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Global Forecast 2016

Q3

Issue date: June 2016 Page 2

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Contents

Regional Insights……………………………………………………………. p. 3

Global Outlook …………………………………………………………….. p. 5

Continued threat from terrorism

Droughts and disease add to insecurity in conflict areas

Growth stable, but far from impressive

Africa ……………………………………………………………………...… p. 7

Jihadist insurgents adapt to shifting conditions

Corruption and fraud undermine outlook for major economies

Commodity price relief, but the damage has been done

Middle East and North Africa …………………………………………… p. 9

Diverse coalition continues to pressure Islamic State

Possibility of widespread energy-related unrest

Oil rebound has reduced pressure, not removed it

South Asia ………………………………………………………………….. p. 11

Natural hazards to test governments’ emergency planning

Political and sectarian strife to herald protest action

India still needs reform to maintain momentum

Asia-Pacific …………………………………………………………………. p. 15

Political risks framed by leaders

Strategic distrust fuels South China Sea tension

Still strong but China beginning to drag

North & Central America ……………………………………………….. p. 17

Concerns increase as criminal groups strengthen their operations

Political violence intensifies around controversial elections

Recession risks receding as growth picks up

South America …………………………………………………………….. p. 19

Rio 2016 Olympics in the midst of political and economic crisis

Venezuelan crisis and unpopular reforms trigger regional tensions

Environment improving but policy risks remain

Europe ………………………………………………………………………. p. 21

Continued threat from Islamist-related terrorism

Migrancy issue to become more complex

Brexit poses threat to already weak structural recovery

Russia & CIS ……………………………………………………………….. p. 23

Economic decline underpins legislative election risk

Land reform protests undermine regime confidence

Almost at the bottom, oil rally providing hope

Health & Environment..………………………………………..………… p. 25

Zika risk continues into summer months

Fears increasing over Angola yellow fever outbreak spreading

Acute food shortage crisis expected to bite in Q3

Issue date: June 2016 Page 4

―Tensions are expected to rise across the Ameri-

cas throughout Q3, with the contested electoral

campaign in the US intensifying over the coming

months and some risk of increasing protests in

major Latin American countries. The current state

of economic distress and political deadlock in Ven-

ezuela will lead to an escalation in crime and civil

unrest. Even if the country is unlikely to default on

its debts this year, capital controls will tighten and

the political pressures will build. International at-

tention will be largely focused on the Rio 2016

Olympic Games in the midst of a crisis following

the suspension, and potential impeachment, of

President Dilma Rousseff. The Temer administra-

tion is moving forward with some fiscal reforms,

but the tight credit conditions and increased cor-

porate defaults limit a meaningful rebound.‖

Lorena Gutierrez, Senior Security Analyst

at G4S Risk Consulting Ltd.

Ariel Rajnerman, Economist, Latin America

at Roubini Global Economics

―Islamist-related terrorism remains the major challenge to European security, exacerbating the region’s vulnerability to

other economic and political shocks. Western European countries, including the UK, France and Belgium, will continue to

experience terrorism incidents, while the likelihood of an attack linked to Islamic State (IS) remains high. The ongoing

migrant crisis will continue to put pressure upon Europe at a macroeconomic level, as its institutions struggle to cope.

Countries in South and Eastern Europe that are arrival points for displaced persons will face particular strain.

The pressure on the EU will be exacerbated by the ―leave‖ vote in the UK’s EU referendum as some core European lead-

ers push for the UK to quickly begin negotiations. Being non-binding, the vote does not necessarily mean exit is a done

deal. However, the potential for copycat referenda from other countries and indeed other parts of the UK risks splinter-

ing Europe. Investors are likely to remain wary about investment in the UK until there is clarity on the path forward.‖

Alan Meyrick, Senior Security Analyst at G4S Risk Consulting Ltd.

Alex Waters, Senior Economist, Western Europe

―Two clear paths have emerged for Africa. On the one

hand, diversified economies such as Kenya and Rwanda are

prospering, despite their varied political challenges and

security risks. On the other hand, commodity-dependent

nations such as Angola and Nigeria are struggling, as earlier

failures to broaden their fiscal revenues leaves them ill-

exposed to ―lower for longer‖ oil prices. Nigeria’s decision

to allow FX depreciation is a key step towards adjustment,

but it may add pressure on a government which is strug-

gling to reign in violence in the Niger Delta. Governments

focusing on investing in infrastructure and reforming their

economies will need support from multilateral institutions,

while leaders focusing on preserving their rule at all costs

will require domestic and international pressure if their

countries are to avoid descending into chaos.‖

Dominic MacIver, Senior Security Analyst

at G4S Risk Consulting Ltd.

Maya Senussi, Senior Economist, Turkey, Middle East and Africa

at Roubini Global Economics

Regional Insights

Issue date: June 2016 Page 5

―In Asia, attention will refocus on China and its regional strategic objectives

in the coming quarter. Competing claims in the South China Sea will exacer-

bate tensions between China and the Philippines, while US military manoeu-

vres threaten to harden China’s stance. Governments will also look to re-

gional infrastructure projects to shore up domestic investment and with it,

stability. Leaders in the Philippines, Papua New Guinea and Malaysia will

strive to placate opposition supporters angry at perceived corruption and

possible abuse of power, while unrest in Bangladesh could fuel nationwide

unrest, influenced by religious hardliners. Militancy will endure in Pakistan

and Afghanistan, with soft targets at particular risk. Domestic economic

pressures in China will keep the government wary of reforming state owned

enterprises and cutting overcapacity, suggesting it will rely instead on in-

creasing leverage. This lack of reform will leave China and the region subject

to greater economic activity. In India, the political pressure on economic

policy is growing, and the government is likely to roll out some fiscal and

economic measures – the new FDI measures will only be effective if difficult

business environment reforms are addressed.‖

Faraz Nasir, Head of Intelligence & Advisory Services at G4S Risk Consulting Ltd.

Rachel Ziemba, Managing Director Emerging Markets at Roubini Global Economics

―While Islamic State (IS) remains a key headline in the Middle East and North Africa region, Q3 will see sea-

sonal-related risks emerge, threatening business continuity and political stability. Infrastructure gaps will become

apparent across the MENA region with Iraq among those most affected, while widespread protests over power

outages and poor public service delivery may escalate into challenging the authorities. Terrorism and insurgency

will continue to threaten further destabilisation, particularly in Libya where one battle, against IS, has been won,

but localised competition over control of oil resources threatens to flare up again. The stabilisation of oil prices

may pare back fiscal cuts but not remove the need to make them. The expectation gap regarding the benefits of

the Iran nuclear deal at home and in the U.S. is growing, which could weaken the authority of Hassan Rouhani’s

government to push through reforms that foreign investors are looking for.‖

Frankie Wilkinson, Senior Security Analyst at G4S Risk Consulting Ltd.

Rachel Ziemba, Managing Director Emerging Markets at Roubini Global Economics

―In Russia and the CIS, attention is moving towards important legislative elections to the Duma in

September, which will be closely watched for any sign of the Russian public tiring of the Kremlin’s

economic management, most likely via protest votes against the ruling United Russia party. With the

political system stagnant but the opposition too weak to exert pressure against the dominant securi-

ty forces, intra-elite infighting is the most likely scenario for change, but this is unlikely given the

electoral cycle. The formation of a new National Guard, with a mandate to shoot protesters and

under the president's direct control, will act as an insurance policy against this. Russia’s economy is

slowly exiting recession and inflation is falling sharply, paving the way for some additional stimulus,

needed given that domestic financial costs remain high and sanctions are unlikely to be lifted in the

near-term.‖

Dominic MacIver, Senior Security Analyst at G4S Risk Consulting Ltd.

Mert Yildiz, Senior Economist, Russia, CIS and CEE at Roubini Global Economics

Issue date: June 2016 Page 6

Increasing protests over poor public service delivery

Populations are growing more restless in the face of govern-

ment mismanagement and poor public service delivery. Pro-

tests over electricity and water shortages are forecast to

occur across the Middle East and North Africa, continu-

ing in sub-Saharan Africa, particularly South Africa, and

escalating in South Asia. In the Americas, distrust in the

government and frustrations over corruption are likely to

translate into civil unrest, particularly in Brazil. Meanwhile, in

Asia-Pacific, corruption remains a key rallying point for

opposition groups and students. In Russia, there is a risk of

unrest ahead of and in the aftermath of 18 September legisla-

tive elections amid a declining economy and an anticipated

crackdown on opposition to the ruling United Russia party.

Continued threat from terrorism

The threat of terrorism remains extant across much of the

globe, particularly in the Middle East and North Africa,

Asia and Europe. With Ramadan ending at the beginning of

Q3, there is a high risk of attacks in the closing days of the

holy month, often considered the most holy days of the fast-

ing period. As Islamic State (IS) continues to suffer losses in

Iraq, sympathisers and returning fighters are able to launch

attacks in other countries. Europe is thought to be at particu-

lar risk during the summer months as large gatherings are

increasingly common. The Istanbul Ataturk Airport (IST) at-

tack highlights the vulnerability of public spaces to random

attacks. As well as the finals of the UEFA Euro football tour-

nament in France , music festivals and other sporting events,

such as the Olympics, can also be considered viable targets.

Further attacks on the Mediterranean coast, including Tuni-

sia, cannot be entirely discounted despite falling tourist num-

bers.

Droughts & disease add to insecurity in conflict areas

Zika virus and yellow fever outbreaks in the Americas and

Africa, respectively, are likely to spread in Q3 with mount-

ing concerns over the viruses spreading to North America,

Africa and Asia, infecting new populations. Zika is particular-

ly likely to be heavily scrutinised amid the Rio Olympics and

the onset of summer in the northern hemisphere. Continued

reports of yellow fever infections outside of the outbreak

area in Angola will heighten fears of an epidemic, particularly

as vaccine stockpiles become depleted.

Meanwhile, droughts and monsoons will continue in Q3.

Coupled with conflict, there are increasing concerns over

food security and the ensuing health crises and conflict that

can arise from such situations. Drought continues to blight

southern and eastern Africa, and may yet force thousands to

migrate. Mass movements of people brings with it the poten-

tial for deadly disease outbreaks, including cholera, and the

potential for militant and rebel groups to target vulnerable

populations, both for attacks and as pools of recruitment.

Political and Security Outlook

Global Overview

GIS is an online monitoring system providing geo-political intelligence on current and future threats to corporate security, travel and business continuity. Intelligence is gathered and analysed offering a 24/7 service to clients.

The numbers correspond to incidents within a given cluster.

The 10 Risk Categories are:

INTERNATIONAL RELATIONS

IGCW (INSURGENCY, GUERRILLA

AND CIVIL WARFARE)

TERRORISM

CIVIL UNREST

CRIME

KREP (KIDNAP, RANSOM, EXTORTION

& PIRACY)

ENVIRONMENT & HEALTH

POLITICAL RISK

BUSINESS RISK

INFRASTRUCTURE

Issue date: June 2016 Page 7

Economic Outlook by

After a weak start to the year, macroeconomic conditions

had stabilized in Q2 with the global economy looking posi-

tioned for a modest expansion. However, the outcome of

the EU referendum in the United Kingdom has hit global

financial markets into what looks to be another risk-off envi-

ronment. How long this risk-off period will persist, and its

impact on the real economy beyond Europe, remains to be

seen. One key channel to monitor will be global trade finance

and its impact on trade. Our baseline is one of subdued glob-

al trade, but a financing shock could weaken it further.

The global economy has been at a sub-trend pace—just un-

der 3 percent in 2016 with only modest improvement likely

in 2017—and the hit to GDP growth in the UK and Europe,

as well as structural slowdown in China suggests there will be

little improvement in 2017. We see some commodity ex-

porters moving out of recession or near-recession (Brazil

and Russia) as well as North America.

The US has just experienced two quarters of mediocre

growth (1 percent on average), with little sign of price pres-

sure. Q2 is shaping up only moderately better, and we now

think the FOMC is likely to defer its next rate hike until De-

cember, if not later, given tighter financial conditions in the

wake of the UK’s Brexit referendum. The softening of the

labour market leaves little price pressure, while investment

outlook, both oil and non-oil will remain subdued.

The eurozone is doing slightly better than expected, but the

recovery seems fragile overall, with potential growth still well

below 1 percent in most of the bloc’s member states. In Ja-

pan, Abenomics is running out of steam, with mediocre

growth slowing since mid-2015. The recent decision to defer

the consumption tax hike is positive but will do little to pro-

mote actual growth and rebalancing.

Elsewhere, emerging market growth continues to slip. Two

of the five BRICS (Brazil and Russia) will only slowly exit

recession and commodity-exporters are still grappling with

the balance-sheet effects of low energy and commodity pric-

es. In China, the government’s preference for growth over

reform looks set to be a source of macro and market volatili-

ty, especially as recent policies tilt the pendulum back toward

construction and investment. The resulting increase in lever-

age will weigh on growth and earnings, but a crisis looks un-

likely in the next year. India, a relative outperformer, will

need to implement nationwide reforms to maintain its

growth trend.

Inflation looks to have peaked for now in most emerging

markets and central banks have space to ease policy. As a

result, we expect more policy divergence among emerging

market economies with Argentina, Brazil and Russia, In-

donesia able to cut rates sharply as sequential inflation

drops. Central banks in many Asian countries (more exposed

to rising oil prices) are likely to stay on hold or cut rates

modestly (such as South Korea and Thailand). The delay

in US interest rate normalization will provide space for do-

mestically driven policy.

Issue date: June 2016 Page 8

Low oil price begins to impact upon political stability

As countries continue to adapt to the new cheaper oil con-

text, fiscal and political stability are suffering in economies

that depend on the commodity. In Nigeria, budget cuts and

macroeconomic incompetence are driving away investors and

depleting dollar reserves. Volatility is at its highest in the Del-

ta region, where the fragile and hard-won peace is breaking

down, mostly as a result of the advanced capability of an

emergent militant group, the Niger Delta Avengers, which

will continue to bomb pipelines, damage infrastructure, kid-

nap civilians and attack security forces over the coming quar-

ter. Meanwhile, the concerns of Angola’s President Edu-

ardo dos Santos for the firmness of his regime are evident in

the appointment of his unpopular daughter, a banking and

telecoms magnate and Africa’s richest woman, to head the

powerful state oil company, tasked with improving efficiency

and profitability. Although many doubt President dos Santos

will follow his pledge to step down before elections next

year, intra-elite volatility will play out behind closed doors

over the coming months in the run-up to the ruling party’s

congress in August. If the president’s children enter the suc-

cession race, as appears possible, violence on the streets

should be expected.

Jihadist insurgents adapt to shifting conditions

The threat from jihadist insurgents continues in diverse wa-

ter-stressed locations across the continent, most of all in

north-eastern Kenya and southern Somalia, the Lake Chad

Basin and the wider Sahel. In Chad, half of the population is

facing hunger and more than a quarter are severely food inse-

cure. Lake Chad’s water levels have fallen 95 percent over

the past half century and conditions will continue to deterio-

rate as a result of climate change, driving the poverty and

marginalisation that fuel insurgents such as Boko Haram, as

well as northwards migration patterns towards Europe.

Meanwhile, Kenya continues to face a high terrorism threat

from al-Shabaab militants infiltrating its north-eastern region.

The proposed closure of Dadaab, a massive refugee camp

Africa

Q3 Political and Security Outlook

SOUTH AFRICA:

Negative long-term

outlook to continue

unless ANC heavy-

weights can oust Pres-

ident Zuma from party

leadership.

RWANDA: Despite

rising authoritarianism,

diversified economic

growth and improving

rule of law to benefit

population as a whole.

ZIMBABWE: Grow-

ing currency crisis at

risk of setting off un-

rest and return to

economic catastrophe.

MALI: Ongoing al-

Qaeda insurgency con-

tinues to pose threat

to foreign nationals,

including beyond the

country’s borders.

Issue date: June 2016 Page 9

complex, would accelerate this, although the Kenyan govern-

ment is assumed to be pursuing the policy partly as a negoti-

ating stance with international donors. Mass-casualty terrorist

attacks remain most likely to aim at soft targets throughout

West Africa, most of all in Mali, as al-Qaeda in the Islamic

Maghreb (AQIM) and its associates continue to press their

campaigns, including into the central region around Mopti.

Corruption and fraud undermine outlook for major

economies

With Mozambique entering a destabilising debt crisis and

President Jacob Zuma retrenching his position in the ruling

party against the reformers that oppose him, the outlook for

stable governance in southern Africa is not improving. The

Mozambican government is under fire for massive hidden

debts that have recently emerged, built up over decades and

paid for above market rates, raising suspicions of wrongdoing,

as the ruling Frelimo party directed funds obtained through

secret lending towards its security and intelligence services.

Likewise, South Africa narrowly avoiding having its sover-

eign debt downgraded to junk status comes as a result of the

stagnant outlook, beset by the ruling party’s gradual degener-

ation into a mere patronage network. Ahead of local elec-

tions in August, President Zuma has rallied his position in the

ANC, isolating the technocratic finance minister. Mass job

cuts are forecast to continue, particularly in the mining sec-

tor. Separately, Kenya’s diversified economy is thriving, but

its political situation is contested, as the opposition CORD

alliance presses the government to disband the compromised

electoral commission, sharply increasing the risk of civil un-

rest and inter-communal violence, which is mostly likely to

centre in the country’s western city of Kisumu.

South Africa may narrowly miss recession this year, but

growth will fail to meaningfully revive into 2018, even assum-

ing the domestic and external environments improve. The

country’s drought will continue to stoke unemployment

(record high in Q1) and food prices (even once agricultural

output stabilises). Mining and manufacturing should gradually

recover, assuming the worst is over for commodity prices,

but growth in consumer spending will slow as rising inflation,

interest rates and tax burdens weigh on disposable income,

hurting the retail sector. Fiscal measures have so far prevent-

ed a credit-rating downgrade, but weakening credit quality

and the high chance of fiscal slippage suggest such moves are

only a matter of time.

Further monetary tightening is unavoidable, despite anaemic

growth. The SARB paused its tightening cycle in May after

hiking rates to 7 percent earlier in the year to combat infla-

tion. A further 25 bps of hikes is likely by year-end, with the

next increase in Q3, and a further 50 bps in 2017. The SARB

is worried about the breach of the upper bound of its 3-6

percent inflation target and continues to stress upside price

risks (on rand depreciation, food-price pressures and wage

gains in excess of inflation) and the potential de-anchoring of

(already high) inflation expectations.

Nigeria’s reluctance to liberalize FX and inaction around

budget passage has delayed economic adjustment, with

growth shrinking in Q1 and likely in Q2. The new ―flexible‖

exchange rate and official devaluation should alleviate some of

the local credit crunch. The devaluation is a necessary step in

the adjustment process and could ease some of the dollar

shortages that have been choking off domestic demand. How-

ever, its likely to do so at the expense of higher inflation and

rising wage pressure which could unsettle domestic political

conditions. The recent fall in Nigerian oil exports have erased

any macroeconomic benefit from stronger oil prices and we

see the government struggling to fulfil the country’s infra-

structure needs. Nigeria’s growth will remain below trend

through 2017, as consumer expenditure slowly recovers and

oil output remains subject to outages.

Regional Currencies Not Benefiting from the Recent Rally

in EM FX

Q3 Election Calendar 07 July - Sao Tome and Principe - Presidential election

likely to proceed without incident

03 August - South Africa - Municipal elections to be held

for all districts and local municipalities, with a likelihood for

localised unrest based on micro-level rivalries

11 August - Zambia - Presidential & National Assembly

elections to coincide with referendum on changes to the con-

stitution

17-20 August - Angola - UNITA party congress to deter-

mine succession plan for long-standing president, current com-

petition centring between his son and the defence minister

Q3 Economic Outlook by

Issue date: June 2016 Page 10

Q3 Political and Security Outlook

Diverse coalition continues to pressure Islamic State

The variegated military coalition has made territorial gains

against Islamic State (IS) in Q2 and international and regional

forces will continue to exert pressure on the militant group

through Q3, particularly in Iraq. In response, IS will attempt

to increase the frequency and lethality of guerrilla-style ter-

rorist attacks as the group’s ability to hold ground diminishes.

Ongoing operations in Anbar province involving the paramili-

tary Popular Mobilisation Units (PMU), the Iraqi military and

Kurdish forces will prove pivotal in pushing IS out of its

stronghold in Fallujah, most likely after a protracted siege,

and Mosul later this year or into the next. IS control over

territory in northern and eastern Iraq is entrenched to the

extent that Q3 is more likely to see more back-and-forth

retaliatory attacks than major coordinated offensives like the

Fallujah campaign. If the Iraqi army is successful in taking the

city in Q3, however, Mosul will become the last remaining

major IS stronghold in Iraq. However, the size of the city is

such that any offensive against it would set off a complex hu-

manitarian disaster as the estimated 700,000 residents are

forced to flee or live in besieged conditions.

The Kurdish-led and US-backed Syrian Democratic Forces

(SDF) have made their first steps towards the IS de facto cap-

ital of Raqqa in Syria, but will not advance until they have

captured the key strategic town of Manbij, which may not

Middle East and North Africa

TURKEY: Military operations against the Kurdistan Workers’ Party (PKK) to continue, in tandem with the PKK’s long-

running vehicle-bombing campaign targeting police and military personnel, including in Istanbul.

ISRAEL AND THE PALESTINIAN TERRITORIES: IDF likely to increase security operations against Palestinian mili-

tants in the wake of the 9 June Tel Aviv shooting.

LIBYA: Militia groups to continue pressuring IS strongholds around Sirte., but local rivalries will continue to prevent a uni-

fied front against the terrorist group.

IRAQ AND SYRIA: Military operations against IS around Mosul and Fallujah to have the potential to turn into drawn-out

urban conflicts. Likely intensification of fighting around Aleppo involving regime and rebel forces.

Issue date: June 2016 Page 11

Q3 Economic Outlook by

happen in Q3 as the force has limited capability beyond its US

covert backing, not least as its Kurdish component faces ex-

treme hostility from Turkey and others for its PKK connec-

tions. In Libya, the establishment of the UN-backed Govern-

ment of National Accord (GNA) and the lifting of a 2011-

imposed arms embargo is allowing for a more coordinated

and organised front against IS. Full coordination is, however,

highly unlikely as General Haftar’s so-called Libyan National

Army (LNA) and the affiliated House of Representatives

(HoR) show no signs of recognising the legitimacy of the

GNA in Q3. Continued offensives by individual anti-IS fac-

tions have reversed the jihadists’ advance, but concerns have

been raised over the dispersal of IS militants into other Liby-

an towns, particularly in the southern region.

OPEC countries to continue high rates of oil produc-

tion

Global oil prices are set to plateau in Q3 as production

shortages in Nigeria and other non-OPEC countries are bal-

anced by a supply glut in the Middle East. A production turf

war between Saudi Arabia and Iran will likely further trig-

ger regional economic hostilities as Iran struggles to attract

inward investment despite the post-sanctions environment.

Iranian exports are now thought to be nearing pre-sanction

levels of 2.5 million barrels per day (bpd), largely due to the

return of international shipping companies. In Saudi Arabia,

the dismissal of long-standing oil minister Ali al-Naimi is un-

likely to translate into a transformation of current policy;

Riyadh’s aggressive production policy is expected to continue

through Q3 as the government focuses on developing policies

to implement Vision2030, such as through proposals to levy

taxes against foreign workers.

Despite Iraq’s ongoing conflict against Islamic State (IS), oil

production output reached a record level of 4.5 million bpd

in Q1. Iraq’s defence expenditure has soared since 2014, with

oil sales propping up the country’s campaign against IS—low

oil prices are, however, stretching the budget deficit. Produc-

tion rates will be limited in Q3 as a result of an ongoing pow-

er supply problems at oilfields in the south of the country, as

well as a budget crisis meaning the government is struggling

to pay oil majors.

Possibility of widespread energy-related unrest

Protests are highly likely in the coming months as infrastruc-

ture failings are expected in the summer. Power outages oc-

cur annually across MENA countries, as underinvestment and

poor maintenance ensures unreliable supply during summer

as demand surges, when temperatures soar and the public

relies on air conditioning. With the lack of supply comes roll-

ing blackouts, sometimes lasting several days. In previous

years, protests have erupted over the issue in Lebanon,

Jordan, Egypt, Morocco, Algeria, Iraq and Libya. Pro-

tests are expected across the region again in Q3 as regional

governments have failed to upgrade dilapidated and inade-

quate infrastructure. Protests are most likely in southern

Iraq, Libya and Lebanon where local populations are already

frustrated with local governance and poor public service de-

livery.

The oil-price rally has helped boost revenue and reduce pres-

sure on local currency pegs and financial markets throughout

the Middle East and North Africa region. However, even with

oil prices at USD 50/b, most regional economies can only

pare spending cuts, not reverse them, putting further strain

on domestic demand. Local credit conditions remain tight, as

state-owned enterprises and sovereigns in Saudi Arabia,

Qatar and the UAE continue to borrow, crowding out the

private sector. Central banks are expected to shadow the

Fed, lest they put more pressure on their currency pegs to

the US dollar.

Saudi Arabia’s economic and energy policies are adding to

uncertainty in the region. Measures to attract foreign invest-

ment, including the adoption of global equity-payment stand-

ards and a deepening of local debt markets, are positive for

long-term investors but will only be successful if the macro

story improves. Key factors to watch concern oil output (we

assume a modest increase), the implementation of new fiscal

(VAT, subsidies) measures, the pace of unemployment and

the size and terms of the planned Aramco IPO. It is unlikely

that the government will part with a large share of equity in

Aramco, limiting the scope of funds raised. The state’s FX

reserves are expected to fall toward USD 500 billion by year-

end as the country shifts to liquid assets and some greater

direct investment.

The implementation of the nuclear deal has brought more

Iranian oil barrels to market, but domestic growth has

lagged. We expect that will change in FY 2016 (growth fore-

cast: 3 percent) as oil revenue allows the Iranian authorities

to be less fiscally and monetarily austere, supporting domes-

tic demand. Global banks remain reluctant to enter due to

sanctions and counterparty risk. Going forward, investment

and growth will depend on Iran’s ability to implement re-

forms, including FX convergence, bank recapitalization and

the needed compromise on oil deals. Approaching presiden-

tial elections in 2017 will up the ante for delivery as local

policy makers have set high expectations of the growth bene-

fits from the nuclear deal, which are challenging to meet.

Issue date: June 2016 Page 12

Enduring militancy to escalate amid summer fighting

season

In Afghanistan, the onset of the summer season will herald

an intensification of Taliban attacks across the country. The

summer months will see the group, buoyed by revenues ac-

crued during a bumper opium poppy harvest, push to seize

territory in key battlegrounds across the country’s southern

provinces. The upsurge in violence will be compounded by

disruption in the Taliban leadership following the death of

Mullah Akhtar Mansour in a US drone strike in May.

Mansour’s successor, Mullah Haibatullah Akhundzada, will

move to consolidate his leadership, with the appointment of

battle-hardened operatives to senior positions within the

organisation likely signalling an escalation of violence. Paki-

stan will also likely see an uptick in militant activity, with the

government struggling to the stem the recruitment of individ-

uals to extremist groups, notably on university campuses.

Given the steady encroachment of Islamic State (IS), other

groups will seek to bolster recruitment and planning efforts,

likely foreshadowing an increase in attacks, especially against

soft targets.

Natural hazards to test governments’ emergency

planning

The onset of the annual monsoon season will see severe

weather affect swathes of South Asia, with Sri Lanka and

Bangladesh likely to bear the brunt of tropical storms,

flooding and landslides. While summer monsoon rains will

provide short-term respite from widespread drought that has

South Asia Q3 Political and Security Outlook

BANGLADESH: Enduring threat of targeted

killings by Islamist militants to threaten secular and

non-Muslim religious groups.

INDIA: Monsoon rains to provide short-term

relief amid ongoing drought.

INDIA: Growing likelihood of fresh caste protests

across Haryana amid ongoing tensions over gov-

ernment quota agreements.

SRI LANKA/BANGLADESH: Onset of sum-

mer monsoon season to herald widespread flood-

ing, burgeoning internal displacement of affected

communities.

Source: Al Jazeera

Source: PressTV

Issue date: June 2016 Page 13

plagued India during Q2, the government will continue to

struggle with impaired crop yields, dwindling water reserves,

inconsistent power supply and spiralling unemployment.

Tumbling wheat production will continue to drive migration

from farming communities to urban centres, increasing pres-

sure on infrastructure and public services, while diminished

energy sector output will perpetuate ongoing electricity

shortages. The Modi administration’s emergency response,

including the provision of water-saving technology to farm-

ers, is unlikely to gather momentum during Q3, with mone-

tary constraints impeding farming communities’ acquisition of

such equipment. The slow roll-out of water conservation

education programmes in rural areas will also likely delay

recovery. Output at hydroelectric power facilities across will

resume gradually amid the onset of the monsoon season,

however, normalisation will likely take several months.

Political and sectarian strife to herald protest action

Pervasive anti-government sentiment will herald protests

across South Asia, with both opposition movements and reli-

gious groups alike calling for political recognition. In Afghan-

istan, members of the Hazara ethnic minority, spurred by

large-scale protests in Kabul in May, will likely seek to hold

further service delivery protests in Kabul. In Bangladesh,

tensions between the incumbent Awami League (AL) and

Jamaat-e-Islami (JI) supporters will continue to grow follow-

ing the execution of JI leader Motiur Rahman Nizami in May.

While a programme of mass arrests of opposition figures will

largely preclude a popular uprising, the AL’s continued crack-

down on dissent will feed disquiet among Islamist groups,

increasing the likelihood of countrywide unrest. In the Mal-

dives, friction between opposition groups, media outlets and

the government over the imposition of new freedom of

speech laws, will likely spark further protests in Male, with a

latent potential for violence.

Q3 Economic Outlook by

India’s economy is one of the few that is accelerating this

year, led by consumption, and should achieve a growth path

in the mid-7 percent range. It is also one of the few econo-

mies where growth has been surprising on the upside, alt-

hough official data may well be overstating this. The recent

local election results have provided the ruling BJP with an

opportunity to push through legislative compromises in the

upper house of parliament, such as the needed goods and

services tax, but breaking the deadlock around key legislation

and pushing reforms through at a national level will remain a

challenge.

Some of the ―good luck‖ India has received in recent years is

starting to wane. The rise in oil prices will feed through into

local inflation and partial subsidy cuts imply the budget will

also be challenged. Although compromises over the goods

and sales tax and bankruptcy code are welcome, the imple-

mentation of reforms still seems in question.

Moreover, uncertainty hangs over monetary policy, with

Raghuram Rajan’s decision not to seek another term as chief

of the Reserve Bank of India amplifying concerns about the

country’s macro path. Governor Rajan was seen as a key

macro anchor, coming to office after India deployed defen-

sive measures amid the taper tantrum. Although Rajan has

struggled to fulfil some elements, such as the public banks

clean-up, he has brought credibility internationally. Key sign-

posts to look for now include the identity of the new RBI

governor, who is likely to be less independent than his pre-

decessor, and the government's commitment to inflation

targeting. India’s balance sheet looks much stronger than in

2013, but the combination of policy mix will likely be pro-

growth, slightly higher inflation and lower rates.

Elsewhere in South Asia, macro economic conditions have

remained robust, with Pakistan benefiting from IMF and

international financial support as well as lower oil costs. Ex-

ports remain scarce and tax revenues low. The region re-

mains highly reliant on remittances from the middle east and

other parts of the globe to support consumption. These

flows have stagnated, admittedly at a high level, which will

limit regional growth. Bangladesh, one of the non-European

countries most linked to the UK economically, remains ex-

posed to the fall in UK domestic demand which is likely to

manifest as the UK negotiates with the EU about its exit

from the group.

Source: The Guardian

Issue date: June 2016 Page 14

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Political risks framed by leaders

The short-term focus in the Philippines is set to fall on pub-

lic security, as president–elect Rodrigo Duterte seeks to rep-

licate his successful policies in Davao. This could include

measures such as increased police funding and the potential

militarisation of the police, a surge in raids on organised

crime targets and an escalation in the domestic war on drugs.

In Papua New Guinea, the administration of Prime Minis-

ter Peter O’Neill will face continued protests that demand he

face corruption allegations brought by a number of anti-graft

agencies. The government will pursue attempts to inhibit the

workings of the country’s independent court system. Like-

wise, Malaysian Prime Minister Najib Razak’s government

will seek to divert attention away from the 1MDB scandal,

pushing an Islamic law bill that could divide the opposition,

composed of Islamists and Malay Chinese. Elsewhere, Legisla-

tive Council elections on 4 September in Hong Kong are

likely to be preceded by mass rallies and protests by both pro

-China and pro-democracy camps. The election will effective-

ly serve as a referendum on unpopular current Chief Execu-

tive Leung Chun-ying. In Japan, the 10 July Upper House

election will serve as a vote on three and half years of Abe-

nomics and be the first since the Abe administration’s con-

tentious security legislation on defence. Abe’s Liberal Demo-

cratic Party and its allies may secure a two-thirds majority in

both chambers of the Diet for the first time due to a frac-

tured opposition.

Asia-Pacific Q3 Political and Security Outlook

ASIA-PACIFIC: The

terror threat across the

region remains latent,

with Indonesia and Ma-

laysia at particular risk

burgeoning Islamist radi-

calism.

NORTH KOREA:

Further nuclear-related

activity threatens to im-

pose greater sanctions,

restarting a cycle of re-

gional tension.

CAMBODIA: Potential

for latent unrest should

government continue

with opposition crack-

down.

AUSTRALIA: Voters

go to the polls on 2 July,

choosing to back the

Liberal Party’s tax cuts,

or the opposition Labor

Party’s increased public

spending.

Issue date: June 2016 Page 17

Strategic distrust fuels South China Sea tension

A UN arbitration panel is expected to rule on the Philip-

pines’ lawsuit against China’s territorial claims in the South

China Sea (SCS). Beijing will ignore the outcome, moving to

escalate land reclamation and construction programmes in

the area. Chinese activity will exacerbate tensions with the

US, which will likely respond with naval patrols and recon-

naissance flights near Chinese military-grade facilities situated

on contested reefs. There is a possibility China declares an

air defence identification zone (ADIZ) over the SCS, which

will immediately increase brinkmanship. China will also inten-

sify its diplomatic outreach, using foreign aid to coalesce

small nations in a bid to bolster support for its territorial

claims. Washington will find it difficult to encourage China to

curtail its military outposts, moving instead to pursue policies

to deter further militarisation amid regional strategic distrust.

Philippines’ president-elect Rodrigo Duterte has indicated he

may enter into talks with China, though Manila’s posture will

continue to be dictated by Washington.

Infrastructure investment push expected to contin-

ue

The region is expected to push forward with large infrastruc-

ture projects and initiatives. South-east Asia’s infrastructure

will emerge as a beneficiary of China’s One Belt One Road

(OBOR) policy, with Singapore and Indonesia in particular

likely to see large-scale Chinese investments. The OBOR,

working also as a means to increase Chinese influence

throughout the region, will compete with other major re-

gional trade initiatives; the Trans-Pacific Partnership (TPP) in

and the Regional Comprehensive Economic Partnership

(RCEP).

Q3 Economic Outlook by Asia-Pacific continues to outpace other regions in terms of

growth but economic activity looks set to slow further. Alt-

hough the slower than expected pace of rate hikes in the US

reduces some pressure on regional capital flows and FX, the

structural slowdown in China will remain a drag on regional

sentiment and global risk appetite. ASEAN countries have

stabilised and the region has two of the strongest-growing

economies—Indonesia and the Philippines.

China’s economy is continuing its volatile slowdown, which

poses a risk to regional growth and sentiment. Although con-

sumption remains resilient, we now see construction as a

support to growth, suggesting the much-needed rebalancing

of the economy may be delayed.

In Japan, Abenomics is floundering and growth disappointing,

keeping pressure on the Bank of Japan to do more. However,

policies to generate reflation depend on the Bank and the

Finance Ministry both compromising. We now expect weaker

growth and less yen depreciation than we did in our Q2 Out-

look. The risk-off environment caused by the British EU

membership referendum result, and other global factors, may

increase pressure on the Bank to act.

Despite the dearth of commodity investment, Australia

continues to perform strongly, due in part to fiscal and mon-

etary stimulus. Public and private consumption will be key

supports for the economy.

Trade-dependent East Asian economies such as South Ko-

rea are struggling as a result of weaker global trade growth

and changing G4 demand patterns. Thailand and Malaysia,

meanwhile, have been squeezed by the weakness of their

trading partners, while the lingering political uncertainty has

done little to increase domestic investment.

Weaker growth and structural vulnerabilities across the re-

gion’s emerging markets risk sparking more populist policies

and corruption. The divided government in South Korea,

the new populist president in the Philippines, challenges

pushing through reform in Indonesia, and the lingering ef-

fects of the 1MDB corruption scandal in Malaysia leave lim-

ited positive catalysts.

Although the Duterte government in the Philippines is

more focused on domestic security than economics, the cen-

tral bank has recently rolled out new measures to kick-start

credit growth and infrastructure. Similarly in Indonesia, au-

thorities are focused on boosting domestic credit in the ab-

sence of stronger exports and economic activity is set to

increase.

Issue date: June 2016 Page 18

Security concerns increase as criminal groups

strengthen their operations

The wave of attacks against security forces by street gangs in

El Salvador is expected to continue throughout Q3, raising

concern over the sophistication of the modus operandi of

criminal groups. Despite the launch of a military offensive

against criminal gangs, the increasing recruitment of lower-

level street gang members by organised criminal groups op-

erating in the region sets the environment for prolonged

violence. The recent resignation of Guatemala’s former

attorney general following death threats will increase pres-

sure on the government to tackle the suspected infiltration

of criminality into government institutions. Although the Mo-

rales administration maintains strong public support, civil

organisations demanding an effective response against cor-

ruption and insecurity are likely to hold demonstrations. An

ongoing territorial dispute between Guatemala and Belize,

which has led to several violent clashes in the area, will fur-

ther diminish the rule of law on both sides of the porous

border, raising the risk that regional criminal groups will cap-

italise on the bilateral conflict to increase illegal smuggling

operations. In Mexico, criticism against President Enrique

Peña Nieto’s economic and security policies is expected to

intensify in Q3, particularly after the ruling PRI party’s poor

performance in the June local elections, a key test ahead of

the 2018 presidential polls.

Political violence intensifies around controversial

elections

In the US, the Republican and Democratic parties will hold

their national conventions from 18-21 July and 25-28 July,

respectively, to officially choose their presidential nominees

ahead of the 8 November election. In late May, Republican

candidate Donald Trump reached the number of delegates

North and Central America Q3 Political and Security Outlook

CANADA: The loss

of oil sands produc-

tion as a result of

wildfires in Alberta

will have an impact on

the country’s eco-

nomic performance in

Q3.

US: Security forces

expected to be on

high alert amid terror-

ism threat on 15th

anniversary of 11 Sep-

tember attacks.

MEXICO AND

CENTRAL AMERI-

CA: Protests are like-

ly as Mexico, Guate-

mala, El Salvador, Nic-

aragua and Costa Rica

celebrate Independ-

ence Day on 15-16

September.

Issue date: June 2016 Page 19

required to secure the delegation, with his last campaign ri-

vals withdrawing from the race. Former secretary of state

Hillary Clinton also secured the Democratic nomination in

early June. After the July conventions, the electoral debates

will build up, with a high risk of protests and clashes between

rival party supporters. In particular, activist groups opposed

to Trump’s controversial campaign platform are expected to

hold demonstrations, particularly in states with a high per-

centage of Hispanic voters.

In the Dominican Republic, unrest experienced during Q2

is expected to continue as the opposition challenges the re-

sults of the 15 May general election, which granted President

Danilo Medina a second term. Widespread accusations of

fraud have led to violent protests and opposition leaders

have called on their supporters to continue demonstrating,

although the likelihood of a vote re-count is low. Electoral-

related violence is also expected to continue in Haiti, where

an electoral verification commission has recommended the

first-round presidential vote be re-run due to violence and

fraud allegations in the October 2015 ballot. Opposition can-

didate Jude Celestin will continue to demand the interim

Privert government to reform the electoral system before

the new election, scheduled on 9 October, takes place, rais-

ing the risk of further protests if the electoral commission

fails to make reforms in the short term.

In the United States, growth is now accelerating after two

quarters of sluggish gain, but remains over-reliant on consum-

er spending. Headline inflation is picking up in response to

rising energy prices, but gains in core inflation have stalled.

Financial stresses have abated since the beginning of the year,

although market conditions make further bouts of volatility

likely.

With the eas-

ing of these

financial

stresses, Fed

officials are

becoming

more com-

fortable with

the outlook

for the economy. However, stubbornly low inflation and infla-

tion expectations, along with the tightening of financial condi-

tions in the wake of the UK’s EU referendum, mean the Fed

is unlikely to hike until December and, if financial conditions

remain strained, the Fed will remain on hold for longer.

In Canada growth has picked up, but remains quite uneven.

The oil-price recovery has eased the biggest drag on activity,

although the huge fire in Alberta has dented oil output. The

government’s fiscal plan will add around 0.5 percent to

growth in 2016 and perhaps a similar amount in 2017. We

expect the Bank of Canada to remain on hold this year, as it

sees a significant degree of slack in the economy and low-

inflation risks should CAD strengthen.

In Mexico, recovering oil prices and a more favourable ex-

ternal outlook are supportive, but tighter fiscal policy and

modest monetary tightening will drag on growth over the

next few years. Fiscal policy will likely tighten as the govern-

ment catches up after a period of easier policy, and investors

focus on the contingent liabilities of the national oil company,

Pemex. Lower oil production will hit exports, while layoffs in

the public sector and at Pemex will dampen consumer confi-

dence, weakening the recent consumption pattern. After a

surprise intra-meeting rate hike in February, we expect the

central bank to increase rates by 50 bps in 2016.

Q3 Economic Outlook by

Source: Irish Times

Issue date: June 2016 Page 20

Q3 Political and Security Outlook

Rio 2016 Olympics in the midst of political and eco-

nomic crisis

The Rio 2016 Olympic and Paralympic Games will take place

from 5-21 August and 7-18 September, respectively, in the

middle of a severe political and economic crisis in Brazil. In

May, the Senate temporarily suspended President Dilma

Rousseff for up to 180 days, during which she will face an

impeachment trial over accusations that she manipulated the

state budget during her re-election campaign in 2014. The

ruling will determine whether Rousseff will be permanently

removed from office or if she can return. Throughout Q3,

acting President Michel Temer faces accusations of corrup-

tion and sabotage against the Rousseff administration, while

society is expected to grow increasingly polarised over

Rousseff’s potential impeachment, with her supporters con-

demning the process as a coup. The current political environ-

ment will raise further concerns over the planning for the Rio

Olympics, with the ongoing economic recession becoming a

South America

COLOMBIA: Government will be pres-

sured to meet a 20 July deadline to sign a

peace agreement with rebel group FARC

following a ceasefire deal achieved in June.

ECUADOR: The devastation caused by

the April 2016 earthquake will continue to

have economic repercussions on the

country during Q3.

BOLIVIA: Calls for a new referendum to

allow Evo Morales to run for a fourth

term expected to trigger political ten-

sions.

PERU: Strikes by mining workers are

likely in Q3, demanding a government

crackdown on illegal mining operations.

Issue date: June 2016 Page 21

major source of anxiety over the event’s effective planning.

As inflation and unemployment rise, crime levels are likely to

grow, as well as the potential for violent demonstrations

across the country, including in Rio de Janeiro, against politi-

cal uncertainty, economic decline and the high cost of hosting

the Games. International concerns over the spread of the

Zika virus will continue over the next three months, despite

recent calls by the World Health Organisation (WHO) not

to overestimate the threat in Brazil, especially as milder ap-

proaching winter temperatures reduce mosquito breeding

sites.

Venezuelan crisis and unpopular reforms trigger re-

gional tensions

The current state of economic emergency in Venezuela is

expected to extend into Q3, with political tensions between

the opposition and the Maduro government increasing and

leading to violent clashes. Severe shortages will continue to

aggravate the current public health crisis due to the lack of

medicines, staples and raw materials, also forcing several

companies operating in the country to close their plants. The

government continues to claim that the opposition, support-

ed by the US and right-wing governments in the region, is

orchestrating a coup. The armed forces have reiterated their

allegiance to Maduro, although an eventual shift in loyalty

cannot be discarded, particularly as the crisis worsens

throughout Q3. While the opposition will continue to de-

mand Maduro’s removal via a recall referendum, continuous

government manoeuvres to delay the process will trigger civil

unrest, particularly in Caracas.

In Chile, protests by students and labour unions are ex-

pected to re-gain vigour as both groups demand to partici-

pate in the drafting of the government’s labour and education

reforms, which continue to be a source of discontent. Strikes

and protests are also expected in Argentina during Q3, as

President Mauricio Macri tries to implement unpopular eco-

nomic policies to reduce inflation, including job cuts at state

institutions. In Peru, when president-elect Pedro Pablo

Kuczynski takes office in July, he will face the challenge of

ruling in a highly-divided society, which is demanding an effec-

tive response to an increase in crime, one of the key topics

of the election.

The external environment has become more supportive for

South America thanks to rebounding commodity prices, Chi-

nese stimulus and the Fed’s slow pace of rate hiking. Com-

bined with some political and policy improvements, this will

set the stage for regional growth to bottom out in H2 and

rebound in 2017. Potential output, though, seems likely to

remain low, absent a serious structural reform push.

The recovery of commodity prices will help narrow the

―twin deficits‖ (fiscal and external) that have been a source of

concern. Although risks remain, current account deficits have

started to decrease, and more supportive commodity prices

will also boost fiscal revenue.

Among the group of more robust economies (Chile, Co-

lombia, and Peru), Colombia still stands out as the most

vulnerable given the policy choice to slowly adjust to lower

oil revenue. We anticipate that the recent rate increase in

Colombia will be the last for this hiking cycle, with easing

expected in 2017 once inflation falls back toward target.

However, those countries that accumulated higher imbalanc-

es during the commodity boom, such as Argentina, Brazil

and Venezuela, have fewer buffers with which to cope with

the external shocks and are facing outright recessions. There

are clear signs of policy improvement in Argentina and

Brazil, but little likelihood of improvement in Venezuela,

despite the oil price rally. A credit event in the latter is only a

matter of time, most likely in 2017.

In Brazil, the odds of needed fiscal and structural reforms

has increased with the change in government and we see the

Brazilian economy growing modestly in 2017. Fiscal progress

and the ongoing inflation deceleration will allow the central

bank to begin cutting rates in H2. However, political uncer-

tainty remains high.

Q3 Economic Outlook by

Issue date: June 2016 Page 22

Continued threat from Islamist-related terrorism

The threat from Islamist-related terrorism remains a major

concern across Europe, particularly in light of the large-

scale attacks in Paris and Brussels. The threat, while focused

on external concerns linked to Islamic State (IS), al-Qaeda

and other Islamist extremist groups, is also intrinsically asso-

ciated with self-radicalised domestic nationals, who have

carried out major terrorist attacks in Western Europe. High

-risk targets include transport hubs, large public gatherings

and government or military buildings and facilities, particular-

ly in France, Italy, UK, Belgium and Germany who have

been singled out as potential targets in IS propaganda. France

will remain on high alert during the Euro 2016 football tour-

nament which ends on 10 July, with elevated security across

10 host cities. Other major sporting events could also be

highlighted as potential targets, including Wimbledon and the

Tour de France. Despite clear acceptance of the defined

threat and the implementation of mitigation measures, it

remains likely a terrorist attack, linked to IS, will occur in

Western Europe in Q3.

Europe Q2 Political and Security Outlook

GREECE/ MACEDONIA:

Stranded migrants will increase

the risk of civil unrest and clashes

between local population and se-

curity forces as pressure on do-

mestic services and infrastructure

escalates.

FRANCE: Union strike action

will likely continue over the con-

troversial labour reform, with

neither side expected to back

down, leading to future, disruptive

public sector strikes and protests.

ITALY: Increasing migration is

expected to prompt an escalation

in anti-migrant sentiment which

may result in an uptick in unrest

between local populations and

migrants.

BELGIUM/FRANCE/UK: Is-

lamist-related terrorism will con-

tinue to challenge the security

services, with arrests and counter

-terrorism operations expected

to continue. Threat of an attack in

Western Europe remains high.

2-24 July: France - Tour

de France

6-10 July: Netherlands -

European Athletics Cham-

pionships

27 June- 10 July: UK -

Wimbledon Tennis Cham-

pionships in London

10 July: France - Euro

2016 Final

Q3 Major Sporting Events

Issue date: June 2016 Page 23

Q3 Economic Outlook by

Brexit fallout to dominate high-level politics

On 23 June, the British public voted for the UK to leave the

EU in a referendum in which the Leave vote gained 51.9 per-

cent to Remain’s 48.1 percent. Turnout was 72 percent. A

settling period is anticipated in Q3 as negotiations to invoke

Article 50 of the Lisbon Treaty, setting a two-year deadline

for negotiations to be completed, will get underway with

strong pressure from the EU to expedite the process. How-

ever, the UK government has implied that no invoking of

Article 50 will take place until the UK’s political affairs are in

order, triggering a tense relationship with Brussels during

Q3. Far-right parties in France and the Netherlands are

now calling for their own exit referendums and Catalonian

independence supporters will also likely capitalise on the

vote to push their agenda. Other calls will continue through-

out Q3, but are unlikely to manifest in concrete plans to hold

further exit referendums. In the UK, Scotland will continue

to push for a second referendum on independence, but

pushback from Westminster will seek to prevent this from

occurring in the short term. Security concerns resulting from

the referendum include the reported rise in hate crimes,

targeting both EU citizens and British nationals. Although a

minority, the attacks are a worrying sign of increasing xeno-

phobia being legitimised following the referendum.

Migrancy issue to become more complex

Ongoing instability in Africa and the Middle East will drive

further migrancy to Europe during Q3, putting additional

pressure upon the EU and how it manages the growing crisis,

particularly in southern Europe. The number of migrants

attempting to reach northern and Western Europe is likely

to remain high, despite the increased border restrictions in

Eastern Europe that have effectively closed the Balkan route.

Migrants are predicted to seek alternative means of travel

and are embarking on dangerous sea routes from North Afri-

ca. Thousands of people could potentially travel from Libya,

and to a much lesser extent Egypt, to Italy’s Lampedusa and

Sicily, while migrants stranded in Europe, especially Greece,

may also use maritime routes to avoid being returned to

Turkey. There remains the risk of unrest between local

populations and migrants, particularly in Greece and other

eastern European countries where migrant numbers are es-

calating due to border closures and movement restrictions.

Tensions between governments will also continue as EU

countries fail to agree on how to manage the problem. Fur-

ther anti-migrant protests, supported by right-wing groups,

will continue in Western and northern Europe, and are ex-

pected to encounter large counter-demonstrations.

The referendum result in the United Kingdom is far from

concluding the Brexit issue. Indeed, it is still not certain

whether the UK will actually leave the EU. The extent of the

market turmoil and the risk of political, economic and finan-

cial contagion will determine actions and reactions across

Europe.

There is now a significant downside risk that GDP growth

will slow across Europe. We still expect growth in the euro-

zone for 2016 to be slightly stronger than last year due to

additional government spending from funds deployed to cope

with the migrant crisis and the additional fiscal flexibility vari-

ous EZ states have obtained from the European Commission.

The latter should relieve some of the burden on the ECB to

support aggregate demand although fiscal support and invest-

ment spending will remain subdued.

Both Spain and Germany saw relatively strong growth in

the first quarter of the year, however we expect this mo-

mentum will be short-lived, with a return to more modest

growth in the coming quarters. Germany’s export-driven

growth model has taken a hit as global growth has slowed (a

trend likely to continue), but domestic investment has helped

offset this weakness. In Spain, we anticipate that Prime Min-

ister Mariano Rajoy's Popular Party (PP) will be able to form

a coalition government, although uncertainty, exacerbated by

the UK’s EU referendum, will remain.

France recorded solid growth in Q1 thanks to uncharacter-

istically strong private consumption, along with public invest-

ment. We expect the latter to remain robust for the rest of

2016, but we anticipate a slowdown in private consumption,

implying slower growth for the remainder of the year.

Outside the monetary union, Western European inflation will

likely gain some ground this year, but remain below country

targets for the foreseeable future, except in Norway where

we expect it to drift back up. GDP growth rates seem likely

to weaken in Sweden and Switzerland.

Emerging Europe should grow more strongly in 2016-17 than

last year, mainly as a result of Russia gradually exiting reces-

sion. Growth is slowing in the Czech Republic, Hungary

and Poland, despite weaker currencies, an easing bias and

recovering demand from the eurozone. We expect more

monetary policy cuts everywhere except the Czech Repub-

lic. In Turkey, activity will remain around potential in 2016

(3.5 percent), slowing thereafter with political uncertainty

posing downside risk.

Issue date: June 2016 Page 24

Economic decline underpins legislative election risk

With Russia’s economy still under pressure as a result of

low oil prices, upcoming legislative elections on 18 Septem-

ber provide a near-term obstacle to the pre-eminence of the

Putin regime. The current leadership is engaged in a behind-

the-scenes struggle between hardliners in the security estab-

lishment and technocratic reformers such as Alexei Kudrin, a

former finance minister, who has been tasked with develop-

ing an economic reform programme to reduce the depend-

ence on oil. Although the ruling United Russia party lacks

popularity, the suppression and harassment of serious oppo-

sition figures such as Alexei Navalny indicates there will be

no viable alternative at the ballot box. Protests will be possi-

ble, with Putin attempting to shore up the security forces by

appointing the loyalist Viktor Zolotov to head a new National

Guard that will be tasked with preventing unauthorised mass

gatherings.

Return of Savchenko to increase pressure for reform

The return of nationalist activist and helicopter pilot Nadia

Savchenko to Ukraine, following her high-profile trial and

release by Russia, will create new impetus for reform in Kiev.

With the new popular hero campaigning for a fresh round of

legislative elections, her charismatic but inexperienced pres-

ence in parliament will provide a new centre of gravity for

the anti-corruption movement. Current reform programmes

Russia and CIS Q3 Political and Security Outlook

RUSSIA: 18 September legislative elections to come with elevated risk of protests against the ruling

party.

ARMENIA / AZERBAIJAN: Nagorno-Karabakh conflict expected to continue with low-level violence

despite fragile ceasefire.

Issue date: June 2016 Page 25

Q3 Economic Outlook by

have been stymied by intrigue and factionalism among

Savchenko’s colleagues as deputies, as well as among leaders,

such as former prime minister Yulia Tymoshenko, who are

seeking to co-opt Savchenko to serve their own agendas.

Land reform protests undermine regime confidence

The unexpected emergence of protests in Kazakhstan over

April and May has provided moderate reason to doubt the

stability of governments in Central Asia, given the region’s

most advanced regime struggled to implement a major plank

of economic reform. The government’s plans to sell off fal-

low land to private bidders, including foreigners, set off a

rare protest movement in the country, prompting an unusual

case in which the regime backed down in the face of popular

opposition, even as it detained those blamed for leading the

mass demonstrations. Meanwhile, an equally rare suspected

Islamist terrorist attack in Aqtobe and growing concerns

about Taliban control of the provinces of Afghanistan that

border Turkmenistan served as a reminder about the

threat of cross-border penetration by militants and domestic

radicalisation.

Football hooliganism raises concerns for 2018

The combination of its hooligans attacking England fans in

France, a humiliating early exit from the Euro 2016 tourna-

ment and a ban from athletics for state-sponsored doping

that may see the country barred from the Rio Olympics will

all be unwelcome to both FIFA and the Kremlin ahead

of Russia hosting the 2018 World Cup. Although the Rus-

sian government had imposed travel bans on some of the

firms, the suspected encouragement by the far-right leader of

the official fan union, Alexander Shprygin, of hooligan activi-

ties will cause embarrassment abroad and will complicate the

preparations for two years’ time. Although a further crack-

down on hooligans is likely over the coming quarter, the

Kremlin’s willingness to indulge ultra-nationalist fan groups

should unnerve football associations and sponsors preparing

for the tournament, primarily as support by Russian security

forces for foreign fans under attack should not be taken as a

given.

Although Russia is still stuck in a recession, the recent stabi-

lisation of both oil prices and the rouble should see growth

bottoming out and turning positive toward year-end. While

our view of flat growth this year is more positive than the

majority of market participants, who are expecting another

year of recession, we do not see strong gains arriving until

2017, when we expect to see GDP growing by around 1.7

percent. In the near term, net exports will remain the main

growth driver, as imports contract, while tight policies (fiscal

and monetary) reinforce the decline in domestic demand,

with consumer confidence at record lows. Improving busi-

ness confidence readings point to a rebound in private invest-

ment in 2017.

The slowing inflation trajectory keeps intact our expectation

for the Central Bank of Russia ease monetary policy. After

beginning its cuts in June with a 50bps cut, we continue to

expect the Bank to reduce the policy rate by 300 bps (to 8.00

percent) by year-end and expect some fiscal easing as the

electoral cycle kicks off next year.

Elsewhere in the CIS, regional economies continue to suffer

due to relatively low oil prices, low remittances and weak

consumption as a result of higher inflation and recession in

Russia. As a result, most of the countries in the region are

looking to international development banks and the IMF for

liquidity support or funds for capital investment. Kazakh-

stan and Azerbaijan have allowed some foreign exchange

adjustment, but if oil prices remain low or decline again, we

could see further falls. Tighter fiscal conditions and political

stress from past oil price declines is adding to domestic pres-

sures in Kazakhstan, forcing the government to pull back on

its planned agricultural land sales to foreigners. The foreign

exchange adjustment in these countries resulted in higher

inflation restraining consumption and GDP growth. Others

such as Turkmenistan and Uzbekistan are maintaining

tight economic policies. Resource-poor countries like Tajiki-

stan and Kyrgyzstan are particularly vulnerable due to low-

er remittance flows from Russia and may need international

financial support. These policies are tightening domestic cred-

it conditions, putting more strain on the banks who will

struggle to lend, and thus on consumers.

Issue date: June 2016 Page 26

Health & Environment

Figure 1: Global map of the predicted distribution of Ae. aegypti. [The global distribution of the arbovirus vectors Aedes aegypti and Ae. al-

bopictus. Kraemer, Moritz U G; Sinka, Marianne E; Duda, Kirsten A; Mylne, Adrian Q N; Shearer, Freya M et al. (2015) eLife vol. 4, p. e08347 http://elifesciences.org/lookup/doi/10.7554/eLife.08347.004]

Zika risk continues into summer months

The World Health Organisation (WHO) has warned of the

potential risk of Zika virus spreading to southern Europe,

particularly in Madeira, Portugal, and the eastern coast of

the Black Sea. Additionally, Zika has been detected on the

Atlantic coast of Africa, including Cape Verde, as well as in

the Americas, including Panama and Puerto Rico, outside

of the original outbreak area. More than 60 countries have

now been affected by the outbreak, with further geographical

spread likely in Q3. As summer approaches in the northern

hemisphere there is a risk that the virus will spread, particu-

larly to the southern US and Europe. In the southern hemi-

sphere, the number of cases are expected to drop in many

countries as the colder winter months approach, which will

decrease the mosquito population.

Concern centre on Brazil, particularly the effect on tourism

and Olympics visitors in August. As the disease is not as out-

wardly fatal as other outbreaks, such as the West Africa Ebo-

la outbreak, Zika is gaining less international attention. With

some 500,000 visitors expected at the Olympics, however,

the risk of the disease spreading to new territories via re-

turning travellers is present, even though the risk will be low

in Rio itself. The mosquito is exceptionally well-adapted to

live alongside humans and measures to remove stagnant wa-

ter sources, their primary breeding ground, is a core part of

prevention methods.

With the link between Zika infection and the birth defect

microcephaly being confirmed, governments and health agen-

cies continue to advise women planning to become or who

are pregnant to avoid travelling to affected areas. The US has

pledged USD 2 billion to combat the virus, with most

measures focusing on preventing mosquito bites, with a vac-

cine for the disease yet to be developed.

Fears increasing over Angola yellow fever outbreak

spreading

As of 15 June, some 3,137 cases of yellow fever have been

reported across Angola, with the outbreak centred around

The Ebola epidemic in West Africa in 2014-2015 highlighted the disruptive nature of disease

outbreaks and the long-term effects on local infrastructure, economic development and health

outcomes. With exponential population growth and the increasing movement of people, disease

outbreaks will be increasingly difficult to contain. As such, awareness of health and environment

risks should be an essential component of security manager’s planning.

Issue date: June 2016 Page 27

Luanda. A national taskforce set up by the Angolan govern-

ment is leading the response to the outbreak. A vaccination

campaign has been underway since February, with funds paid

out of the UN’s Central Emergency Response Fund (CERF),

but is having difficulty reaching rural areas. Some nine million

doses of the vaccination have been shipped to Angola, a fifth

of the global supply. The shipped doses are currently enough

to vaccinate around one third of the population, highlighting

the danger of the outbreak spreading.

Regional spread has already begun, with dozens of cases re-

ported in DR Congo and a handful of cases in Kenya and

Namibia. DR Congo is particularly prone to the spread of

an outbreak due to poor border controls, the difficulty of

vaccinating a population spread over a vast territory with

uneven security provisions and a trade in forged certification

undermining vaccination programmes. A yellow fever out-

break is also ongoing in Uganda with 30 suspected cases and

11 deaths in Masaka district and Rukungiri district.

The yellow fever outbreak in Angola is raising international

concerns over the potential for the disease to spread to Asia

which has no past precedent of harbouring the disease. At

least 11 imported cases of yellow fever have been recorded

in China, infecting returning workers from Angola. More

than 100,000 Chinese nationals are present in Angola illus-

trating the potential for the disease to travel back to China.

The disease is spread by Aedes aegypti, the same species that

spreads Zika and dengue fever, which is endemic in an array

of Asian countries. The risk of a full-blown outbreak is very

low, but the potential remains that an infected returnee could

pass on yellow fever after being bitten by domestic mosqui-

toes, thus allowing the virus to be passed on to the local pop-

ulation. At the current juncture, the risk of a local cycle of

transmission becoming established is assessed as low.

Acute food shortage crisis expected to bite in Q3

International aid agencies are warning of a food crisis follow-

ing severe droughts in the Horn of Africa, Southern Afri-

ca, South-East Asia, South America, Central America

and the Caribbean. Droughts since 2015 have been at-

tributed to El Niño, an irregular warming of the Pacific Ocean

that changes global weather patterns, but the full impact of

the phenomenon is expected to be felt in the coming months,

with more than 80 million people in acute food crisis world-

wide. An additional 240 million people are under food stress,

according to a report by the Joint Research Centre (JRC), the

UN Food and Agriculture Organization and the World Food

Programme. The UN estimates that food supplies will only

last until July in affected areas and the food crisis will peak

between December 2016 and April 2017.

In some areas, prolonged armed conflict is also contributing

to the food crisis; some seven million people in Yemen and

six million in Syria, as well as large populations in Afghani-

stan, the Central African Republic, the Democratic

Republic of Congo, Somalia, South Sudan and Sudan.

Although these areas will be a priority for aid agencies, com-

pliant local authorities are not guaranteed, raising the likeli-

hood of a humanitarian emergency in some conflict zones.

Alongside food shortages, disruption in the food supply chain

often leads to mass movements of populations, raising the

associated risk of disease outbreak. In particular, cholera, an

acute diarrhoeal disease usually associated with poverty, poor

sanitation and limited access to clean drinking water, is of

concern during the food crisis brought on by prolonged

drought. Sierra Leone and Zimbabwe, among other na-

tions, are experiencing critical water shortages in their capi-

tals, raising the risk of such diseases spreading.

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