Geopolitical Risk Report – October 2019

• HONG KONG PROTESTS – The wave of violent protests against the Hong Kong Government’s controversial extradition bill, which critics cite as evidence of Beijing’s spreading influence over the region have shown few signs of receding over the past month. Despite the decision to withdraw the bill at the beginning of September, protestors have called these measures ‘too little, too late’ and called for widespread reforms to protect the democratic freedoms eroded since the 2014 Umbrella Revolution. Violent protests have once again escalated towards the end of the month as the fifth anniversary of the 2014 Revolution draws closer.
• BREXIT – The UK’s political gridlock over Brexit has gone from bad to worse over the past month with the country sliding into what has been widely referred to as a constitutional crisis. Despite PM Boris Johnson’s Government losing its parliamentary majority at the beginning of the month, opposition MPs have refused to vote for a general election until there is a concrete guarantee the UK will not crash out of the EU on 31st October without a deal, leaving parliament in a state of gridlock. The Supreme Court’s ruling that Johnson’s decision to prorogue parliament last month was illegal has only amplified calls for the PM to stand aside in recent weeks.
• TRUMP IMPEACHMENT – The decision of Democratic Speaker of the House, Nancy Pelosi to finally launch impeachment proceedings against US President Donald Trump over a phone conversation between Trump and Ukrainian President Volodymyr Zelenskiy in which the U.S. leader pressurised Ukraine to investigate former Vice-President and 2020 election rival Joe Biden represents a dramatic surge in the institutional risks associated with investment in the United States. Adding to existing risks stemming from the US-China trade war, this latest development is bound to heighten the sense of political instability in the country, potentially derailing the relatively healthy growth of the U.S. economy in recent years.

 

Geopolitical Risks Today

 

• ISRAELI ELECTIONS – The failure of Benjamin Netanyahu – Israel’s longest-serving leader – to secure a working majority during the national elections of 17 September  has not only pushed the country into political deadlock, but also entails alarming geopolitical implications for the region as a whole. With chances of cooperation between Israel’s two largest parties, Netanyahu’s Likud and Benny Gantz’s Blue and White, continuing to remain elusive, the much anticipated peace plan of US President Donald Trump has also been put on hold. The plan, promising answers to long-standing questions such as the state of the West Bank and Palestinian national sovereignty, cannot be voiced until Israel has a leader to hear it. As such, instability in the Arab-Israeli looks like it is going anywhere anytime soon. 

• NORTH KOREA – After months of stalled talks, officials from the United States and the Democratic People’s Republic of Korea have finally announced their return to the table this weekend. While such announcements should provide some stability in a region riven with geopolitical unpredictability, their arrival has also coincided with renewed military posturing from North Korea’s closest rivals: Japan and the Republic of Korea. Yesterday, South Korea unveiled its first batch of F-35 fighter jets during a parade in Seoul that is likely to infuriate its Northern neighbour. Meanwhile, the Japanese prime minister announced an extra $50 billion in Defence spending this year. While US-Korean talks may prove fruitful, the geopolitics of the Korean Peninsula remains, as ever, fraught with risk. 

• RIYADH – Since several of Saudi Arabia’s most valuable oil fields were targeted by drones, allegedly from Yemeni Houthi insurgents, on 14 September, the kingdom’s competition with regional rival Iran has reached even greater heights. However, the continuation of geopolitical uncertainty is proving to have serious financial implications for Riyadh – exemplified by its falling fiscal ratings. Yesterday, the ratings agency Fitch downgraded the Arabia’s largest economy from an A+ to an A, despite protests from the Saudi government. With a potential sale of US denominated Islamic bonds imminent and broader attempts to diversify its economy away from oil floundering, the fortunes of Saudi Arabia’s economy appear increasingly uncertain. 

 

Monthly Risk Forecast

 

• • KASHMIR – The likely easing of restrictions imposed across the Indian-administered province of Jammu and Kashmir after New Delhi’s suspension of Article 370 over the next month has the potential to precipitate a surge in violence in the contested region. Article 370, which has guaranteed the autonomy of the Jammu and Kashmir since partition was repealed in August, prompting New Delhi to impose a state of lockdown across the region to forestall widespread riots in the Muslim-majority province. Pakistani PM Imran Khan took the opportunity to warn India that its moves had the potential to bring the two nations to the brink of war at the UN General Assembly in New York. As the lockdown is gradually lifted over the coming weeks, do not be surprised by a surge in political tensions in the subcontinent.
  • SOUTH AMERICAN ELECTIONS – With voters in Argentina, Bolivia and Paraguay set to head to the polls in presidential elections across the continent during the coming month South American investors should be prepared for political turbulence in the weeks ahead. The Argentinian peso crashed earlier in August after an unexpected primary victory by left-leaning populist Alberto Fernandez spooked investors. In Bolivia incumbent Evo Morales appears set to maintain the presidency. However, by holding the post for an unconstitutional fourth term Morales risks triggering opposition which may undermine the political and economic stability the country has enjoyed for the past decade.

 

• STERLING – Over the past couple of  months, the failure of the United Kingdom and the European Union to reach an acceptable Brexit deal has sent the value of sterling into freefall. Pivoting on failures to find another option to the contentious ‘Irish Backstop’, the pound crashed to a thirty-four year low against the dollar at the start of September. While its value has risen slowly since then, sterling’s continued resurgence will be highly contingent on the EU’s reception of announcements made at the Conservative Party Conference on September 29. PM Boris Johnson has promised constructive alternatives to the backstop in the form of ‘two borders for four years’. With these proposals already suffering blows from the Republic of Ireland, approval from Brussels seems unlikely. What is certain, however, is that October will either make or break the power of the pound. .