Key risk themes in 2018 and 2019

17 January 2019

We look back at some of the most important Credit, Political & Security events in 2018 and consider, with hindsight, whether they were foreseeable.

Trade Disruption

The risk of disruption to supply chains and trading operations escalated in 2018, as the US and China imposed a series of tit-for-tat protectionist trade measures. Washington raised duties on a total of USD 250 billion of Chinese products during the year, while Beijing retaliated with tariffs on USD 110 billion of US goods. Although some observers did not expect the trade dispute with China to have proven so protracted, President Donald Trump was widely anticipated to deliver on his electoral pledge to increase protectionism.

Tightening Financial Conditions

Led by the US, quantitative easing gave way to quantitative tightening as major central banks halted or withdrew the stimulus measures introduced after the 2008 financial crisis. In addition to US interest rates hikes and idiosyncratic factors, this contributed to a sharp rise in financial volatility in emerging markets. However, the change in financial conditions was not unexpected. In late 2017, the Federal Reserve announced that it would begin reducing its balance sheet and signalled that it would raise interest rates, while most economists correctly expected the European Central Bank to end quantitative easing by the end of the year.

Unorthodox Candidates Win Key Elections

In a rejection of the political mainstream, Andrés Manuel López Obrador (AMLO) and Jair Bolsonaro won presidential elections in Mexico and Brazil, respectively, while anti-establishment parties formed a new government in Italy. Due to his significant lead in polls, AMLO’s election was anticipated. The result in Brazil was comparatively less predictable, but Bolsonaro consistently polled above his rivals once former President Luiz Inácio Lula da Silva was barred from running. In Italy, a coalition appeared to be the likely outcome before the elections, although it was not clear that the right-wing League and Eurosceptic Five Star Movement would be the two parties to form the new government.

Islamist Militants Consolidate in the Sahel

The number of violent incidents perpetrated by Islamist militants in the Sahel tripled in the 12 months prior to October 2018, according to the Africa Center for Strategic Studies. The increase in terrorism in the Sahel also elevated the risk of attacks in countries such as Nigeria and Côte d'Ivoire. Militant activity in the Sahel has been on an upwards trajectory over recent years, and hopes that the launch of the G5 counterterrorism force would stabilise the situation in the short term proved unfounded.

Piracy Rises in the Gulf of Guinea

According to the International Maritime Bureau, there were a total of 156 piracy and armed robbery incidents across the world in the first nine months of the year, compared with 121 during the same period in 2017. The number of these incidents that occurred in the Gulf of Guinea reached 57, an almost threefold increase on the previous year. The uptick in incidents continued a theme witnessed in recent years, as African piracy has shifted from the coast of Somalia to the Gulf of Guinea.

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Below we look forward to the risks that are likely to dominate 2019. The growing competition between the US and China appears set to be a defining theme.

Trade Truce Unlikely to Last

Although the US and China agreed to halt the introduction of new protectionist measures in December 2018, the truce is likely to be short-lived. The US is likely to increase a 10% tariff rate on USD 200 billion of Chinese products to 25% in early 2019, and growing US-China competition could prompt the two countries to introduce additional non-tariff barriers, such as regulatory restrictions and investigations. In the coming months, the US may also impose a 25% levy on auto imports from the European Union (EU).

Political Instability in Europe

Mainstream political parties are expected to suffer setbacks in the European parliamentary elections in May 2019. Snap elections may be called in Germany and also in Italy, which could reignite Rome’s budgetary dispute with the EU. The political outlook in the UK remains highly uncertain, while France’s “Yellow Vest” movement may prove challenging to suppress. Europe’s weak economic outlook is likely to fuel the risk of protests and political violence.

Slowing Growth

Global economic growth is forecasted to slow from 3.4% in 2018 to 3.1% in 2019, driven by tighter monetary policy and a downturn in world trade. The US is in a late phase of its economic cycle and the effect of the USD 1.5 trillion tax cut approved in 2017 is fading, but the risk of a recession remains low in 2019. While it is expected to slow gradually, China’s growth could fall sharply if it fails to find the correct balance between maintaining a moderate pace of economic expansion and reining in high levels of debt.

Risks to Reform

In Brazil, the Bolsonaro administration is expected to pursue fiscal reforms to halt a rapid build-up of debt, but the new president’s ability to work with a highly fragmented Congress will be severely tested. Argentina’s economic travails have undermined support for President Mauricio Macri ahead of general elections in October 2019, which could see a less market-friendly candidate elected. In India, the ruling Bharatiya Janata Party may lose its parliamentary majority in upcoming lower house elections, which would increase the risk of policy reversals.

Data Breach

In addition to the costs associated with business disruption and reputational damage, the introduction of the EU’s General Data Protection Regulation (GDPR) in 2018 elevates the risk of costly fines following a data breach. In 2019, the EU is likely to want to demonstrate that the new legislation has teeth.

For further information please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837.