Political risks to watch in 2014

political risk storm

Turkey, China and Brazil face a difficult year ahead in more ways than one: economic growth forecasts, political stability and foreign direct investment prospects are likely to take a hit.

The consensus is that 2014 is destined to be a good year for the global economy, at least relative to 2013’s tepid performance. Gone is the threat of the Eurozone implosion, a paralyzed US government, or a conflict between Israel and Iran. Economic performance is expected to pick up modestly this year as a result of strong stock markets and high investor confidence. A healthy U.S. economy is expected to anchor and promote a stronger global economy this year. Analysts see a global growth rate of 4 percent – a full percentage point better than 2013.

Yet, actual performance will fall short of expectations. Several of the world’s more promising emerging economies are confronting tenuous political situations. External and fiscal deficits remain large in a number of emerging market economies, growth is decelerating, currencies are losing their value, and oncoming elections are exacerbating political tension. There is terrific potential for things to go awry for even the most promising economies. Here are a few of the stories destined to feature prominently in 2014.

Turkey

Protesters flirted with another wave of demonstrations on December 28th – days after investigators exposed the AKP’s corrupt maneuverings. Prime Minister Recep Tayyip Erdoğan responded angrily, alleging a “soft coup,” reshuffling his government, and purging the prosecution team, as well as members of the police force involved in the arrests of the 89 people linked to the bribery and corruption scandal.

Turkey’s economy depends on inflows of foreign capital, and while the protests that swept through Anatolia this summer did little to scare away investors, a rapidly depreciating currency, a clear weakness for corruption, disregard for rule of law, and the potential for protests to bubble up again as the 2014 elections approach may amount to significant outflows of FDI. Moreover, the Turkish lira depreciated 17 percent in 2013.  A weak lira is saddling companies with higher payments on foreign loans made years ago when Turkey’s economy was booming.

At the end of 2014, the AKP will still control the government, though the steps they take to do so in the midst of political and economic turmoil may compel investors to think more carefully about the opportunities Turkey has to offer.

China

Policy reforms will prevent a hard landing in China, but as Nouriel Roubini suggests, its transition from fixed investment to private consumption will not occur fast enough. China’s state-run institutions are deeply rooted, and vested interests will push back against change.

China is facing an unresolved self-contradiction: wanting to transition to private consumption, while trying to preserve its authoritarian political system. Sustained economic growth is a function of inclusive economic institutions, the development of which often requires political struggle and compromise. China’s government has yet to tolerate any of the requisite political tension that would compel increasingly inclusive economic intuitions moving forward. China’s short-term ability to spur markets and encourage growth is destined to slow down soon.

A trend in compliance, too, may hurt prospects for Chinese economic growth. Analysts suggest that with China’s economic growth slowing, we can expect to see a crackdown on corruption. Despite levels of corruption higher than India, Chinese crackdowns will be primarily directed at foreign companies. According to a publication by Frontier Strategy Group, 64 percent of the 500,000 corruption investigations in China between 2000 and 2009 involved foreign companies. Foreign investors, then, may have reason to think twice about entering a market eager to make an example of them to justify their authoritarian control of the political and economic system.

China’s proclivity to stimulate regional political tensions, too, adversely impacts the entire region’s economy. Asian territorial disputes and the escalating rhetoric between China and Japan threaten regional stability and dampen regional trade, causing companies to fall short of their profit potential.

Brazil

Brazil suffers from a precarious mix of issues also affecting Turkey and China. Like Turkey, Brazil’s political situation is tenuous. Like Turkey, Brazil is entering an election year amidst a population wary of the billions of dollars being poured into the 2014 World Cup and the 2016 Olympics while government services remain inadequate. The Brazilian population’s proclivity to protest was demonstrated this summer, and with the 2014 World Cup just ahead of the presidential race, investors can expect to witness some major demonstrations. As a precaution, the National Security Force has already planned to deploy about 10,000 riot troops in the 12 cities hosting World Cup games in early to mid-June.

Like China, analysts expect 2014 to feature a compliance crackdown as the government tries to make an example of foreign companies to deflect domestic criticism and stir up populist support. If Brazil’s government were ever in need of populist support, this would be the year, and what better way to deflect anger than to blame foreign companies.

However, as Kenneth Rapoza notes, most of Brazil’s risk has to do with greater government involvement in the economy. Taxation on investment, and monetary policy related to the foreign exchange rate, make Brazil less agreeable to investment in the coming year.

Elections are making it difficult for governments in emerging countries to attract and maintain investment. The pressure to appeal to domestic populations complicates the implementation of policies more amenable to foreign investment this year. As various governments including Turkey and Brazil attempt to shore up support at home, expect the investment opportunities of yesteryear to fall off, making these countries especially vulnerable to a sudden withdrawal of FDI.

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Categories: Economics, International

Author:Eli Lovely

Eli Lovely is an Analyst at Kroll Associates. In 2010, he graduated Phi Beta Kappa from Wheaton College (MA) before earning his M.A. with distinction in Democracy and Governance Studies from Georgetown University in 2013. While in graduate school, Eli worked at the National Democratic Institute and the U.S. Department of State. He has spent over a collective year living in Turkey as a Fulbright Fellow and a recipient of the Critical Language Scholarship. He is primarily interested in issues affecting Turkey and the Southern Caucuses. The views expressed on this site are Mr. Lovely’s and do not necessarily represent Kroll’s positions, strategies or opinions.

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3 Comments on “Political risks to watch in 2014”

  1. Ned Pagliarulo
    January 6, 2014 at 5:04 pm #

    Great article. I like the overview style.

    I wonder though if China might be more successful in negotiating the balance between authoritarianism and economic growth than you suggest. It has had remarkably steady growth for the past three decades without high inclusivity: (http://research.stlouisfed.org/fredgraph.png?g=qE1).

    Do you think it has reached a tipping point in terms of urbanized populations demanding more?

  2. Betsy Davis
    January 24, 2014 at 12:56 pm #

    Insightful and well written article.

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