Forward-looking updates from GeoQuant's high-frequency political risk intelligence platform.
Israel’s Government Instability Risk continues to spike going into next week’s snap election, reinforcing our prediction since May that PM Bibi Netanyahu and his Likud party will lose power following the poll. In short – and despite Netanyahu’s recent pledge to annex territory in the Jordan Valley if he is re-elected – the current Likud-led government is too weak to survive the election. Per below, Government Risk (yellow line) is at an all-time high in our nearly 7-year time series – higher than before Netanyahu/Likud’s narrow 2015 win and clearly rising since the recent 9 April election. Indeed, like Government Risk, note that Institutional Support Risk is also (i) at a new peak; and (ii) running significantly higher than projected the day after that election (projections noted by the dashed line), demonstrating how Netanyahu’s failure to form a government in May, related opposition from rightist rival Avigdor Lieberman/Yisrael Beiteinu, and the persistent threat of a corruption indictment has undermined his re-election [NB: Institutional Support Risk measures the incumbent's support from key political, legal and administrative institutions]. Mass Support Risk, is also running higher albeit below a 2017 high given Netanyahu’s strongman appeal.
Brexit Delayed Is Not Brexit Denied
Since 2017 GeoQuant data has forecast a soft, managed Brexit as the most likely outcome given that parliament is sovereign in the UK and neither the Remain nor hard Brexit options have the breadth or depth of support in the House of Commons to prevail. As always, this analysis is reflected in and guided by our data. Per below, UK Institutional Stability Risk, though still elevated recently, remains far below its Brexit referendum peak, while Government Risk – an inverse measure of the current government’s strength – has hit a new post-referendum peak. Both have risen since Johnson became PM, with the dotted lines below indicating our forecast at that time. Together these have consistently indicated that Johnson’s government was too weak to force a no-deal Brexit, and any Brexit would ultimately require a May-like managed deal.
Of course there are still three ways this saga plays out: extension, a deal, or a no-deal hard Brexit. All three options likely lead to early elections. As previously argued, Johnson is making noisy claims about forcing a no-deal Brexit as a negotiating maneuver, both vis-à-vis the EU and the House of Commons, because his bargaining position is weak. Striking a deal with the EU is his best option at this point, if his goal is to both get Brexit and stay in power. By contrast, getting pushed into an election likely leads to a softer Brexit than he prefers as well as putting him out of power.
Data Spotlight: Introducing GeoQuant's "Contingent Risks" Functionality
U.S.-China Trade Dispute: A Use-Case Demonstration of Our New "Contingent Risks" Functionality
Our recently released “Contingent Risks” functionality – now available via our webapp – offers a new set of bilateral data series that summarize the direction and magnitude of geopolitical risks between any given pair of countries in real-time, based on the flow of recent geopolitical developments common to both countries. The resulting Contingent Risk score is designed to help answer the following questions: (i) are geopolitical risks in one country linked to geopolitical risks in another?; and (ii) by how much – and in which direction – are these linked (or “contingent”) risks moving? Here, we provide a use-case demonstration of the Contingent Risk functionality using the U.S.-China Contingent Risk score from January 2018 through 2020 alongside of trends in the USD/CNY exchange rate.
As can be seen in the figure below, U.S.-China Contingent Risk has escalated substantially from January 2018 onwards, reflecting a marked increase in bilateral tensions due to the ongoing trade dispute. More recently, this past week’s announcement that China would grant several U.S. products a one-year exemption from Chinese tariffs – and President Trump’s subsequent announcement that he would delay the five percent increase in existing tariff rates (from 25% to 30%) on $250bn of Chinese imports – resulted in a slight decline in the countries’ contingent risk score.
Despite this momentary blip, we continue to forecast elevated contingent risk between the two countries heading into the next round of bilateral talks in October, suggesting that the broader non-tariff aspects of the dispute are unlikely to be resolved in the short-term, and echoing our longstanding forecast surrounding the outcome of the trade dispute based on the trajectory of our Investment/Trade Policy Risk indicator. In short, while some tariff relief is possible -- particularly in the run-up to the U.S. 2020 presidential election – resolution of the broader dispute (which encompasses a wider set of concerns linked to national security, industrial development, and technological innovation) – remains unlikely prior to the election.
Per the dashed line in the figure below, we note in addition that the USD/CNY exchange rate has increased in lock-step with U.S.-China Contingent Risk, reflecting the gradual and carefully managed yuan depreciation of the past several months. Our forecast of rising contingent risk suggests that further depreciation remains a possibility in the near-term.
Market Movements | Spotlight on Thailand/USDTHB
Top-line Political Risk for Thailand has remained in tight positive correlation (r =+.67) with the USD/THB -- implying baht strengthening as risk decreases -- since former junta leader Prayut Chan-o-Cha was elected as civilian prime minister on 5 June 2019. The decline in top-line Political Risk following the return to civilian rule has boded well for the baht’s strength relative to the dollar, while simultaneously raising the usual concerns about export competitiveness. Despite the recent bout of baht strengthening, our data suggests heightened potential for countervailing pressures driven by rapidly rising Institutional Risk to emerge over the coming weeks following yet another defection of a House micro-party from the ruling coalition, leaving Prayut with an increasingly slim two-seat majority in the House (252 seats for Prayut vs. 248 for the opposition). The baht has thus far remained unresponsive to rising Institutional Risk linked to the defections (as reflected by a negative correlation on 26-day rolling basis). That said, over the longer-term (i.e. from June 2013 - 2019/YTD) we note an exceptionally strong positive correlation between Institutional Risk and the baht (r = +.81) -- the strongest correlation observed across our full indicator set during the same time period -- and early potential for an inflection point into renewed positive territory to emerge on a 26-day rolling basis in the coming weeks.
The Month Ahead | Political Risk
The figure below provides our 50-country forecast of top-line Political Risk for the month ahead (today through 11 October). Red (green) bubbles indicate increasing (decreasing) risk. Full trend lines available on the app. Custom insights available for clients.
TOP 5 (Upward-Trending Risk) | Venezuela, Ukraine, Peru, Mexico, Turkey
Bottom 5 (Downward-Trending Risk) | Poland, Iran, Egypt, Chile India
