Middle East and North Africa

As elections reshape political incentives worldwide, 2026 will see major powers recalibrate diplomacy and conflict, raising the risk of fragile deals, regional instability and sudden escalation.

Annual

Global Trends

U.S.-driven tariff uncertainty will remain high in 2026 amid legal threats to the Trump administration&#39;s tariff agenda and likely disagreements between the United States and its trading partners over the terms of their trade deals. The U.S. Supreme Court appears poised to strike down <a href="/article/us-launches-largest-trade-war-modern-history">tariffs imposed</a> by the Trump administration under the International Emergency Economic Powers Act, including his fentanyl and reciprocal tariffs, at some point in 2026. The White House will seek to replace them under other trade powers. But some of these tools require long, detailed investigations, which could force the White House to choose which countries to tariff. The countries it prioritizes would likely be ones it has focused most of its trade criticism on so far, such as <a href="/article/new-us-eu-deal-averts-full-blown-trade-war-now">EU member states</a>, <a href="/article/buffers-will-help-mexico-navigate-tariff-turbulence">Canada and Mexico</a>. Regardless of how the Supreme Court rules, the United States will continue to wield tariffs as a coercive tactic against other countries. It will justify its actions on alleged noncompliance with the trade deals reached in 2025, and also on nontrade issues, such as EU technology policy and global conflicts. High uncertainty regarding U.S. trade policy will undermine investor confidence, particularly in the U.S. manufacturing sector, and drag down U.S. economic growth and manufacturing competitiveness. If the tariffs are struck down, the process of granting tariff refunds to companies worldwide will be chaotic. Beyond the United States, concerns about trade diversion will likely lead more countries to implement targeted trade barriers, including tariffs, in politically sensitive sectors to protect against a surge of goods previously destined for the U.S. market.&nbsp; &nbsp;

Volatile U.S. Tariff Policy Amid Legal Challenges

Strategic competition between the United States and China and the global build-out of data centers will drive high supply chain uncertainty beyond that caused by tariffs, with critical raw materials and memory chip supplies the most likely areas to face disruptions. China and the United States agreed in <a href="/article/china-secures-favorable-us-trade-deal-new-escalations-still-likely">October 2025</a> to pause certain export controls, technology restrictions and higher tariffs on each other until mid-November. But both countries have a strategic interest in placing more restrictions on each other, particularly as artificial intelligence technologies mature, creating the risk that the deal either falls apart or is not extended. A breakdown would result in China restricting its exports of rare earth elements and related products, which would most significantly affect production in the automotive and aerospace industries. Any breakdown in the deal will likely prove temporary, however, and it will likely be renewed. Even if the U.S.-China trade deal does not collapse, Chinese approvals of rare earth exports will likely remain slow. Movement on developing China-free alternative <a href="/article/us-australia-leadership-summit-yields-critical-minerals-pact-aukus-reaffirmation">rare earth supply chains</a> will continue in 2026, but the actual diversification away from Chinese supplies will be limited given the relatively small size and number of fully developed China-free projects. In the meantime, memory chip supplies will likely pose a persistent challenge for companies and governments. The effects of the surge in demand for high-performance memory chips for AI applications will move down the memory chip supply chain and, to a certain extent, the processor chip supply chain. This could lead to another semiconductor shortage reminiscent of the post-COVID shortage that disrupted production across various industries, particularly the automotive sector.&nbsp; &nbsp;

Disruptions in Rare Earth, Memory Chip Supply Chains

Investment in the AI sector will continue to surge in 2026. While a bubble burst remains unlikely, the risk will rise alongside growing backlash over environmental impacts and job displacement, as well as intensifying U.S.-China competition amid improving Chinese AI models. The rising valuations of AI companies and their suppliers with little expectation of profitability in 2026 will drive concerns that the AI sector and/or the data center infrastructure sector are experiencing a bubble that could burst. If one in fact pops, it would most likely first cascade through the AI sector, with many AI companies going under. Data center and semiconductor companies supplying the AI boom would be impacted next. That said, a full-blown cascading event through the economy does not appear likely, as the <a href="/article/gpt-5-and-evolution-ai">AI boom</a> is not being driven by credit and leverage, but more by tech companies flush with cash like Alphabet. Even if the AI boom does not lead to a burst bubble, backlash against AI will grow over the course of 2026. Societal concerns about job displacement will mean that AI will remain a flashpoint in virtually every labor negotiation in the West, particularly with regard to white collar jobs, which have not typically faced downsizing due to automation. Finally, China will effectively close the gap with the United States in the AI race in 2026 as many of its models &mdash; particularly open-weight models &mdash; perform closer to U.S. frontier models. This will elevate concerns in the West as companies and researchers increasingly pick cheap, customizable and competent Chinese models for their needs and rising Chinese &mdash; not U.S. models &mdash; become the de facto standard in some applications.&nbsp;

AI Bubble Risks

Space competition, both around Earth and to the Moon, will intensify in 2026 as the United States launches the world&#39;s first manned lunar mission since the 1970s and as space increasingly becomes a competitive zone between the United States, China, Russia and Europe. The United States is expected to launch the <a href="/article/us-resets-its-sights-moon-kicking-next-space-race">Artemis II</a> mission no later than April, sending astronauts to fly around the moon in what will be the first manned mission near the moon in more than 50 years. The mission, coupled with China&#39;s Chang&#39;e 7 lunar exploration mission, which is expected to launch in August, exemplifies the accelerating competition over lunar exploration. China will also carry out its first manned flight of the Mengzhou capsule, its <a href="/article/china-space-lands-probe-moon-far-side-great-power-competition">lunar-capable spacecraft</a> that it plans to use in its first manned mission to the moon before 2030. Closer to Earth, the deployment of more satellite constellations for communications and other applications and the launch of more reusable launch systems, like the recently launched and landed New Glenn rocket, will continue to drive space as a commercial area of competition. This will give countries even more incentive to develop space as a military domain. Europe will spend much of 2026 attempting to enhance its own space capabilities and reduce its reliance on the United States, particularly for defense and communication applications. To that end, 2026 will mark the start of the European Space Agency&#39;s transition from focusing solely on space exploration and commercial applications to assuming a formal defense role. This follows the seminal decision in November 2025 to widen its mandate to include security and defense, with one of the first pillars to be implemented being the European Resilience from Space initiative, a new dual-use Earth observation initiative. Separately, the European Union will launch its European Space Shield initiative as a part of its Defense Readiness 2030 Roadmap.

The New Space Race Reaches the Moon

Large government deficits in most advanced and several emerging economies will continue to translate into further increases in debt ratios, increasing financial vulnerabilities, limiting governments&#39; ability to respond to economic shocks and raising the risk of financial market volatility. Government debt ratios currently exceed 100% of gross domestic product in five of the seven G7 countries. Despite a slightly improved economic outlook, their average fiscal deficit will exceed 6% of GDP in 2026, up from 5.5% of GDP in 2025. <a href="/article/french-debt-soars-parliament-unlikely-reach-fiscal-consolidation">France</a> will face the most challenging financial outlook given its outsize fiscal deficit, high debt ratio and lack of political consensus on fiscal consolidation. U.S. <a href="/article/economic-upshot-us-republicans-budget-reconciliation-bill">fiscal deficits</a> will also remain high. Persistent inflation, concerns about a dovish Fed policy and erratic economic policies there will help keep long-term bond yields high, despite lower central bank policy rates. Many emerging economies will also continue to run outsize fiscal deficits in the context of high and increasing debt ratios. Government debt is close to or already exceeds 80% of GDP in major emerging economies like <a href="/article/brazil-faces-inevitable-fiscal-reckoning">Brazil</a>, <a href="/article/beijing-grapples-deflation-overinvestment-tariff-pressures-mount">China</a> and South Africa, and will continue to increase. Meanwhile, countries like Mexico, Poland and Romania will also continue to run large fiscal deficits and experience increasing debt ratios. While the financial risks in developed and emerging economies will likely remain manageable, domestic political and external financial shocks could increase risk premiums and interest rates. This will increasingly limit these governments&#39; <a href="/article/defense-spending-will-modestly-boost-german-economy-challenges-remain">fiscal space</a>, eventually forcing them into politically contentious medium-term fiscal consolidation.

A Mixed Fiscal and Debt Outlook

Americas

The United States will threaten to abandon the U.S.-Mexico-Canada Agreement, fueling uncertainty, but Mexico and Canada are likely to make concessions to secure the pact&#39;s survival. The United States will threaten or actually trigger the process to abandon the USMCA or replace it with bilateral agreements, fueling market volatility and business uncertainty ahead of the agreement&#39;s July 1 renegotiation deadline. Canada and Mexico, however, will agree to implement clearer provisions around core-parts lists and labor value content, higher working standards, and stricter rules of origin, especially for the auto, steel and aluminum, and electronics sectors, preventing the pact&#39;s collapse. Still, the revamped USMCA framework and U.S. <a href="/article/look-trumps-evolving-tariff-strategy">tariffs on imports</a> beyond quota levels will make <a href="/article/geopolitics-trade-rising-threats-nearshoring-americas">North American supply chains</a> less competitive and raise U.S. inflation. The United States will also push for Canada and Mexico to further <a href="/article/what-trumps-focus-immigration-trade-and-ideology-means-latin-america">curb trade</a> with China. Mexico City and Ottawa are likely to help shield North America from transshipment and circumvention of Chinese electric vehicles, steel and manufacturing inputs, but will avoid harsh measures to avert Beijing&#39;s trade investigations, export controls or retaliatory tariffs. U.S. and Canadian pressure for Mexico to partially reverse its 2024 energy reform and Mexico&#39;s <a href="/article/interventionist-constitutional-reforms-unlikely-deter-foreign-investment-mexico">deteriorating rule of law</a> will generate disputes between the three countries. But the Mexican government will not <a href="/article/whats-stake-mexicos-first-ever-judicial-elections">reverse constitutional reforms</a>, most likely just diluting legislation or paying compensation to U.S. energy companies. In turn, Canada will likely agree to increase dairy quotas to U.S. producers, but province-level legislation <a href="/article/trade-series-role-digital-trade-modern-free-trade-agreements">detrimental</a> to Big Tech companies will continue to <a href="/article/high-stakes-canadas-attempt-pivot-away-us">sour relations</a> with Washington.

USMCA To Be Renewed

In 2026, the United States will use military pressure against the remaining Venezuelan regime and criminal networks and seek to engineer a political transition while expanding counternarcotics operations across the region. Following the U.S. capture of former Venezuelan President Nicolas Maduro, U.S. military operations on Venezuelan territory will continue in 2026, primarily through airstrikes and other kinetic actions <a href="/article/us-confrontation-venezuela-potential-scenarios">targeting drug trafficking networks</a> and military assets. Washington will seek to <a href="/article/what-trumps-policy-shifts-mean-venezuela">degrade the hard-line remnants of the Maduro regime</a> and shape conditions for a more cooperative government while avoiding a ground invasion, given the high political and operational costs of an occupation. Instead, the Trump administration is likely to pursue a strategy centered on <a href="/article/what-maduro-clinging-power-means-venezuela">pressuring regime members to step aside</a>, cooperate with the U.S., or compete in elections while encouraging defections within the security forces. This is likely to embolden the opposition to protest against the Venezuelan government, even without a clear support from Washington for it to take power. As a result, the leadership vacuum created by Maduro&#39;s removal will likely fuel prolonged political instability, elite infighting and episodic unrest throughout 2026. Venezuela&#39;s oil sector will experience disruptions amid political instability and power struggles within Petroleos de Venezuela. Washington is likely to use the promise of sanctions relief and of some export licenses as leverage to incentivize elite defections, but the operational constraints on foreign investors will remain significant. Beyond Venezuela, Washington is likely to expand its campaign against drug trafficking organizations operating in <a href="/article/outlook-trumps-war-mexican-cartels">border areas or isolated regions of Mexico and Colombia</a>. In Mexico, any unilateral U.S. action would strain bilateral relations and risk derailing trade negotiations, although a full diplomatic rupture remains unlikely. In Colombia, a likely right-wing victory in the August presidential election would increase ideological alignment with Washington and facilitate deeper military cooperation. Similar alignment dynamics are also likely to enable U.S. counternarcotics operations &mdash; either overt or tacit &mdash; in Ecuador, Guatemala, Honduras, Peru and Trinidad and Tobago. Finally, political instability in Venezuela and renewed threats from the United States will worsen Cuba&#39;s economic and energy crises, further weakening the regime in Havana.

U.S. Military Activity in the Western Hemisphere Increases

Brazil&#39;s government will increase fiscal spending ahead of its general election in October, and the presidential race will lead to market volatility over concerns about the future of Brazil&#39;s fiscal policies. Tactics to bypass the country&#39;s limits on fiscal spending will likely include the use of state-owned enterprises&#39; extraordinary dividends, public banks&#39; funds, oil and gas auctions and waivers for emergency relief expenditures. This lax fiscal policy will limit the Central Bank&#39;s ability to reduce interest rates, leading to a slow monetary easing cycle. Moreover, fiscal concerns and electoral developments will be the main domestic drivers of market volatility. President Luiz Inacio Lula da Silva will likely leverage low unemployment, limited inflation, <a href="/article/brazil-s-economic-growth-set-face-headwinds">modest growth</a>, social programs and the right-wing opposition&#39;s fragmentation to secure a narrow victory. Lula will also seek to maintain a <a href="/article/us-protectionism-portends-opportunities-and-hurdles-brazil">pragmatic relationship</a> with the Trump administration while adopting a nationalist rhetoric of defending the <a href="/article/implications-trumps-tariffs-brazil">country&#39;s sovereignty</a>. In the unlikely scenario that a right-wing candidate wins the election, this will trigger a strong domestic financial market rally amid the outlook for more business-friendly policies and less state interventionism right-wing candidates have defended, including deregulation, privatization and <a href="/article/brazil-faces-inevitable-fiscal-reckoning">fiscal adjustment</a> beyond 2026.&nbsp; &nbsp;

Brazil To Undergo Fiscal Deterioration and Financial Volatility in Electoral Year

The Argentine government will leverage its expanded base in Congress to approve economic reforms and rely on U.S. support to gradually depreciate the peso, but lingering capital controls will deter investments. Argentina&#39;s libertarian government will use the seats it secured in Congress during the <a href="/article/stakes-javier-milei-argentinas-midterm-elections">2025 midterms</a> to advance its <a href="/article/what-expect-argentina-after-mileis-first-year-office">reform agenda</a>. Labor, penal, pension and tax reforms are likely in 2026, even though the government&#39;s agenda will fuel protests and opposition members of Congress, unions and other groups will try to dilute some proposals. The Argentine government will also seek to implement a gradual depreciation of the peso, but the success of that strategy will depend on continued U.S. support, which is likely given the Trump administration&#39;s commitment to strengthening ideological allies in the region. White House support will also help Buenos Aires make progress with <a href="/article/what-make-argentinas-latest-imf-deal">International Monetary Fund reviews</a> and ease market concerns during likely episodes of uncertainty stemming from demonstrations, defeats in Congress or corruption scandals. Still, the gradual approach to economic liberalization, including only a partial removal of capital controls, will likely slow large-scale investment inflows, which will remain concentrated in the <a href="/article/gauging-outlook-energy-reforms-argentina">extractive sectors</a> in 2026. &nbsp;

Argentina Advances Economic Reforms

Right-wing candidates will win most presidential races in Latin America, and newly elected conservative governments will consolidate a political realignment with stricter security measures and pro-business policies. In Colombia, <a href="/article/colombia-ongoing-legislative-gridlock-bodes-ill-petros-reform-agenda">left-wing President</a> Gustavo Petro&#39;s failure to fight <a href="/article/amid-continued-setbacks-colombias-petro-rethinks-his-total-peace-strategy">guerrillas</a>, combined with multiple <a href="/article/what-another-corruption-scandal-means-colombias-fragile-government">corruption scandals</a> and sluggish economic growth, will likely result in a conservative candidate winning the presidential election in May. The new government that takes office in August will adopt a militarized approach to fighting armed groups, likely increasing <a href="/article/what-trumps-sanctions-and-tariffs-threats-mean-colombia">security cooperation</a> with the United States. In Peru, Boluarte&#39;s Impeachment Unlikely To Improve Peru&#39;s Political and Security Climate<a href="/article/boluartes-impeachment-unlikely-improve-perus-political-and-security-climate">Boluarte&#39;s Impeachment Unlikely To Improve Peru&#39;s Political and Security Climate</a> with the political establishment amid an ongoing security crisis will favor outsiders and populist candidates in the April presidential election. The next Peruvian government will also adopt heavy-handed policies against organized crime, while protests are likely amid persisting popular dissatisfaction. This regional conservative shift will be compounded by new right-wing governments in <a href="/article/chiles-presidential-election-potential-outcomes-and-their-implications">Chile</a> and <a href="/article/economic-crisis-fuels-political-shakeup-bolivia">Bolivia</a> throughout 2026, which will likely implement pro-business agendas and deregulate their economies while pursuing closer ties with Washington.

South America Shifts to the Right 

Eurasia

Russia and Ukraine will resist major concessions to end the war early in the year, but accumulating military, <a href="/article/russias-war-economy-faltering">economic</a> and political pressure on both sides, combined with U.S. electoral timelines, will increase the likelihood of a negotiated settlement as 2026 progresses. The Trump administration will maintain diplomatic pressure on Moscow and Kyiv for a settlement, but will collide with Russian intransigence and Ukrainian refusal to accept territorial concessions. Washington will therefore use oscillating pressure, either <a href="/article/new-us-sanctions-strike-heart-russias-war-economy">tightening sanctions</a> enforcement against Russia and/or floating escalated lethal aid to Ukraine, or threatening to cut off intelligence and military support to Kyiv. Moscow will maintain <a href="/article/despite-us-diplomatic-push-ukraine-peace-still-long-way">diplomatic engagement</a> with Washington while simultaneously intensifying its offensive to consolidate control of the Donbas and expand into Zaporizhzhia. Facing mounting casualty rates and political sensitivities ahead of September State Duma elections, Moscow will be unlikely to call for large-scale conscription and will instead resort to rolling mobilization of reservists and contract-based enlistments. Despite manpower and relative technical advantages, Russian forces are unlikely to achieve a decisive breakthrough due to Ukraine&#39;s dense drone surveillance and entrenched defenses, especially as European states will maintain military aid. If the Kremlin calculates that securing a settlement with the Trump administration before a hostile U.S. Congress takes power following the midterm election represents the optimal window to formalize territorial gains and extract sanctions relief, Russia will prioritize reaching a deal. Any settlement will likely contain significant territorial losses for Ukraine and weak security guarantees, creating lingering uncertainty over future Russian aggression. Should the Kremlin determine that protracted conflict is essential for regime stability, or if European support for Ukraine is unable to keep up with Kyiv&#39;s needs, diplomatic efforts will collapse and attrition warfare will persist beyond 2026.&nbsp;

A Fragile Deal in Ukraine Becomes Possible 

Foreign political pressure and financial support will keep Ukraine&#39;s institutions functioning despite fiscal constraints and shrinking manpower, but a negotiated settlement involving territorial concessions would likely trigger nationalist backlash, exposing President Volodymyr Zelensky to political challenges from hard-liners. The need for International Monetary Fund financing and EU accession prospects will continue to anchor Ukraine&#39;s reform efforts during the year, even as its policy will remain centered on sustaining the war effort. Kyiv will face severe financial constraints, as its fiscal deficit will continue to rely heavily on Western aid to fund military operations and public services. Labor market pressures will intensify as war losses, permanent refugee outflows and brain drain deplete human capital. Ukraine will struggle to maintain force levels as the pool of draft-eligible men shrinks. If Kyiv is forced into a <a href="/article/ukraine-likely-reject-trumps-peace-plan-ultimatum-prolonging-war">diplomatic settlement</a> with Russia requiring territorial concessions, it would introduce acute internal volatility, sparking nationalist backlash and sustained protest activity, fracturing the wartime consensus that has shielded the government from internal challenges. The lifting of martial law following a settlement would likely lead to presidential and parliamentary elections, exposing Zelensky&#39;s administration to intensified political competition at a moment when public trust has substantially eroded. Zelensky would face the prospect of being personally blamed for accepting deeply unpopular settlement terms, triggering challenges to his leadership from both nationalist hard-liners and opposition figures demanding accountability for war losses. &nbsp;

Ukraine Faces Mounting Domestic Pressures as War Grinds On

Armenia and Azerbaijan will take modest steps toward the implementation of the provisions of their 2025 peace framework, reducing the risk of another war between them. Trade normalization between the two countries will likely proceed cautiously, with both sides building confidence through measured commercial engagement rather than comprehensive economic integration. Domestically, Armenian Prime Minister Nikol Pashinian will face intensifying public discontent, largely stemming from perceived concessions to Azerbaijan and tensions with the <a href="/article/armenia-archbishops-arrest-escalates-prime-ministers-feud-church">Armenian Apostolic Church</a>. The constitutional amendment renouncing Armenia&#39;s claim to Nagorno-Karabakh &mdash; a prerequisite of Azerbaijan for final treaty signature &mdash; will similarly remain deeply unpopular, and Pashinian will likely defer calling a referendum on it until after the June election. If he is not reelected, the fate of the draft peace deal will become less certain. But if he retains power following the vote, he will likely <a href="/article/what-make-us-brokered-peace-deal-between-armenia-and-azerbaijan">prioritize implementation</a> of the Trump Route for International Peace and Prosperity, the centerpiece of the joint declaration signed with the United States and Azerbaijan, seeking to demonstrate tangible benefits from their summit held in Washington. Meanwhile, Baku will complete the construction of its part of the Aras Corridor, which runs through Iran parallel to TRIPP, while maintaining TRIPP as leverage and an alternative that excludes Armenia from regional integration if it remains uncooperative. Russia will seek to challenge TRIPP&#39;s development, but its diminishing regional standing will restrict its ability to meaningfully prevent either Yerevan&#39;s or Baku&#39;s pivot to the West.

Armenia Grapples With Internal Divisions as Regional Realignment Accelerates

Kazakhstan will face mounting economic pressure and social unrest as weak institutions and controversial reforms will deepen structural vulnerabilities and geopolitical dependence on Russia and China. Economic headwinds will intensify as oil production gains from the 2025 Tengiz expansion are offset by weaker oil prices and widening budget shortfalls. The National Bank will allow the tenge to depreciate given its link to the ruble, while high inflation, already reportedly twice the official target, will exacerbate cost-of-living strains. A broad tax reform, including a value-added tax increase from 12% to 16% and the removal of simplified regimes and exemptions for small enterprises, will coincide with utility rate hikes and elevated interest rates, eroding household purchasing power and dampening business sentiment. These measures will upend the regime&#39;s implicit social contract, triggering sporadic unrest that President Kassym-Jomart Tokayev will seek to contain by dismissing the government and reshuffling ministers. Still, any Cabinet will struggle to address structural weaknesses in a resource-dependent economy, with weak fiscal discipline and a deteriorating investment climate curtailing foreign direct investment inflows. Tokayev will intensify repression of civil society and independent media while advancing constitutional reforms to <a href="/article/how-kazakhstans-proposed-reforms-will-impact-question-succession">abolish the Senate</a> to further concentrate executive power. This combination of economic crisis, institutional hollowing out and growing social tensions will test internal stability just as Kazakhstan&#39;s strategic position becomes more precarious. Persistent security risks to the Caspian Pipeline Consortium route through Russia, which carries most of Kazakhstan&#39;s crude exports, will meanwhile leave the country reliant on <a href="/article/what-russias-courtship-kazakhstan-says-about-shifting-balance-power-eurasia">Moscow&#39;s goodwill</a>, while China&#39;s expanding financial leverage through <a href="/article/geopolitics-trade-central-asias-struggle-logistics-sovereignty">infrastructure lending</a> will deepen Astana&#39;s dependence on Beijing.

Economic Pressures Will Deepen Kazakhstan's Geopolitical Vulnerability

 Asia-Pacific

The U.S.-China trade truce will hold, but brief escalations will remain likely and a comprehensive deal elusive, while Chinese economic support will be restrained and a major military escalation near Taiwan is unlikely. The <a href="/article/china-secures-favorable-us-trade-deal-new-escalations-still-likely">interim U.S.-China</a> deal to curb tariffs and export controls is likely to hold, driven by concerns of industrial disruptions, especially before President Donald Trump&#39;s April visit to China. Still, monthlong periods of escalation and de-escalation are likely, driven by new U.S. tech restrictions and Chinese export controls, primarily on rare earths but potentially on legacy chips, lithium-ion batteries and/or pharmaceutical ingredients. The U.S. midterm elections will likely pressure Trump to mitigate industrial and agricultural trade disruptions, while also extracting trade concessions from China. China is likely to respond quickly, risking further trade escalations. After the elections, Trump will be more willing to both wield tariffs and curb tech restrictions on China to reach a comprehensive deal, but Chinese retaliation, U.S. courts and congressional pushback will impede its realization. Domestically, China will expand <a href="/article/president-xi-lays-out-chinas-plans-next-five-years">consumption suppor</a>t measures and ease debt restrictions, but large-scale stimulus is unlikely, and without major tax or wage reforms, consumption is likely to remain weak while topline growth slows. Though Chinese military exercises will <a href="/article/taiwan-report-highlights-evolving-security-orientation">steadily expand</a> around Taiwan, China is unlikely to conduct a blockade or invasion due to economic concerns and lingering prospects for a more pro-China <a href="/article/after-one-year-under-lai-taiwans-political-dysfunction-shows-little-sign-easing">Taipei government</a> after the January 2028 elections. &nbsp;

Fragile U.S.-China Trade Truce Holds

Japan&#39;s government will increase spending on households ahead of potential elections, while <a href="/article/new-premier-takaichi-quick-fix-japans-long-term-political-problems">Prime Minister Sanae Takaichi&#39;s</a> national defense push will bolster U.S. ties but widen a diplomatic rift with China. Takaichi&#39;s Liberal Democratic Party will pursue an expansive fiscal policy to bolster household support measures and military capabilities, including arms exports to regional partners like Australia and the Philippines. Takaichi will also attempt to pass a controversial Diet seat-reduction bill. Failure to carry out this or other LDP promises to its coalition partner, the Japan Innovation Party, could split their <a href="/article/end-era-japans-26-year-coalition-government-falls-apart">fragile coalition</a>, risking fraught new negotiations or even a snap election. An election would bolster Takaichi&#39;s <a href="/article/japans-conservative-takaichi-set-become-next-prime-minister">conservative agenda</a> if she is reelected, or yield a fractious opposition government if she loses. If Takaichi stays, either by winning an election or avoiding one, her defense spending and shipbuilding cooperation will strengthen U.S. ties despite <a href="/article/us-trade-deal-mixed-victory-japan-template-regional-partners">temporary trade disputes</a>. This spending plus greater arms exports will deepen Japan&#39;s diplomatic tensions with China, as would any joint U.S.-Japan procurement of nuclear-powered submarines. China could respond with trade restrictions and military drills near Okinawa and Taiwan, but direct clashes remain unlikely. If an election results in the LDP losing seats but remaining in power, the party could replace Takaichi as premier, thereby scaling back Takaichi&#39;s heavy spending. In the unlikely event the opposition comes to power, diverse coalition partners would drastically slow domestic policymaking, while Japan&#39;s defense push would diminish and economic security cooperation with the West could also slow as Tokyo prioritizes regional economic ties, including with China.

Japan Tests Coalition as China Ties Fray

Mainland Southeast Asia will hold elections amid overlapping security crises, driving elevated volatility and leaving regional criminal economies intact. Thailand&#39;s Feb. 8 election will likely yield a narrow coalition susceptible to nationalist pressure, incentivizing Bangkok to maintain a hardened stance toward <a href="/article/cambodias-ruling-party-wins-another-one-sided-election">Cambodia</a> in the wake of their <a href="/article/deadly-clashes-sharply-escalate-thai-cambodian-border-dispute">July 2025 border war</a> and <a href="/article/latest-thailand-cambodia-clashes-will-test-us-appetite-intervention">December 2025 clashes</a>. The suspension of the <a href="/article/takeaways-2025-asean-summit">Kuala Lumpur Peace Accord</a> and unfruitful U.S.-brokered communication efforts highlight de-escalation challenges. This environment will sustain a cycle of tactical escalations and pauses, with checkpoint closures, troop surges and sporadic exchanges disrupting trade and cross-border labor. With both militaries reinforcing forward positions in response to the other&#39;s moves, a low-likelihood but high-impact risk persists that a mass casualty event &mdash; especially during Thailand&#39;s election period &mdash; could turn episodic clashes into a sustained and larger confrontation. Meanwhile, Myanmar&#39;s <a href="/article/myanmars-elections-and-militarys-quest-legitimacy">sham election</a> will deepen conflict by forcing the junta to escalate military operations to stage nationwide control, prompting resistance counteroffensives and expanding ungoverned border zones that, in turn, accelerate arms trafficking, migrant flows and militia activity into neighboring provinces. Simultaneously, scam compound economies across Cambodia, Laos and Myanmar &mdash; all deeply intertwined with the same border instability and trafficking flows &mdash; will disperse into smaller, more mobile operations embedded in IT outsourcing, gaming and logistics companies. Although Chinese and U.S. pressure will generate visible raids and rescues, entrenched patronage networks will prevent their comprehensive dismantling. &nbsp;

Elections, Border Tensions and Persistent Organized Crime in Southeast Asia

Vietnam and Indonesia will adopt increasingly securitized leadership models that maintain economic openness but tighten state control over sensitive sectors, raising compliance burdens and politicizing investment conditions even as overall macroeconomic stability endures. Vietnam&#39;s January Party Congress, its first <a href="/article/what-expect-following-death-vietnams-top-leader">leadership transition</a> since 2020, will <a href="/article/vietnams-administrative-overhaul-new-era-governance-and-investment-conditions">consolidate</a> Communist Party General Secretary To Lam&#39;s authority and entrench a security-centric governing structure. Lam will use <a href="/article/enforcer-vietnams-anti-corruption-campaign-has-been-appointed-president">anti-corruption probes</a> to discipline rivals, slowing approvals and increasing scrutiny on foreign investment in real estate, energy and data-intensive sectors. Still, Vietnam will continue its <a href="/article/vietnam-us-trade-deal-reduces-tariffs-devil-details">export-led</a>, foreign direct <a href="/article/geopolitics-trade-us-tariffs-give-impetus-asean-trade-diversification">investment-driven model</a> with manufacturing as a priority sector, insulating it from policy and regulatory disruptions. Lam will also <a href="/article/vietnams-lam-extends-diplomatic-balancing-act-rare-north-korea-visit">balance closer ties</a> with China and other Global South partners with defense dialogue and supply chain diversification with the United States and others. Meanwhile, <a href="/article/how-subianto-making-his-mark-indonesian-politics">Indonesian President</a> Prabowo Subianto will accelerate the <a href="/article/unrest-indonesia-will-continue-not-dislodge-government">remilitarization of governance</a> and deepen <a href="/article/avoid-steeper-tariffs-indonesia-reaches-high-stakes-trade-deal-us">resource nationalism</a> across the mining and agriculture sectors. New security laws will widen the state&#39;s surveillance powers, expand the military&#39;s authority to operate domestically and embed military-linked actors in regulatory functions. Foreign investors will face tighter permit scrutiny in goods including nickel, bauxite, copper and tin, and downstreaming mandates that sustain bans on unprocessed mineral exports. &nbsp;

Security States Consolidate in Vietnam and Indonesia

U.S. efforts to renegotiate a South Korean security pact will be contentious, but defense industrial cooperation will prevent a rift, while inter-Korean border threats will decrease barring a failed attempt at renewed U.S.-North Korea talks. The United States will pursue contentious talks to renegotiate its security pact with South Korea to extract financial concessions and to deter China better. A joint plan to procure nuclear-powered submarines and cooperate on shipbuilding, likely to be finalized in 2026, will reduce the likelihood of a breakdown of security talks and make further economic and defense industrial cooperation likely. U.S. President Donald Trump will also pursue the revival of bilateral talks with <a href="/article/north-koreas-foreign-affairs-hit-inflection-point">North Korean Supreme Leader</a> Kim Jong Un, but the U.S. midterm elections and the prospect of lengthy negotiations may convince the White House to delay talks. Inter-Korean <a href="/article/after-months-political-tumult-south-korea-elects-new-president">border clashes</a> will generally become less likely amid U.S. and South Korean charm offensives, but a reescalation of tensions &mdash; including North Korean missile launches and border exercises &mdash; is possible if Trump-Kim talks are delayed or they commence but break down.

U.S. Pursues Revamp of Korean Peninsula Ties

Israel will alternate between attrition and escalation in Gaza, Lebanon and Iran before its scheduled elections in 2026, aiming to force Hamas into exile, Hezbollah into disarmament and Iran into an unfavorable nuclear deal in a strategy that will risk restarting major wars. Israeli Prime Minister Benjamin Netanyahu will seek a major military victory to secure another term in what will be a tight general election in 2026. This strategy will maintain military pressure on Hamas, Hezbollah and, at times, on Iran, and would mostly involve limited air power and, in <a href="/article/israel-moves-toward-de-facto-partition-gaza">the case of Gaza</a>, ground raids, aid restrictions and the blocking of reconstruction. Israel would rely on the United States to support this strategy with continued diplomatic and military aid, even as pro-Israel sentiment weakens in the run-up to America&#39;s midterm elections. Israel may launch short, major military campaigns to degrade its rivals&#39; capabilities, risking reopening war with Iran and <a href="/article/growing-risk-new-hezbollah-israel-war">Hezbollah</a> after they regroup from their summer setbacks, potentially drawing Israel into ground conflict in Lebanon and another air/missile war with Iran. These escalations will also restart Houthi attacks in the Red Sea and risk Iranian action against pro-U.S. Arab states. If Netanyahu loses the Israeli election, a new government will maintain his strategies initially, but could eventually adopt a less hawkish view, leading to de-escalation with Hamas, Hezbollah and/or Iran.

A Year of Attrition and Calculated Escalation in Israel

Turkey&#39;s domestic political crackdown, stalled Kurdish peace process and expanding regional ambitions will drive heightened protest risks at home and rising &mdash; but still manageable &mdash; geopolitical friction abroad. The Turkish government will expand its crackdown on <a href="/article/turkey-imamoglus-arrest-dims-oppositions-presidential-prospects">opposition candidates</a> to further weaken the senior leadership of the opposition Republican People&#39;s Party ahead of the 2028 election, elevating protest risks. Ankara will also push for constitutional reforms to enable President Recep Tayyip Erdogan to run for reelection in 2028, but the government&#39;s unwillingness to fully meet Kurdistan Workers&#39; Party demands in exchange for Kurdish support in parliament means the <a href="/article/threats-turkish-kurdish-peace-process">peace process</a> will likely stall, while mounting frustrations risk collapsing it altogether. Meanwhile, Turkey will expand its regional influence through expanded trade, military cooperation and the provision of electricity in Syria, which will heighten Turkish-Israeli tensions, although a <a href="/article/can-israel-and-turkey-avoid-conflict-syria">direct conflict</a> is unlikely. Turkey will likely offer logistical and personnel support in low-risk positions for stabilization operations in Gaza, and potentially in Ukraine if a deal is reached between Ukraine and Russia, although this would likely require incentives, such as European defense deals. Additionally, Turkey will try to reenter the U.S. F-35 program to improve its air force.&nbsp; &nbsp;

Turkish-Kurdish Peace Process Stalls as Ankara Seeks Expanded Regional Influence

Regional tensions over Iran&#39;s nuclear program and support for allied groups will be high in 2026, with more Israeli strikes on Iran possible; stalled nuclear talks with the United States will meanwhile erode President Masoud Pezeshkian&#39;s power. Uncertainty about the status of Iran&#39;s highly enriched uranium after the June 2025 Israeli and U.S. strikes on nuclear facilities, Iran&#39;s reduced relations with U.N. nuclear inspectors, and Tehran&#39;s attempts to rebuild air defense and missile and drone manufacturing capabilities will keep the prospect of new Israeli strikes on Iran relatively high in 2026. Any escalation probably will remain contained to Israel, Iran and the United States for the most part, though renewed conflict would likely result in Yemen&#39;s Houthi movement resuming attacks on commercial vessels and potentially one-off strikes against targets in the Gulf. The lack of a nuclear deal and renewed tensions with the United States will further weaken Pezeshkian domestically, strengthening Iran&#39;s hard-liners. This is unlikely to convince Iran to strike Israeli and U.S. targets, but will slow Pezeshkian&#39;s domestic reform agenda and potentially accelerate hard-line conservative social policies. This would create another flashpoint alongside poor economic conditions for protests inside Iran, though the government will try to permit some social freedoms to forestall unrest.

Regional Tensions Persist as Iran Rebuilds

Syria will prioritize reconstruction and internal stability by seeking Gulf Arab investment; appeasing the West through counterterrorism cooperation and nominal political reforms; and avoiding confrontation with Israel, possibly via a security deal that could involve an Israeli buffer zone. Syria&#39;s provisional government will pursue appeasement to end international isolation, seeking a rapprochement with neighbors like <a href="/article/implications-syria-israel-de-escalation-agreement">Israel</a> and Iran to ease external security threats. This strategy will include deeper U.S. security cooperation, which will take advantage of Western sanctions relief during 2026 and support the slow diplomatic progress toward an Israeli-Syrian security deal that would end Israeli strikes in the country. With sanctions lifted, reconstruction aid will grow from Gulf Arab states such as Qatar, Saudi Arabia and the United Arab Emirates, though each will have different goals as it tries to shape Syria&#39;s provisional government. But risks to Syria&#39;s stability remain, including internal <a href="/article/us-engagement-syria-will-promote-stability-kurdish-integration-will-continue-lag">political splits</a>, only a gradual end to Israeli strikes, slow reconstruction and hard-liner backlash (potentially strengthening the Islamic State), which could lead to large-scale violence. Likely delays in drafting a new constitution and elections will strain internal ethnic and sectarian ties, risking further violence and slowing reconstruction.

Syria Aims for Rehabilitation Through Concessions 

Led by Saudi Arabia, the Gulf Cooperation Council states will prioritize balancing government expenditure with lower oil prices, reinforcing a cautious approach to major spending like megaprojects and broad foreign aid, but retaining an investment appetite for artificial intelligence, chips and arms diversification. Forecasts of overproduction and potential economic slowdowns worldwide will likely keep oil prices low in 2026, putting pressure on GCC budgets and strategic priorities. Saudi Arabia&#39;s 2026 budget already projects a $44 billion deficit (or 3% of GDP) and includes <a href="/article/mixed-record-saudi-arabias-vision-2030">modest spending cuts</a>, reflecting its ongoing effort to narrow the budget gap from 2025. Even so, economic diversification will continue, with Saudi Arabia&#39;s nonoil sector projected to grow, driven by expansion in tourism, entertainment, finance, technology and other services. Saudi Arabia is also positioned to become a more <a href="/article/modern-geopolitics-saudi-arabia">significant competitor</a> in the regional real estate market as it normalizes foreign ownership of land. The focus on internal development will incline the GCC to remain on the sidelines of any new regional conflicts whenever possible. But GCC states will each seek an advantage in artificial intelligence, access to chips and arms diversification, pitting their large sovereign wealth funds against one another in the investment contest for these scarce technologies and resources. &nbsp;

GCC Tilts Toward AI and Away from Megaprojects

Europe

The European Union will intensify efforts to reduce its dependence on Russian energy and Chinese critical minerals while preparing to support Ukraine unilaterally if the United States withdraws support, a stance that will sustain elevated Russian hybrid threats and accelerate momentum toward rearmament and deeper defense integration. The European Union will proceed toward ratification of its <a href="/article/new-us-eu-deal-averts-full-blown-trade-war-now">tariff framework</a> agreement with the United States, but proposed amendments in the European Parliament and renewed U.S. tariff threats over alleged nontariff barriers tied to EU digital and <a href="/article/geopolitics-trade-eu-steps-back-ambitious-environmental-policies">supply chain regulations</a> will threaten to unravel the deal, potentially reigniting tariff escalation and keeping uncertainty elevated. The Carbon Border Adjustment Mechanism will also enter its operational phase, introducing levies on embedded emissions in key industrial imports, raising compliance costs for EU importers and causing friction with trade partners. Meanwhile, Brussels will begin phasing out remaining <a href="/article/end-russian-gas-ukraine-cements-europes-new-energy-landscape">Russian oil and gas contracts</a> under its RePowerEU plan; advance its ReSourceEU initiative to curb <a href="/article/budding-eu-china-rapprochement-amid-us-tariffs-will-have-its-limits">critical mineral dependence</a> on China; and consolidate its broader competitiveness agenda through new Omnibus simplification packages covering digital, environmental, automotive and energy policy. Additionally, Europe will sustain military and financial support for Ukraine, <a href="/article/what-make-europes-counterproposal-us-ukraine-peace-plan">rejecting any settlement</a> that undermines Ukrainian sovereignty, security or long-term stability, while at least temporarily supporting Kyiv unilaterally should Washington withdraw support. Russian <a href="/article/baltic-brink-new-flashpoint-europes-confrontation-russia">hybrid threats</a> and broader escalatory dynamics will remain elevated, especially if Europe rejects a U.S.-brokered deal and ramps up support for Ukraine. Against this backdrop, the European Union will accelerate rearmament and <a href="/article/future-transatlantic-security-cooperation-part-1-view-washington">defense integration</a> efforts, with several key initiatives and military-mobility projects set to launch in 2026 alongside the first disbursements of <a href="/article/how-eus-safe-loans-package-will-reshape-europes-defense-industry">SAFE defense</a> loans.

EU Pursues Strategic Autonomy, Rearmament Amid Strained Trans-Atlantic Ties

The United Kingdom&#39;s ruling Labour Party will face a significant risk of an internal leadership challenge as weak polling, limited fiscal space and growing factionalism undermine Prime Minister Keir Starmer&#39;s authority, though any successor would likely maintain broad policy continuity amid the same fiscal constraints. A leadership challenge would most likely emerge before or shortly after local elections in May, with likely significant Labour losses <a href="/article/painful-upcoming-budget-likely-amplify-starmers-leadership-woes">intensifying dissatisfaction</a> with Starmer&#39;s leadership and agenda. An early general election remains highly unlikely, however, given Labour&#39;s large parliamentary majority and the danger that several lawmakers would lose their seats in an early vote. In the run-up to the May vote, Starmer is unlikely to make major policy shifts and will instead double down rhetorically on a <a href="/article/after-14-years-what-would-uk-labour-government-look">pro-growth agenda</a> centred on supply-side reforms and fiscal prudence, but this is unlikely to reverse Labour&#39;s declining popularity or restore party discipline. A politically weakened Starmer may also harden his stance on <a href="/article/uk-eu-deal-signals-strategic-recalibration-post-brexit-trade-and-defense-relations">post-Brexit relations</a> with the European Union to avoid domestic backlash, complicating negotiations with the bloc on issues such as U.K. financial contributions or youth mobility. In case of a successful leadership challenge, a centrist successor would prioritize fiscal stability and incremental reforms, while a more left-leaning figure would seek looser borrowing and higher social spending, yet both would still operate within binding <a href="/article/market-instability-tests-uk-governments-fiscal-strategy">fiscal constraints</a> that would limit major departures from Starmer&#39;s overall policy trajectory.

A Potential U.K. Leadership Change Amid Growing Labour Party Turmoil

Political instability in France and Germany will raise the risk of government crises and early elections in both countries while weakening their ability to steer major EU defense, energy and industrial initiatives. France faces another year of <a href="/article/french-political-crisis-deepens-another-prime-minister-resigns">political paralysis</a>, with a significant risk of early parliamentary elections if the government fails to secure a workable 2026 budget or struggles with preparations for the 2027 budget, and if another prime minister is forced to resign. Still, an early National Assembly election would likely yield another fragmented parliament unable to break the deadlock or deliver meaningful <a href="/article/french-debt-soars-parliament-unlikely-reach-fiscal-consolidation">deficit reduction</a>. Early presidential elections remain unlikely, but pressure on President Emmanuel Macron to call one will intensify if the impasse persists even after new legislative elections, or in the event of significant social unrest in response to austerity measures. In Germany, the ruling coalition will come under increasing strain as internal dissent from <a href="/article/german-election-results-position-center-right-retake-helm">Chancellor Friedrich Merz</a> deepens tensions within his Christian Democratic Union. As the government has only a 12-seat majority, a few defections could bring about key votes and force diluted compromises on welfare, pension and <a href="/article/economic-impact-germanys-debt-brake-reform">economic reforms</a>. While the coalition&#39;s members do not want an early election, the risk of one following a government collapse will rise the more the legislative gridlock persists and internal dissent intensifies. Political instability in France and Germany will weaken their influence over EU decision-making, slowing the process and increasing the European Commission&#39;s own ability to shape policy.&nbsp;

The Franco-German Engine Loses Steam 

Italy will maintain political stability despite mounting economic stagnation while a fragile minority government in Spain faces legislative paralysis and potential early elections despite sustained growth and fiscal consolidation. Meanwhile, a potential pro-EU shift in Hungary may remove a long-standing obstacle in EU negotiations only partly offset by the return of a populist government in Prague. Enabled by strong polling and a fragmented opposition, Italy&#39;s government will seek to <a href="/article/italy-struggles-translate-political-stability-economic-growth">consolidate power</a> through a high-profile justice-reform referendum and potential electoral reform that strengthens Prime Minister Giorgia Meloni&#39;s coalition ahead of the 2027 general election. Stability and fiscal discipline will allow Rome to exit the EU excessive-deficit procedure, reinforcing improved investor confidence. But <a href="/article/modest-growth-and-spending-pressures-will-limit-italys-debt-reduction-efforts">stagnating growth</a> and the expiration of EU recovery funds may eventually increase pressure to loosen fiscal targets, potentially reigniting market concerns toward the end of 2026. In Spain, sustained policy gridlock and <a href="/article/spains-political-problems-worsen-government-loses-catalan-support">corruption scandals</a> affecting Prime Minister Pedro Sanchez&#39;s minority government will increase the probability of early elections, which would likely produce another fragmented parliament. A right-wing coalition would offer greater stability, but the inclusion of the far right would likely increase the risk of social unrest, particularly in regions with strong separatist movements, while another left-wing minority government would prolong policy inertia. Still, Spain&#39;s economy and public finances will remain resilient, with another rolled-over budget in 2026 constraining new spending initiatives but keeping the deficit on a downward path. Hungary&#39;s April parliamentary elections could see long-standing Prime Minister Viktor Orban replaced by pro-EU coalition leader Peter Magyar, easing EU-level negotiations on Ukraine and Russia. Although Andrej Babis&#39;s return as Czech prime minister in December 2025 reintroduced another euroskeptic actor, he is unlikely to replicate Orban&#39;s level of obstructionism, as his euroskepticism is more transactional and domestically driven and lacks Orban&#39;s overt pro-Russian orientation.

Diverging Trajectories in Italy and Spain, Shifts in Hungary and the Czech Republic Recast EU Dynamics

Sub-Saharan Africa

Al Qaeda-linked jihadists&#39; targeting of Mali&#39;s economic infrastructure will increase pressure on the country&#39;s junta to shift its counterterrorism strategy, such as by striking deals with the jihadist group or pivoting closer to the United States, but the jihadists could still enter the capital. Al Qaeda affiliate Jamaat Nusrat al-Islam wal-Muslimin will likely <a href="/article/malis-junta-fights-its-life-jihadists-tighten-their-noose-bamako">continue interdicting</a> the supply of fuel to Mali&#39;s capital of Bamako while simultaneously strengthening its ties to civilian opposition groups. This will raise the risk of unrest in Bamako and pressure the junta to shift its counterterrorism strategy, which could either see it strike agreements with JNIM or pivot closer to neighboring West African countries and/or the United States. This dilemma will heighten <a href="/article/whats-next-mali-russia-s-wagner-group-pulls-out">intra-junta tensions</a> and raise the risk of a coup, after which the new authorities could strike an agreement with JNIM whereby the jihadist group would gain some influence over the Malian government in exchange for de-escalating its insurgency. Intra-junta tensions could also result in the outbreak of infighting between security forces, which could see JNIM entering Bamako in a less-likely, high-impact scenario. This would raise the likelihood of U.S. or <a href="/article/france-africa-and-future-part-2-age-multi-alignment">European airstrikes</a> on JNIM military assets in Mali, but a military operation to dislodge the jihadist group from Bamako would prove challenging.&nbsp; &nbsp;

A Mounting Risk of Jihadist Breakthrough in Mali

South Africa&#39;s coalition government will likely advance reforms in the power and water sectors despite rising internal friction ahead of the next municipal elections, but gains in investor confidence will be undermined by likely findings of criminal influence over parts of the political class and state apparatus. The <a href="/article/challenges-facing-south-africas-new-coalition-government">coalition government</a> between the left-leaning African National Congress and the center-right Democratic Alliance will likely pass reforms to the water sector that improve the management of <a href="/article/geopolitics-water-cascading-effects-south-african-underinvestment-water-distribution">water resources</a> and oversee the launch of a wholesale electricity market, which would put downward pressure on electricity prices. While these reforms will improve market sentiment vis-a-vis South Africa, the likely release of findings by a commission of inquiry that <a href="/article/essential-geopolitics-outlook-south-africas-coalition-government">detail collusion</a> between parts of law enforcement and ANC officials with organized criminal groups will hamper investor confidence. These findings will threaten to increase intra-ANC tensions and weaken President Cyril Ramaphosa. Despite this, the <a href="/article/what-democratic-alliances-exit-government-would-mean-south-africa">Democratic Alliance</a> will likely remain in the coalition government, but it will face growing friction with the ANC ahead of South Africa&#39;s next municipal elections, scheduled for late 2026 or early 2027, which could delay the adoption of the 2026 budget. &nbsp;

South Africa's Coalition Government Holds On

Worsening tensions between Ethiopia and Eritrea increase the likelihood of intensifying proxy clashes that could result in a severe military escalation, while Ethiopia&#39;s June general election will likely see Prime Minister Abiy Ahmed&#39;s reelection, but will threaten to spark unrest and a fresh crisis in the Tigray region. Addis Ababa&#39;s push for direct sea access and Eritrea&#39;s ties to anti-government groups inside Ethiopia will likely keep <a href="/article/assessing-risk-ethiopia-eritrea-war-2026">bilateral tensions high</a> throughout the year. While Abiy is unlikely to initiate a large-scale invasion to seize the Eritrean port Assab for landlocked Ethiopia, Eritrea will likely sustain financial and military support to Fano militias in Ethiopia&#39;s Amhara region while simultaneously seeking closer ties with the Tigray People&#39;s Liberation Front, or TPLF. This will increase the risk of an intensifying proxy conflict between Ethiopia and Eritrea that could result in a full-blown war in a less-likely, higher-impact scenario. Meanwhile, Abiy is likely to be reelected in Ethiopia&#39;s general election scheduled for June 1, but some opposition forces will denounce the vote as unfair, which could spark <a href="/article/worldwide-gen-z-protesters-may-be-disappointed-their-success">violent unrest</a>. Moreover, the TPLF&#39;s likely inability to run in the general election would threaten to trigger <a href="/article/ethiopias-tigray-region-faces-brewing-storm-amid-shifting-alliances">fresh violence</a> in Tigray, which would simultaneously increase the risk of a military escalation between Ethiopia and Eritrea.&nbsp;

Ethiopia Faces a Heightened Risk of Conflict With Eritrea

The United States may broker a de-escalation of Sudan&#39;s civil war but is unlikely to secure a comprehensive peace agreement, while U.S. mediation efforts between the Democratic Republic of the Congo and Rwanda are likely to face mounting challenges. Rising pressure from U.S. President Donald Trump&#39;s administration to end Sudan&#39;s civil war will increase the likelihood of the Sudanese Armed Forces and the paramilitary Rapid Support Forces agreeing to <a href="/article/sudan-slips-toward-de-facto-partition">deconfliction measures</a>, such as temporary truces. Localized ceasefire violations would still likely occur, while the SAF and RSF are unlikely to agree to a comprehensive peace agreement due to opposition from Islamist factions allied with the SAF. Meanwhile, U.S. efforts to advance <a href="/article/fragile-peace-takes-shape-between-congo-and-rwanda">the peace process</a> between the Democratic Republic of the Congo and Rwanda are likely to face growing headwinds due to implementation challenges and difficulties in securing a peace agreement with the Rwandan-backed M23. Localized clashes between the Congolese military and the M23 are likely to persist throughout much of the year and could result in <a href="/article/assessing-risk-expanded-conflict-congo">military escalation</a>, though U.S. pressure will mitigate the risk of a protracted escalation in the first half of the year.&nbsp; &nbsp;

U.S. Peace Efforts Shift to Sudan Amid Increasingly Tough Congo-Rwanda Mediation

Political tensions will rise in Nigeria ahead of the 2027 general election, increasing the risk of intercommunal violence that will likely result in the United States launching more aerial strikes against jihadist groups in coordination with Abuja. Political jockeying ahead of the 2027 general election will likely spark localized instances of violence, including ethnically and religiously motivated clashes. Together with <a href="/article/nigeria-security-forces-struggle-address-growing-militancy">persistent jihadist activity</a> in the north, this could cause cuts in U.S. development aid amid scrutiny by Washington of violence against Christians. However, Abuja will likely remain open to bilateral security cooperation with the United States, including coordinated U.S. airstrikes against jihadist groups, mitigating the risk of unilateral U.S. airstrikes. Still, the latter&nbsp;<a href="/article/will-united-states-take-military-action-nigeria">cannot be ruled out</a>. If they occur, they could weaken President Bola Tinubu domestically and would likely trigger anti-U.S. protests. Meanwhile, legislation tabled by lawmakers from the ruling All Progressives Congress could see the general election brought forward to November. Should the vote in fact occur in 2026, Tinubu would stand as a front-runner, but the risk of <a href="/article/worldwide-gen-z-protesters-may-be-disappointed-their-success">postelection unrest</a> would increase due to organizational challenges arising from holding the poll early.

Rising Political Tensions Ahead of Nigeria's General Election Amid U.S. Scrutiny 

South Asia

India&#39;s slow-moving trade talks with the United States will not eliminate the risk of further tariffs, while New Delhi will seek to balance ties with Russia and China and implement reforms to improve its business environment. India and the United States will likely continue trade negotiations, though ongoing court proceedings could slow progress, especially if the U.S. Supreme Court finds the Trump administration&#39;s so-called reciprocal tariffs unlawful. The Supreme Court&#39;s ruling will not affect the tariffs on pharmaceutical products threatened by Washington. If imposed, they would hit India hard, given the sector&#39;s heavy reliance on the U.S. market and its roughly 1.72% contribution to gross domestic product. India may try to offset tensions by cutting tariffs on U.S. electronics, industrial goods and medical equipment and by boosting defense and energy imports, though these steps would only partly sway Washington, whose stance is shaped mainly by domestic supply chain and political factors. Meanwhile, India will likely further scale back direct purchases of <a href="/article/will-trumps-tariffs-deter-india-buying-russian-oil">Russian oil</a> in the near term, but this reduction is unlikely to be permanent, as New Delhi will likely continue exploring workarounds through unsanctioned refiners, heightening the risk of angering the United States and delaying trade talks. India-China relations will meanwhile likely see a <a href="/article/despite-modest-improvement-india-china-relations-face-enduring-challenges">modest thaw</a>, potentially through restored border trade and more frequent diplomatic dialogue, but deep territorial distrust will continue to limit normalization. Domestically, the implementation of labor codes, which simplify India&#39;s decades-old <a href="/article/indias-labor-code-reforms-opportunities-and-implementation-challenges">labor laws</a> and improve the business environment, will advance unevenly. Phased implementation will occur in some states, but opposition and trade union resistance will slow nationwide adoption. States refusing to implement codes can be challenged in court, with the Supreme or High courts able to order compliance.&nbsp;

Despite Trade Talks, India Will Face U.S. Tariff Risks

General elections in Bangladesh and Nepal will help restore their constitutional orders, but the new governments will face unrest, pressures to implement governance and institutional reforms, and the need to balance ties with regional countries. Bangladesh will <a href="/article/how-bangladeshi-stability-depends-upon-prompt-election">hold elections Feb. 12</a>, with the Bangladesh Nationalist Party, the student-led National Citizen Party and Jamaat-e-Islami the main contenders. The exclusion of the formerly governing Awami League from elections will likely fracture the league, with midlevel leaders shifting to new and/or rebranded parties or running as independents. Ongoing legal pressure on senior figures will meanwhile limit any attempts to reorganize the longtime ruling party. The new Bangladeshi government will inherit the same challenges the interim government faced, including implementing constitutional and electoral reforms, stabilizing the economy, managing high debt levels and a narrow tax base, and advancing International Monetary Fund-supported fiscal reforms. The country&#39;s deep political polarization means that if a coalition is needed to appoint a government, it would be unstable and might struggle to pass legislation. Relations with Pakistan will likely keep warming through diplomacy, trade and expanded port connectivity, though historical grievances will limit deeper cooperation. With India, shared borders and trade reliance reduce the risk of a rupture, and Dhaka will take a cautious, pragmatic approach focused on security and economic ties. In Nepal, political uncertainty and risks of unrest will remain high as activists pursue political power alongside more established parties in a vote scheduled for March 5. Activists will press the interim and eventual elected government to pursue justice for those harmed in 2025 anti-government unrest and to implement reforms to combat graft and enhance the stability and responsiveness of the government. These demands will fuel tensions between established parties and activists; alongside policy disagreements among activists themselves, this will challenge reform implementation &mdash; especially as stronger reforms will require broad consensus. Nepali political parties will probably be more united when it comes to seeking balancing relations with both India and China, especially amid Nepalis&#39; intensified demand for economic opportunities and growth and amid weakened Nepal-U.S. ties.&nbsp; &nbsp;

Bangladesh and Nepal Hold Elections

Mistrust between Pakistan and India following their May 2025 clashes and amid India&#39;s suspension of the Indus Water Treaty will sustain risks that bilateral tensions and conflict resurge. Mistrust between Pakistan and India will <a href="/article/amid-india-and-pakistans-tenuous-ceasefire-future-flare-ups-remain-possible">remain high</a> as India likely continues to ignore the Indus Water Treaty and as the two sides accuse the other of supporting militant groups. Following their May 2025 conflict, Pakistan and India have sought to <a href="/article/drivers-and-constraints-wider-india-pakistan-conflict">avoid reigniting clashes</a>, which may portend greater caution when it comes to exchanging accusations of transgressions in 2026. That said, Pakistan and at least India-administered Kashmir will continue to face militant attacks, which, alongside Islamabad&#39;s suspicions about India&#39;s suspension of the water-distribution agreement, will sustain a risk that tensions resurge and that clashes reignite. Pakistan has not yet faced a major disruption in water flow, but its reliance on rivers for irrigation, farming and hydropower keeps the threat high. Any additional dams, water diversion or withholding of river data by India would further strain Pakistan&#39;s agriculture and water security, exacerbating economic challenges. Pakistan&#39;s IMF program is likely to stay on track, but more difficult reforms, including energy-sector adjustments and the restructuring of state-owned enterprises, will likely face delays, while fiscal consolidation will remain a significant challenge.

Tensions and Mistrust Persist Between Pakistan and India

Afghanistan and Pakistan&#39;s dispute over anti-Pakistan militants will very likely fuel recurrent border clashes and potential Pakistani ground operations in Afghanistan that will worsen regional instability. The Afghan Taliban is highly likely to remain unwilling and probably incapable of constraining Afghanistan-based anti-Pakistan militants to Islamabad&#39;s satisfaction, which will fuel Pakistan&#39;s resolve to strike targets in Afghanistan in retaliation for major attacks in Pakistan. Neither Kabul nor Islamabad desires a prolonged conflict. This, in addition to international <a href="/article/growing-international-divide-over-taliban-ties-will-risk-regional-stability">efforts to mediate</a>, will sustain pressure on the two sides to reach temporary pauses in hostilities. But barring either side meaningfully compromising on their dispute over anti-Pakistan militants &mdash; and other issues like the legitimacy of the Afghanistan-Pakistan border &mdash; <a href="/article/deadly-border-clashes-sharply-escalate-afghanistan-pakistan-tensions">cross-border clashes</a> will very likely continue. Pakistan probably will consider intensifying military action in Afghanistan the longer clashes continue, or should an escalatory development emerge like a spate of deadly attacks targeting civilians in Pakistan&#39;s major cities. It might even consider establishing a buffer zone along portions of the Afghanistan-Pakistan border along Pakistan&#39;s northwest that see frequent clashes and militant activity. And it might seek to destabilize the Afghan Taliban by increasingly striking locations deeper in Afghanistan or by supporting Taliban rivals. Among other things, bilateral tensions will likely trigger prolonged border closures that challenge both countries&#39; economies, as well as refugee flows to nearby countries that increase regional instability.

2026 ANNUAL FORECAST

Middle East and North Africa

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