carbon emissions in the Continent and to seek closer economic cooperation with China, but issues such as the protection of European investors will continue to create friction with Beijing.&nbsp;<br />&nbsp;</p>

<p>Germany&rsquo;s coalition government will be stable, but debates about who will replace Chancellor Angela Merkel will grow, especially as the competition to become the next leader of the governing Christian Democratic Union party intensifies. With Merkel not seeking reelection in 2021 and with no clear successors to her, a political vacuum could emerge in the heart of Europe in a few months, which in turn would slow down EU policy processes.<br />&nbsp;</p>

<p><strong>June 28 - July 26:</strong> Weekly trade negotiations between the European Union and the United Kingdom.<br /><strong>July 1:</strong> Germany takes over the rotating EU presidency.<br /><strong>July 5:</strong> Parliamentary elections in Croatia.<br /><strong>July 12: </strong>Regional elections in the Basque Country and Galicia in Spain.<br /><strong>July 12: </strong>Second round of the presidential election in Poland.<br /><strong>July 17-18: </strong>EU recovery fund and budget summit.<br /><strong>August: </strong>New rounds of EU-U.K. trade negotiations.</p>

Americas

<h3>Debt Takes Argentina to the Economic Brink</h3><p>Argentina&#39;s debt restructuring negotiation with private bondholders will extend at least into the first month of Q3. In the most likely scenario, there will be no full agreement during the quarter. The absence of any agreement will put Argentina on a path marked by further capital flight and very high inflation, similar to the one it followed <a href="/article/argentinas-latest-default-doesnt-have-mean-another-economic-collapse">after its 2001 default</a>. The Argentine government will continue to act somewhat erratically, professing a desire to attract more private investment one on hand while on the other engaging in populist and nationalist policies that could include expropriations of private firms, fixed prices and subsidies as President Alberto Fernandez tries to balance competing ideological views within his administration. An agreement with the IMF will depend on the fate of the negotiations with the private bondholders; if those prove successful, negotiations with the IMF will start toward the end of Q3.&nbsp;<br />&nbsp;</p>

<h3>U.S.-Mexican Cooperation Continues, Despite Potential Bumps</h3><p>The arbitration and dispute resolution mechanisms of the United States-Mexico-Canada Agreement, which goes into effect July 1, will swiftly be put to the test as the United States files complaints against its partners on issues like biotech and labor standards. As the November U.S. presidential election approaches, the Mexican government will work to remain cordial with the Trump administration, though some irritants might come to the surface, such as the Mexican government&#39;s continued haphazard changes to energy and power regulations in favor of state-owned firms Petroleos Mexicanos and CFE.</p>

<p>As a resurgence of COVID-19 manifests on both sides of the border, extension of border closures and differing policies will generate new transborder supply chains dislocations, though experience acquired in Q2 might resolve these more quickly. Continued increases in crime and the economic effects of COVID-19 will gradually erode Mexican President Andres Manual Lopez Obrador&#39;s popularity at home, <a href="/article/rising-crime-and-covid-19-leave-mexico-leaning-its-military">though increased violence</a> could strengthen binational cooperation against the drug trade.&nbsp;</p><h3>Venezuela&#39;s Ever-Imminent Demise Still Remains Somewhere Down the Road</h3><p>Support for National Assembly President Juan Guaido will erode given the failure of his efforts to weaken Venezuelan President Nicolas Maduro, and Guaido might even face challengers for the mantle of leader of the opposition. The more than 60 nations that recognize him as interim president of Venezuela will not, however, drop their support for him during the quarter. A weaker Guaido and splits among the opposition will help Maduro as he confronts tougher U.S. sanctions and low oil prices, both of which will continue to undermine Venezuelan finances. Meanwhile, the increasing number of Venezuelans infected with COVID-19 and the precarious state of the country&rsquo;s medical infrastructure will degrade social cohesion, as will the return of numerous Venezuelans who had fled the country. Tensions will also rise as National Assembly elections in December approach. Cooperation between Venezuela and Iran will continue during Q3, and the United States will be likelier to intercept tankers transporting fuel to Venezuela from Iran, especially if polls show a close U.S. presidential election.&nbsp;</p><h3>In Brazil, Increased Political Conflict Will Slow Economic Growth</h3><p>Brazil&#39;s political environment will continue to deteriorate during Q3 as conflict intensifies between Brazilian President Jair Bolsonaro and the judicial and legislative branches of government and the country&#39;s electoral tribunal. Despite calls to impeach Bolsonaro, he will not be, though his public support will continue to decline. As Brazil grapples with an increasing number of infections and deaths, clashing federal and state policies will continue. As political dysfunction increases and the human and economic toll of the <a href="/article/brazil-bolsonaros-rift-congress-will-stall-tax-reforms">COVID-19 pandemic grows</a>, pressure on Brazil&rsquo;s currency and public finances will increase and the likelihood of further structural economic reforms to increase productivity will decrease, creating obstacles for long-term economic growth.&nbsp;<br />&nbsp;</p>

<p><strong>July 1:</strong> USMCA formally goes into effect.<br /><strong>July 5:</strong> Presidential election in the Dominican Republic.<br /><strong>July 26:</strong> Legislative elections in the Dominican Republic.<br /><strong>Aug. 17-20:</strong> Democratic National Convention in the United States.<br /><strong>Aug. 24-27:</strong> Republican National Convention in the United States.<br /><strong>Sept. 6:</strong> Presidential and legislative elections in Bolivia.</p>

Eurasia

<h3>The Russian Government Will Face Growing Popular Discontent</h3><p>As foreseen in the last forecast, Russia&#39;s reserves have managed to pull the country through the worst of the COVID-19 and oil price crises, but the Kremlin faces a mounting challenge from popular discontent. The Kremlin will continue to restrict its spending, so only limited resources will be available for social programs meant to counteract the reduced incomes and deteriorating living standards that a substantial portion of Russia&#39;s population faces.<br />&nbsp;</p>

<p>While the government will work to manage perceptions that it enjoys widespread popular support up through the July 1 referendum on constitutional amendments, discontent will gradually rise and could lead to greater support for the opposition and to demonstrations over living standards. Such demonstrations had been on the rise during 2019, triggered by reduced purchasing power and regional elections. The further deterioration of Russia&#39;s economic performance plus upcoming Duma elections in 2021 will likely inspire increased <a href="/article/what-12-more-years-putin-means-russia-politics-constitutional-amendments-term-limits">activism against Kremlin leadership</a>.</p><h3>The Expansion of Russia&#39;s Global Reach Will Drive Tensions With Turkey</h3><p>Russia will maintain its role in Syria and Libya over the next quarter, and this will increasingly drive a wedge between Moscow and Ankara. In previous months, Russia has started to expand its <a href="/article/russia-deepens-its-commitment-libya-s-war-and-political-future">engagement in Libya</a>, which is on the way to becoming Russia&#39;s second-largest expeditionary effort following Syria. As in Syria, in Libya, Russia is providing military support to opponents of Turkish allies. As a result, the increasing threat of incompatible aims and even direct confrontations between Russian and Turkish military assets will undermine Russian-Turkish relations. As seen in the Syrian conflict, localized cease-fires orchestrated by Moscow and Ankara could occur, but such cease-fires mainly have amounted to postponements of hostilities.<br />&nbsp;</p>

<h3>Misaligned COVID-19 Recoveries Will Mean a Slow Restart to China-Russia Trade</h3><p>Trade relations between Russia and China have continued at diminished levels due to the COVID-19 pandemic as mentioned in our previous quarterly forecast. Given China&#39;s position further ahead in its economic recovery, and due to the potential for a resurgence of COVID-19 outbreaks at different times in each country, bilateral trade will remain reduced. These effects on the Russian and Chinese economies will impact other countries throughout Eurasia that depend significantly on trade with Russia and China. Many of these countries, such as Tajikistan and Kazakhstan, lag in terms of the evolution of COVID-19 outbreaks; the continued development of the pandemic within their territories means commerce between them and China and Russia, their main regional trade partners, will remain reduced.<br />&nbsp;</p>

<h3>No Breakthroughs in a Post-COVID Revival of Ukraine-Russia Negotiations&nbsp;</h3><p>The deadlock in Russia-Ukraine negotiations on the conflict in eastern Ukraine has persisted as forecast last quarter, and just as before, an acceleration of diplomatic efforts following the COVID-19 pandemic will also fail. When travel by diplomats and world leaders resumes as the crisis passes, further efforts to implement the Minsk Agreement, such as a new Normandy Summit, are likely. This renewed activity will not lead to any breakthroughs, however, and repeated failure may yet result in renewed escalation on the <a href="/article/kyivs-push-end-eastern-ukraines-conflict-risks-prolonging-it-donbas-minsk-protocol">contact line in eastern Ukraine</a>.<br />&nbsp;</p>

<p><strong>July 1:</strong> Russians will vote on proposed constitutional amendments that include a measure that would allow Russian President Vladimir Putin to stand for two more terms.<br /><strong>Aug. 9:</strong> Belarus will hold presidential elections.<br /><strong>Unknown:</strong> New legislation by the U.S. Congress to halt the construction of Nord Stream 2 may trigger additional sanctions against the gas pipeline between Russia and Germany.</p>

South Asia

<h3>Relations With China Take Center Stage in Indian Foreign Policy</h3><p>Tensions between India and China will be a defining factor in Indian foreign policy throughout the quarter in the <a href="/article/clashes-china-india-border-presage-intensifying-competition">aftermath of the deadliest clashes</a> between the two powers in decades. Economic and political competition in the Indo-Pacific region were already driving bilateral tensions, and now domestic political pressure in response to the clashes in Ladakh will prompt <a href="/article/border-clash-portends-new-indian-strategy-less-talk-more-action-against-china">India to take a more assertive stance</a> against China. These factors will raise the possibility of additional tit-for-tat diplomatic, economic and political measures.&nbsp;</p>

<p>The risk of future military flare-ups in disputed territories such as Ladakh will persist throughout the quarter, although both sides will seek to avoid a wider military conflict. As another part of its more assertive stance, India will also attempt to offset Chinese regional influence by deepening cooperation with other South Asian actors as well as other regional players, possibly including Australia, Indonesia, Japan and the United States. Domestic political concerns, legal and regulatory frameworks, and resistance from external actors, however, will prevent India from locking itself too tightly into any one alliance.</p><h3>COVID-19 Slows Down India&#39;s Economic Recovery&nbsp;</h3><p>Indian Prime Minister Narendra Modi and his government will be heavily focused on <a href="/article/will-india-bear-brunt-covid-19-pandemic-coronavirus-modi-health-economy">containing the COVID-19 outbreak</a> while continuing to jump-start the <a href="/situation-report/india-new-delhi-announces-new-round-covid-19-stimulus-efforts">Indian economy in the third quarter</a>. India will likely see a significant increase in COVID-19 cases, but another nationwide lockdown will be unlikely given Modi&#39;s prioritization of the economy. Continued focus on COVID-19 will continue to delay structural economic reforms that Modi had hoped to pass this year, including labor reforms and privatization efforts; many of those reforms will get pushed into 2021 or 2022.&nbsp;</p>

<p>Nevertheless, India&#39;s headline economic growth will begin to rebound this quarter following the Q2 collapse due to the nationwide lockdown, but the recovery will be unequal. The poor are likely to face the brunt of the humanitarian and economic crises as social distancing implementation remains more difficult for them. Partial lockdowns in specific areas are also likely. The spike in COVID-19 also risks overwhelming India&#39;s health care system in specific areas, such as Maharashtra, Delhi and Gujarat.&nbsp;</p><h3>Afghanistan Crawls Toward Fragile Peace Talks</h3><p>There is a high likelihood <a href="/situation-report/afghanistan-government-and-taliban-agree-doha-venue-talks">inter-Afghan talks</a> between the Afghan government and the Taliban &mdash; the first such talks since the U.S. invasion in 2001 &mdash; will begin within the quarter, although any progress will be slow and incremental. A breakthrough in these talks leading to a more comprehensive peace agreement is extremely unlikely, and the process itself will remain very fragile and <a href="/article/afghanistans-new-offensive-against-taliban-halts-peace-talks-kabul-us-security-ghani">prone to breaking down</a> throughout the quarter. In line with its landmark agreement with the Taliban, the United States will continue the gradual withdrawal of its troops &mdash; the pace of which could be accelerated due to domestic political drivers in the United States regardless of security and political dynamics in Afghanistan or the Taliban&#39;s continued relationship with al Qaeda. The Taliban will leverage the continued withdrawal to press its advantage in negotiations with the Afghan government, which is slowly losing support from its strongest ally, the United States.&nbsp;<br />&nbsp;</p>

<p><strong>July:</strong> Indian Parliament&#39;s &quot;Monsoon Session&quot; is set to begin.<br /><strong>July:</strong> India set to resume international flights following COVID-19 related shutdown.<br /><strong>Aug. 14:</strong> Pakistan Independence Day.<br /><strong>Aug. 15:</strong> India Independence Day.<br /><strong>Aug. 19:</strong> Afghanistan Independence Day.<br /><strong>Aug. 20: </strong>Beginning of Muharram.</p>

Sub-Saharan Africa

<h3>Debt Crisis Is Coming, but not for All Sub-Saharan African Countries</h3><p>The COVID-19 pandemic significantly increases risks of default by individual African countries, but there is not yet a generalized, systemic African debt crisis that would involve contagion among countries and widespread defaults. The pandemic heightens existing risks of default, and could well lead to debt service difficulties beyond Q3 and into 2021, which could be hard to resolve given China&rsquo;s now prominent creditor role.</p><p>The pandemic increases existing credit and default risk through its effect on growth rates, lower exports in both volume terms and from lower commodity prices, rising interest rate differentials and higher rollover risks, as well as the need for higher expenditures on health care and domestic services. Many African countries lack sufficient fiscal space to accommodate those factors, putting them at greater risk of default.<br />&nbsp;</p>

<p>As a G-20 member, China &mdash; now the region&rsquo;s largest bilateral official creditor &mdash; agreed to participate in a nine-month moratorium on debt service by poor countries, but has claimed so many exceptions as to make that meaningless and impossible to assess the amount of actual debt relief. The lack of transparency in Chinese international lending, China&rsquo;s hesitation to participate in the existing international infrastructure for debt restructuring, and the now-large amount of outstanding eurobonds owed by 22 African countries significantly raises the probability that many African countries will be in debt distress in coming months, although the timing or China&rsquo;s response cannot be predicted at present.</p><h3>Little Respite for Sub-Saharan African Oil Producers</h3><p>Sub-Saharan African oil producers Angola, Equatorial Guinea, Nigeria and Ghana will continue to struggle amid continued low oil prices in the third quarter. Nigeria will continue to refrain from implementing significant budget cuts in the face of low oil prices and will avoid a significant devaluation of the official exchange rate even as the black market value of the naira continues to reach new record lows; an <a href="/article/coronavirus-coming-nigeria-and-its-economy-covid-outbreak-sub-saharan-africa-oil">extremely fragile economy </a>in the third quarter will result. A limited recovery in oil prices could give Nigeria some respite, but Saudi Arabia, Russia and others will push Nigeria to fully comply with its promised cuts.&nbsp;</p><h3>Ethiopia Challenges Egypt by Moving Forward With Its Massive Dam&nbsp;</h3><p>Ethiopia will likely proceed with starting to fill the reservoir for the Grand Ethiopian Renaissance Dam this quarter, likely sparking a significant <a href="/article/egypts-losing-battle-grand-ethiopian-renaissance-dam">diplomatic crisis with Egypt</a>&nbsp;in the absence of a deal before filling begins. The lack of a deal with Egypt will not deter Addis Ababa from starting to fill the dam since waiting would result in missing the rainy season and the project&rsquo;s being delayed a year. Egypt and Ethiopia may be able to come to an interim agreement that covers the filling for just this year, but a broader agreement that resolves critical points of disagreement, like water allotment during a drought and dispute settlement mechanisms, is unlikely. Egypt will try to appeal to international mediators, like the United States, African Union and&nbsp;United Nations, but mediation efforts are unlikely to result in a significant change in Addis Ababa&rsquo;s hard stance. But Egypt has few other options. The initial phase of filling the dam&rsquo;s reservoir this quarter is unlikely to significantly impact Egypt&rsquo;s water supply, but Egypt has long-term concerns about its diminished influence in Nile water politics, and about the potential for more dams upstream from it. &nbsp;</p><h3>The Tigray Region Challenges the Ethiopian Federal Government</h3><p>Ethiopia&rsquo;s Tigray region will hold elections Aug. 29 even though elections elsewhere in the country will be delayed due to COVID-19, a step that will contribute to the deterioration of Ethiopia&rsquo;s federal model. The Tigray region can be expected to resist the central government should the latter use force to try and stop it.&nbsp;</p>

<p>Given that Addis Abbas has few options at its disposal for stopping the elections, other regions might decide to follow Tigray&rsquo;s suit and hold votes. Ethiopia&rsquo;s federal model, <a href="/article/make-or-break-moment-nears-ethiopias-political-transformation-abiy-ahmed-election-democracy-africa">already under pressure</a> from ethnic and regional demands for increased autonomy, will face repeated challenges in the coming years.</p><h3>South Africa&rsquo;s Health and Economic Crises Continue</h3><p>South Africa will remain Africa&rsquo;s epicenter of COVID-19, as the country has seen a spike in cases since lifting many of its travel and business restrictions in May. The outbreak will continue to batter the <a href="/article/south-africa-s-covid-19-stimulus-plan-will-cement-its-economic-malaise">South African economy</a>&nbsp;and its health care system in the third quarter, particularly in places like Cape Town and Johannesburg.<br />&nbsp;</p>

<p>Although President Cyril Ramaphosa and Finance Minister Tito Mboweni will face pressure to provide significant stimulus for the ailing economy in their COVID-19 budget, they will not satisfy labor union demands, and South Africa&rsquo;s economy will remain in crisis. Moreover, the country will face the need for deep cuts once the COVID-19 crisis is over. Continuing economic malaise will weaken the African National Congress&rsquo; grip on South Africa&rsquo;s political environment, since labor groups will push for more significant spending and state intervention in the economy instead of austerity.<br />&nbsp;</p>

<p><strong>July:</strong> Ethiopia plans to start filling the Grand Ethiopian Renaissance Dam&rsquo;s reservoir.<br /><strong>July 1:</strong> South Africa&rsquo;s new data privacy law, which has been incrementally adopted since 2014, enters full force.<br /><strong>Aug. 29:</strong> Despite national elections being delayed, the Tigray region of Ethiopia plans to proceed with regional elections.&nbsp;</p><p>&nbsp;</p>

2020 THIRD-QUARTER FORECAST

Europe

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