This past year offered plenty of political turbulence to keep emerging market (EM) investors on their toes. The end of 2019 brought subdued geopolitical risk. Our broad indicator tracking geopolitical risk events was elevated most of the summer and fall before moving lower in the last 30 days (Figure 1). While emerging markets have a knack for delivering the so-called unknown unknowns when it comes to political event risk, we can venture to evaluate some of the known unknowns (aka known event risk) for 2020. Here is a brief list of EM-relevant political events to monitor as we enter the new year.
US elections. Overall election risks taper off across EM 2020, with fewer consequential votes planned. Of course, the US presidential election in November has potentially significant consequences across EM. Domestic issues typically dominate US Presidential election cycles, and the 2020 election should follow this script. However, expect some focused discussion about trade, specifically vis-a-vis China, as well as relations with Russia and Turkey and US sanctions against those countries.
LATAM protests. Q4 witnessed major protests erupt in Ecuador, Bolivia, Chile, and Colombia. While separately triggered, all share a common anti-government sentiment, which, in most cases, was bolstered by economic grievances. Most notable were the protests in Chile, a country viewed as the poster child for economic growth in the region. Yet, continuing economic inequality (worst Gini coefficient score among OECD members) has resulted in domestic unrest necessitating a revisiting of the country’s social contract. Expect protests in Chile to get a second wind as the Constitutional Plebiscite vote set for April approaches.
Argentina’s debt crisis. Reprofiling, restructuring, and what will be the new terms are all still open to speculation at this time. Policy uncertainty remains high as only bits and pieces of the economic plan of newly elected president Alberto Fernández have emerged. Based on statements by newly appointed Finance Minister Martín Guzmán, this situation should change in the new year with Guzmán proposing an ambitious deadline of March for completing debt talks. While excessively optimistic, this condensed timeline necessitates clarity by the government sooner than later.
North Korean provocations. At the time of writing, North Korea’s threat of a surprise Christmas gift for the US is still unknown. North Korea will likely conduct a test launch of a long-range rocket, one with a potential range to strike the continental US. Since the failed February Hanoi Summit, North Korea has conducted several missile tests and test-fired other projectiles. Going into 2020, expect North Korea to keep up its provocative acts as it tries to garner US attention in hopes to have international sanctions against it lifted.
India-Pakistan tensions. While tensions always run high between these two states, it is easy to forget that just ten months ago, the countries narrowly avoided military escalation. Following the February 15 suicide car bombing in Pulwama district killing 40 Indian security officers, India carried out reprisal airstrikes targeting Jaish-e-Mohammed training sites, the militant group claiming responsibility for the Pulwama attack, within Pakistan. Fortunately, both governments moved to de-escalate the crisis. Then in August, the re-elected Modi government announced the revocation of Article 370, which established the special status of the Kashmir territories. Pakistan harshly criticized India’s move to normalize its disputed occupation. The action also led to imposing martial law conditions in Kashmir for several weeks to prevent protests. Most recently, the passage of the Citizenship Act has sparked demonstrations over alleged anti-Muslim bias and speculation of a resulting exodus of Muslims from India to Pakistan. Such a flood of refugees could spark a border conflict.
Mexico Cartel Violence. The anticipated passage by the US of the USMCA trade deal early in Q1 should spark business investment and the economy in general; however, escalating violence by Mexican drug cartels along the Mexico-US border could upset relations with Mexico’s largest trading partner. President Trump’s call to designate the cartels as terrorist organizations currently remains on hold. If enacted, such designation could strain US-Mexico relations by scrutinizing financial transactions by Mexican banks and even the imposition of economic and travel sanctions. In light of Trump’s inclination to play on voters’ concerns with Mexico, he might find cartel violence a useful election foil in a campaign sure to raise the issues of the border wall and illegal immigration.
Middle East détente. Tensions between regional rivals Saudi Arabia and Iran could lessen in 2020. Reports indicate that the two countries have open channels for dialogue to improve relations. Both countries appear weary of the costs imposed by their decade long cold war, with each supporting proxies in regional hot spots like Yemen, Syria, and Iraq, in hopes of diminishing the other’s influence in the Gulf. Both face economic challenges at home and might find more mutual benefit in cooperating to maintain oil price stability. Specifically, the September 14 oil field attacks demonstrated Saudi Arabia’s vulnerabilities should tensions spiral.
To download the PDF version, click here: 2019-12-23 Geopolitical Outlook 2020 Research Note
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