Q3 2014-2015: International Crises Mask Broad Domestic Stability
BMI View: International crises in Ukraine, Syria and Iraq, and the South China Sea mask the fact that domestic political risks will remain contained in most major economies.
As we enter the second half of 2014, the world is seeing a notable increase in international political risk in several quarters. The rapid military gains by the Syria- and Iraq-based Islamic State in Iraq and al-Sham (ISIS) in northern Iraq has brought the country to the brink of civil war. Meanwhile, Ukraine continues to experience a Russian-backed insurgency in the east of the country, despite efforts by the major powers and the new Ukrainian government to end the fighting. Elsewhere, tensions remain high between China and Vietnam in the South China Sea. None of the underlying grievances in these crises will disappear anytime soon. As such, all three regions will merit attention for the foreseeable future.
On a more positive note, domestic political risks in most of the world's major economies appear to be well contained. For example, Brazil, Egypt and Turkey all saw mass protests in 2013, but have returned to calm. In addition, the world's election calendar will be less busy in the second half of 2014, with only Indonesia, Turkey, Brazil, and the United States among G-20 economies holding presidential or legislative (or both) elections. In each of these cases, we do not envisage significant changes to the status quo. Arguably the most unusual political events in H2 2014 will be independence referendums in Scotland and Catalonia (the latter non-binding). We expect Scotland to vote against separation from the UK, but Catalonia may well favour secession, thereby raising the risk of a political crisis in Spain.