Geopolitical predictions for 2021
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EXPORT, INSURANCE AND LONG TERM FINANCE
10.2
Geopolitical predictions
for 2021
2021 is likely to witness emphasis on multilateralism,
coupled with rising military
an acceleration of
and economic powers that feel
ongoing geopolitical the need to bolster their own
shifts, while some defense capabilities in light
emerging markets may of rising emerging security
experience significant challenges, could ultimately lead
growth tailwinds to the regionalisation of power
of centres, or least continue the
As we all look towards the year evolution towards that end.
ahead and try and put the global
recession of 2020 behind us, I
wanted to outline The Hartford’s Political experts anticipate the
perspective for the year ahead. US refocusing on traditional
In respect to geopolitics we alliances, reposition troops in
SHAILESH KUMAR anticipate that the shift towards South Korea and Germany, and
Head of Country, Credit and reaffirming its commitment to
the regionalisation of power
Economic Research NATO. However, this reversion to a
The Hartford centers will continue, and
potentially accelerate. Meanwhile, “robust” US engagement strategy
on the economic front, many is unlikely to result in a hardline
industry experts expect emerging approach towards China, at least
markets to witness a strong year. not initially. Many believe that the
US will not want a confrontational
Geopolitics – Regionalisation to or contentious relationship with
accelerate Beijing at the start of a new
administration. This does not
One of the key forces driving imply an outright reversal of the
geopolitics in 2021 will likely stem past administration’s policies with
from a change in US leadership respect to China, as prior policies
as this could yield significant affecting tariffs and restrictions
shifts on the foreign policy front. on investments and China’s
Specifically, it is anticipated tech sector are likely to stay.
that the year ahead, and But it does mean a potentially
thereafter, will be hallmarked less bellicose approach (at
by an increased US emphasis least publically), and instead
on multilateralism. This means one with more dialogue at the
less solo proclamations on the sub-executive level (there are
US’s intentions, fewer surprises indications that members of the
and quick decisions, advanced new US cabinet may function as
telegraphing of major policy backdoor diplomats with China).
changes, and working with The shift in tone alone could also
traditional allies to promote be interpreted by some as the
foreign policy goals, all while US opting to be “softer” on China
attempting to bridge divides than what was seen in recent
with emerging partners. An years.
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However, over time expect any in Europe to work with China on own capabilities, recognising that
“softer” US approach towards select issues, could then mean the world’s “approach” towards
China to give way to a more that sections of Asia including China is not binary.
aggressive posture. This is Vietnam, India, Taiwan, Australia,
particularly true since China is and to a lesser extent Philippines Further examples of this
largely a bipartisan issue in the and Japan, question the world’s regionalisation could be seen
US, with concerns ranging from commitment to “containing” in the MENA region. Turkey has
security, to intellectual property, Beijing, given that China is a recently shifted its foreign policy
business, trade, investments, preeminent geopolitical and seeking closer defense ties with
and labour standards. But while security concern for these Russia, despite Ankara being a
the US shifts from a hard line, to nations. As a consequence, these member of NATO. This is partly
soft line, and back to a medium countries may be incentivised driven by Turkey’s desire for
line approach with China, there to deepen their regional strategic dominance in the
will of course be other nations cooperation, while concurrently region, which would otherwise
that choose to court Chinese bolstering their own defence come at the expense of Saudi
engagement and proximity to capabilities. Amongst these, Arabia. Both nations are US allies,
Beijing. These include Pakistan, India and Australia are best but ties with each could well
Iran, and Venezuela. Then there positioned to present a credible slide in the coming years. This in
are countries that might not military deterrence (given their turn could embolden Turkey and
be allies or partners of China, existing capabilities), whereas Saudi Arabia to further bolster
but will continue to seek areas Japan could continue down the their own military capacity as
of cooperation, including the path of revising its constitutional they seek to be the power centres
European Union, Turkey, Russia, commitment to pacifism as the of the region. The bottom line is
and some nations in Africa. nation strives to build robust that in each region, the potential
military offensive capabilities for power centres to emerge
An initial soft approach towards down the road. What this could accelerate in the coming
China in the US (which gives framework represents, in short, year.
way to an eventual harder line), is a regionalisation of power
coupled with more willingness structures as countries build their
Credit - IMF: World Economic Outlook 2021
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108EXPORT, INSURANCE AND LONG TERM FINANCE
A big year for emerging markets In the emerging markets, by hold sooner, fiscal spending may
comparison, it seems that be curtailed sooner. Meanwhile,
On the economic front, economic shutdowns are less of an issue we are already seeing indications
advisers no longer anticipate a going forward. There is not time and hearing about the potential
V-Shaped economic recovery to go into all the numbers here, for inflation to pick up amongst
in the first part of 2021 and but generally the rate of death these nations. Part of this may be
have a slightly more sanguine per 100,000 in many emerging attributed to supply dislocations,
outlook than others. Of course, markets is significantly lower coupled with demand surging
experts hope to be wrong, and than the developed world. This, faster than anticipated, coupled
although growth could pick up amongst other factors, leads to with rising commodity prices.
in the second half of the year less support for future shutdowns In response, it’s possible that
resulting in strong annualised in these markets, and in turn some emerging market central
data due to base effects, we are implies that emerging markets banks start to tighten rates in
not assuming it to be a given. But could see an economic recovery 2021, adding upward pressure on
we could see a division between sooner than other areas. their yields while strengthening
large emerging markets and the their local currencies. These
developed world. There are a few The differing economic outlooks trends, coupled with a weaker
reasons for this: could also result in differing dollar, could result in increased
policy responses. If the developed capital flow to emerging markets
First, in the developed world, the world fails to see a V-shape as investors seek yield, thereby
era of COVID-19 shutdowns will recovery materialise, or even strengthening emerging market
not necessarily cease at the start some derivation of it, then we currencies and assets.
of this year, especially outside can anticipate US fiscal and
the US, due to possible delays in monetary policy to remain Essentially, emerging markets
vaccine distribution and rising accommodative for longer. We could be poised to outperform
case levels. Second, shutdown already know that the Fed will in 2021, particularly those that
related headwinds place even be on hold and keep rates at are large, have diverse sources
more pressure on policy support, 0 percent for the next two or contributing towards growth and
which gives rise to policy misstep three years, per their comments revenue, and have favorable
related risks. If countries are slow in September. However, there debt metrics. In fact, our team
to approve fiscal stimulus, or the is plenty they can do on the has a set of models that create
distribution of it, it could present quantitative easing front, and scores for countries on a host of
an additional drag on growth. could potentially continue or perils, and our macroeconomic
Third, policy missteps could also even ramp up purchases and scores for select emerging
manifest in the form of asset security maturities over the next markets are showing the largest
bubbles – ongoing monetary year. This could be particularly numerical improvements when
stimulus has forced investors into true as Treasury security supply using 2021 economic forecasts.
risk assets, which have already increases given the rise in This indicates the potential for
inflated prices. This in turn could aggregate US debt from the macroeconomic stability in these
result in increased asset price 2020 stimulus packages. This in names. The risk to this though is if
volatility when/if prices come turn could suppress yields, at there is a bursting of asset prices
down and the bubbles burst. least in the front end (we could in the developed world, for the
Fourth, when/if economic growth see steeper yield curves). Higher reasons noted above. Inevitably,
begins, fiscal stimulus support government spending, loose this would affect emerging
may be eased and we could start fiscal and monetary policy, low markets too.
to see a wave of bankruptcies for front end yields, and increased
entities that no longer have fiscal central bank balance sheet With that said, many expect,
support. Accordingly, it is possible expansion could naturally be and hope, that investors do
that the economic recovery dollar negative, providing support not paint all emerging markets
remains choppy with a few fits to select emerging currencies with the same brush. The larger,
and starts, which could take us all and assets. diversified, and fiscally strong
the way through 2021. emerging markets with ample
In emerging markets, especially funding sources will likely witness
those where/if the recovery takes greater capital flow and thus
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109TRADE FINANCE TALKS
asset appreciation, even in cases be more discerning of actual This then means that we
where they have high nominal fundamentals, at least more so could see a division between
debt levels (i.e. Brazil). However, than what we saw in the summer emerging markets too, with
smaller markets that have of 2020 when just about every some significantly outperforming
their economies concentrated asset class in every emerging others. In other words, while
in one or two sectors, and market saw demand. we are positive on emerging
are highly indebted, may risk markets, fundamentals matter,
having investors pass them Increasing indebtedness is a and some will potentially perform
over. The latter group of nations growing issue, which could
better than the rest.
could see their refinancing continue into 2021, and we expect
costs increase, and further investors to recognise it as such,
expose them to sovereign thereby investing mainly in the
headwinds. Accordingly, we stronger emerging markets that
anticipate investors to likely exhibit strong fundamentals.
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