Hidden Risks To The Global Economy

Date: February 20, 2012
Pages: 44
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US$ 580.00 US$ 490.00
Publisher: Business Monitor International
Report type: Strategic Report
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ID: HC9FD2A6ADEEN
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Hidden Risks To The Global Economy
Most of the main risks to global economic and geopolitical stability are well known. These are typically a double-dip recession in the United States; the collapse of the eurozone; a 'hard landing' in China; and a war involving the US and its allies against Iran. However, there are plenty of other risks that, while not necessarily 'global' in scope, have the ability to destabilise their regions. This in turn would have negative consequences for business and investment and add to the sense of a dangerous world. In this report, we outline 12 of these ‘hidden risks’. When we say hidden risks, we do not mean ‘black swan’ or completely unpredictable events. Such risks could include a new mass-casualty Islamist terror attack against a major city; a large-scale natural disaster such as a flood or volcanic eruption affecting a key economic region; and the sudden emergence of a new pandemic that disrupts global travel and trade. These are all certainly plausible risks, but they are events whose probability or timing simply cannot be estimated with any degree of confidence. Our list of hidden risks also excludes events such as a geopolitical crisis on the Korean Peninsula or in the South China Sea, a large European state quitting the eurozone, or Western intervention in Syria, because these are all widely recognised in our view. Rather, the hidden risks we identify are all developments which, while not necessarily unknown, are sufficiently 'under the radar' to most business decision-makers or under-reported by the mainstream media that if they were to escalate, would make investors say 'I wish I'd known about this earlier'. Our selection of risks was also determined by our belief that each could play out over the next 12-15 months, rather than an indefinite timeframe spanning many years. As it happens, most of the risks are political, although most also have economic implications. However, there is a mismatch between geopolitical and economic risks. For example, a major crisis in Pakistan or a decisive break in US-Pakistani relations would have substantial geopolitical consequences, such as exacerbating the war in Afghanistan, and increasing the risk of Islamist militant attacks in Central and South Asia. Nonetheless, due to the somewhat peripheral status of Pakistan's economy, it would have a very limited impact on the global economy, aside from increasing India's risk environment. For a geopolitical crisis to have a global economic impact, it would have to lead to a spike in oil prices (which would be felt worldwide) or result in moves towards armed hostilities by at least two major economies. For this reason, we regard a potential conflict between Armenia and Azerbaijan over the disputed territory of Nagorno-Karabakh as a potential global crisis. This is because Armenia is allied to Russia, while Azerbaijan has very close ties with Turkey (a member of NATO) and the US. Iran also has very strong interests in the South Caucasus. Thus, a new conflict between Armenia and Azerbaijan could quickly drag in Russia and NATO states on opposite sides, with Iran potentially thrown into the mix. Given the importance of Azerbaijan to the development of Caspian Sea oil and gas resources, and the fact that the Baku-Tbilisi-Ceyhan (BTC) pipeline passes through Azerbaijan, a conflict in the region could cause oil prices to surge. Even after a putative war had ended, we would expect relations between Russia and the West to be substantially cooler than before. A further Russia-centric risk we see stems from the likelihood of a more assertive Kremlin, when Vladimir Putin returns to the presidency in March 2012. We see scope for greater strains between Russia and the Baltic states over the status of ethnic Russians, and between Moscow and Western capitals over the United States' planned missile shield.
Introduction
Hidden Risks To The Global Economy
SUMMARY TABLE
Argentina And Venezuela Economic Crises
A Slowdown Of Economic Growth
  CHART GONE ARE THE YEARS OF HIGH GROWTH
Argentina & Venezuela – Real GDP Growth, % chg y-o-y
Exacerbating Current Imbalances
CONSUMER PRICE INDEX, % Y-O-Y, AVE
  CHART PUMP-PRIMING STILL KEY
Argentina & Venezuela – M1 Money Supply Growth, % chg y-o-y
  CHART A RAPIDLY WIDENING GAP
Venezuela – Exchange Rate VEF/US$ & M2/Reserves
Regional Implications
  CHART NOT WEAKENING ENOUGH
Argentina – Exchange Rate, ARS/US$ & M2/Reserves
  CHART BENEFICIARIES OF PETROCARIBE
Petrocaribe Agreements
Russia-Baltic States Tensions
Russian Resurgence Underpins Baltic Anxiety
Putin's Likely Return To Power Signals (Even) More Assertive Russia
  CHART STRATEGICALLY IMPORTANT
Map Of Baltic Sea Region
Baltic Countries Increasingly Wary Of The Bear
Latvia
  CHART RUSSIAN LANGUAGE REFERENDUM IN LATVIA TO POSE SERIOUS POLITICAL CHALLENGE
Ethnic Breakdown of Latvia’s Population (%)
Ethnic Breakdown of Estonia’s Population (%)
Estonia
Lithuania
  CHART TRADE TIES COULD BE HIT
Baltics – Exports To Russia, % Of Total 2010
  CHART RUSSIA HARD TO MATCH
Military Expenditure, % Of GDP (2010)
Potential Flashpoints
  CHART ENERGY WARS A DISTINCT POSSIBILITY
Baltics – Energy Import Dependency Ratio, %
  CHART BALTIC ECONOMIES CAN’T AFFORD ANOTHER FINANCIAL SECTOR HIT
Real GDP Growth, %
Balkan Drift
EU Losing Its Clout
T   CHART HE EU ANCHOR WEAKENS
Balkans – Regional Map
  CHART CLOSE TO BECOMING A MINORITY
Serbia - Positive Responses To ‘Do You Support
EU Membership?’
Ethnic Tensions To The Rise
Slowing Or Halting Pro-Market Reforms
  CHART LOWER BUT SUSTAINED GROWTH
Balkans – Real GDP Growth, % chg y-o-y
Business Monitor International Ltd
SPECIAL REPORT
  CHART NO PAIN, NO GAIN
Balkans – Consumer Price Index, % chg
Fiscal Problems Ahead
Little Sign Of Corruption Abating
Foreign Investors Growing Concerned
  CHART THE FDI PYRAMID
Balkans – FDI Inflows, EURbn
  CHART WORSENING POLITICAL OUTLOOK
Balkans – Long-Term Political Risk Ratings, %
No Real Substitute For The EU
Armenia-Azerbaijan Conflict
Aliyev's War Rhetoric: Sabre Rattling Or Genuine Threat?
On The Verge Of Crossing The Rubicon
Costs Still Outweigh Benefits
Algeria Unrest
'Hidden Risk' Of A Political Crisis
Large-Scale Unrest May Threaten Hydrocarbon Exports
Downside Risks Likely To Play Out In 2012
  CHART A RISK FOR THE EUROZONE
Major Importers of Algerian Natural Gas, 2009, % of Total
Iraq Civil War
Rising Risk Of Civil War In 2012
Maliki Seen As Increasingly Authoritarian
Shi'a-Sunni Sectarian Tensions Rising
Iraq Civil War Would Drag In Regional Powers
Kurdish Issue Unresolved
Implications For Iraq's Oil Sector
Cyber Warfare In The Middle East
Rising Risk Of Cyber Warfare
How Cyber Warfare Differs From Conventional Warfare
What Would A Massive Cyber Attack Look Like?
Gulf Of Guinea Piracy
Uptick In Attacks
Economic Costs Rising
Getting Worse Before It Gets Better
  CHART DISTRIBUTION OF GLOBAL PIRACY
Actual & Attempted Acts of Piracy in 2010
Japan Fiscal Crisis
Assessing The Global Impact Of A Sovereign Debt Crisis
Could The Day Of Reckoning Come In 2012?
Would A Crisis Matter Outside Japan?
  CHART THE CLOCK IS TICKING
  CHART ASIA IN THE FIRING LINE
HIDDEN RISKS TO THE GLOBAL ECONOMY
Exports To Japan, % of Total
  CHART THE DOMINO EFFECT?
Japan - Holdings Of USTs
Purchases Of Overseas Sovereign Bonds, JPYtrn
Pakistan Crisis
An Economically-Induced Political Crisis?
Starting At A Disadvantage
  CHART A QUALITATIVE DEPRESSION
Pakistan - Real GDP Growth, %
Pew Global Attitudes Project, Pakistan
  CHART BACK TO 2008?
Pakistan - Brent Crude/Cotton Ratio & Current Account Deficit
  CHART AN INTRACTABLE PROBLEM
Pakistan - 2011 Corruption Perceptions Index
  CHART SECURITY FORCES ARE SUSPECT
2010 CORRUPTION BAROMETER, PAKISTAN
From Malaise To Crisis
Government Already Struggling
Global Implications
  CHART CONSTANTLY UNDER SIEGE
Pakistan - Number Of Attack Incidents
Distribution Of Incidents By Province In 2011
Crop Damage
Don't Underestimate The Risk Of A Fresh Food Crisis
Core View: Continued Food Price Disinflation
But Prices To Stay High
Where Are The Risks?
  CHART HIGH BY HISTORICAL STANDARDS
Selected S&PGS Commodity Indices (Rebased January 2006=100)
  CHART LOWER PRICES IN 2012
Selected Commodities – Average Annual Prices & Forecasts
Implications Of A Renewed Surge In Food Prices
  CHART SUPPLY IS STILL IMPROVING
Global Stocks-To-Use Ratios For Selected Commodities (%)
  CHART ROOM FOR SENTIMENT TO REBOUND
Front-Month Wheat, USc/bushel (LHS) & Non Commercial Net Speculative Positions
  CHART MENA IS EXPOSED
Selected Regions - Annual CPI Inflation (%)
Commodity Trade Finance Collapse
Trade Credit: A Vital Cog
  CHART IMPROVING, BUT LEVERAGE RISKS REMAIN
Selected French Banks – Capital Ratios, %
  CHART ROUNDING INTO FORM
BNP Paribas, Credit Agricole, & Societe Generale Share Prices Rebased (June 1 2010 = 100)
  CHART P/B RATIOS UNDERSCORE ASSET QUALITY CONCERNS
Selected French Banks - Price/Book Ratios
  CHART COING DOWN, BUT HIGH
Select F4rench Banks – Credit Default Swap Spreads, bps
  CHART DELEVERAGING PORTENDS WEAK LOAN GROWTH
France – Banking Sector Loans/Deposits/Ratio %
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