Political Risk and the Trump Administration: From North Korea to Syria
As we were wrapping up our March ratings and forecasts, developments affecting North Korea were gaining steam. Just weeks before a scheduled April 27th meeting between Kim Jong Un and South Korea President Moon Jae-in – to be followed presumably in May by a get-together with President Trump – the North Korean leader railed into Beijing to see China’s Xi Jinping.
The meeting between the two Asian leaders is instructive insofar as it presents an entrée into the interests of each of the parties. After fairly successfully distancing itself from Beijing for the better part of the last several years, Kim was able to ramp up a nuclear program that looks more impressive than most would have assumed. As such, Kim now has the ‘stick’ to be seen in many ways as an equal in regional negotiations – a long-desired goal. Clearly, in suggesting that denuclearization of the North is a possibility, Kim would be interested in seeing an end to the sanctions, as well as other forms of economic relief, including aid and loans.
China, which apparently was a tad anxious of being sidelined after it was announced early in March that Trump had agreed to meet Kim, wants to assert its strategic interests. Beijing doesn’t feel too comfortable with US troops in close proximity and is reportedly less-than-happy that South Korea hosts the US’s anti-ballistic missile system intended to shoot down short, medium and intermediate-range missiles (The program is called Terminal High Altitude Area Defense – THAAD). Coupled with recent tariffs imposed on Chinese steel imports to the US by the Trump administration, it’s not difficult to see why China wants to avoid being caught in what appears to be a rather clever policy of containment by the US.
While South Korea surely would wish to have tensions along the peninsula eased, the US is in a far more interesting and seemingly dominant position to both North Korea and China. Trump seems unrelentingly aggressive towards Kim, and approaches the May talks with South Korea firmly aligned following a trade deal (that originally went into effect in 2012) that opens South Korea’s market to American cars, extends tariffs on South Korean truck exports, and the amount of steel the South can sell into the US. South Korea’s exporters are relieved that none of the tariffs that were initially lifted under the 2012 deal will be re-imposed.
Speaking of China, one of the factors that may play into the relative strength of the country in the region is the state of the economy.
Officially-produced data from the National Bureau of Statistics purportedly show the economy growing by 6.9% in real terms last year, stemming from a construction boom and strong exports as well as domestic consumption. Industrial production rose by 6.6%, retail sales by 10.2%, and exports climbing 7.9% were eclipsed by import growth running at 15.9%.
However, a riskier financing environment, causing borrowing costs to rise, and a cooling housing market are among the factors that are expected to slow the economic expansion. The authorities are also continuing to scale back heavy industry to produce an economy that is more reliant on consumption, reducing the reliance on coal and steel production and state-owned enterprise production over the long-term.
The effects of this transformation are apparent from the diminishing importance of North-East China as an industrial heartland, where a high concentration of bad loans and zombie companies are exacerbating financial sector balance sheet risks. Last year, GDP in recession-hit Liaoning, the north-eastern province bordering North Korea contracted, and the area is proving unable to attract investments, although political prerogatives mean that many agricultural, steel and petroleum companies still receive government subsidies as the authorities balance the desires to avoid a sharp slowdown with addressing the debt problem and enforcing tighter pollution control.
Over the next couple of weeks, the issues affecting Asia will be overshadowed by Trump’s threat (which, I suspect, will be carried out) to enact a military response to Syrian President Bashar al-Assad’s presumed use of chemical weapons in an attack earlier in April on the town of Douma, just outside of Damascas.
Russia – which is involved in Syria’s civil war – said that it would shoot down any US missiles.
The move by the US is not unprecedented as it launched 59 Tomahawk cruise missiles at a Syrian airfield last year in response to another chemical attack. The Pentagon has otherwise limited its involvement in Syria to eliminating the Islamic State largely through representative or proxy forces.
This one looks quite serious as both France and the UK appear set to join the US in the offensive. However, the multilateral community is a tad more engaged this time around and so perhaps the prospect of a full-out confrontation between Washington and Moscow will be limited. Several ‘smart’ missile attacks, similar to last year, followed by diplomacy of sorts is being penciled-in by our analysts. For example, the UN’s World Health Organization has asked for access to the region to verify reports that 70 people had died in the chemical attack. Its work might provide some pause before the hostilities get out of hand, and offer the sufficient political cover for the US, its allies, and Russia to form a more measured response.
Turning to our March ratings, we see a slight but general deterioration in economic confidence through much of Europe and some interesting currency movements, in which PRS’ proprietary trading outfit has established positions. Significantly, PRS is long the Brazilian real and the Chilean peso, while addressing short positions in the Argentina peso, the Pakistani rupee, and Turkey’s lira.
Clients of PRS and those that receive our corruption data by other means should note that our Anti-Corruption and Investment Climate Group (ACIC) has kicked into high gear. Significantly, the group is unique to the field and works with anti-corruption agencies and others to better understand their efforts at eradicating graft and improve their respective business and investment climates.
Moreover, the work of the ACIC is supported by ICRG’s corruption data that are second-to-none, globally. Indeed, recent studies on our data have shown that our corruption scores are:
• strongly correlated (0.8) to those of Transparency International in its Annual Corruption Perceptions Index;
• significantly correlated to inflows of foreign direct investment; and,
• shown to help accurately price sovereign bonds, even for countries that have never tapped the international capital markets.
Additionally, a recent study by the IMF found that an increase in ICRG’s corruption index by one unit (the index ranges from 1-6 points) may raise per capita GDP growth by about one percent!
Finally, beginning in April we will be introducing ICRG Plus – a 16-country supplement to the existing ICRG data. The following countries have been added to the ICRG roster:
• Macao (China)
• Cayman Islands
• British Virgin Islands
• Marshall Islands
Be sure to call our NY office for further details (315-431-0511) and to take advantage of some introductory prices.
Finally, our March ratings saw the risk profiles of 52 countries adjusted, affecting over 70 individual political risk metrics.