In Other News – May 15, 2020

President Trump has amped up anti-Chinese rhetoric over the past week, floating several potential measures to punish China for the coronavirus pandemic, including demands for reparations, scuttling the trade deal, and forcibly delisting Chinese companies from U.S. stock indices. Any of these steps would represent the extreme end of the foreign policy spectrum, and none is likely to be carried out. But several other headline-making U.S. initiatives point to an increasingly confrontational approach to China across a range of issues. The U.S. Commerce Department has taken aim at the rollout of China’s 5G global network business by effectively blocking Chinese tech giant Huawei from obtaining most foreign microchips. The U.S. has accused China of targeting organizations studying Covid-19 to steal research on treatments, vaccines, and testing. The U.S. federal government retirement fund has postponed a decision to transfer of roughly 11% of its $40 billion in international holdings to Chinese stocks, and the delay may be indefinite. The U.S. Navy upped its presence in an area of the South China sea where a Malaysian drillship had been engaged in a standoff with Chinese vessels. Though warning signals are flashing, escalation to the level of direct conflict or a renewal of a damaging trade war is in neither side’s interest, especially as both countries contend with the coronavirus and its severe impact on their respective economies.

Political stability in Latin America could be threatened as coronavirus cases continue to rise in the region and its economies suffer from the impacts of the pandemic. The IMF predicts an economic contraction of 4.2% for Latin America, deeper than the so-called “Lost Decade” of the 1980s or the decline following the 2008-09 financial crisis. The region’s largest economies Brazil and Mexico, which were both slow to respond to the virus and are now seeing spikes in Covid-19 cases, are likely to take the biggest hit with Brazil’s GDP to contract by 4.7% and Mexico by as much as 7%. Argentina, Chile, Peru, Ecuador, and Colombia – to speak nothing of Venezuela – will suffer economic declines as well given their commodity-dependent, export-driven economies. This is complicated further by their lack of financial flexibility to provide bailouts for their populations and a recent history of social unrest. Chile, Ecuador, and Bolivia all faced anti-government protests in 2019. As Latin America comes out of the public health and economic crisis in 2021, the region is likely to face another period of social unrest and political instability. This could also pave the way for a resurgence of the political left in the region, with a return of left-wing populists like Brazil’s former President Lula da Silva promising increased spending on the public health system and social safety net.

Indian Prime Minister Narendra Modi has announced plans for a relief package totaling more than $260bn to help the country climb out of a deep economic slump as it emerges from a nationwide lockdown to combat the coronavirus. Modi provided little detail on how the funds, equivalent to ~10% of India’s GDP, will be allocated and disbursed. India’s central government-mandated lockdown, stricter than most and implemented early in the detection of infections in the country, has been credited with helping keep infections at a manageable level despite India’s 1.3 billion people and high population density. But it had an outsized impact on the country’s poor, many of whom live hand-to-mouth and lack the resources to carry themselves and their families through a six-week period without work. A slight easing of restrictions has seen throngs of people return to the streets, many flouting social distancing and public health guidelines, with worrying implications for the virus’s trajectory. The massive stimulus plans are welcome news for India, which was already struggling with rising unemployment and slowing growth pre-pandemic. Unfortunately, if relaxing the lockdown leads to a spike in infections as expected, India will need to develop a more sustainable means of limiting the virus’s spread to make the most effective use of its relief package.

This year is shaping up to be the worst in oil industry history. That’s according to Faith Birol, head of multilateral energy advisory body the International Energy Agency (IEA). The IEA has forecast that oil prices will remain below pre-coronavirus levels for at least a year, and possibly multiple years. Oil prices have rebounded somewhat after declining sharply in April and even turning negative in the U.S. Major oil producers around the world committed to a coordinated production cut of ~10 million barrels per day to support prices, and those cuts have already begun to have an effect, but with economic activity still limited by various degrees of lockdown across the globe to slow the spread of Covid-19, recovery is still a ways off. A sustained period of low prices will be a blow to economies whose oil export revenues form the foundation of their state budgets, like Saudi Arabia and Russia. It will even be a drag on a return to robust growth in the U.S., where drilling has fallen off sharply and producers have slashed budgets and laid off workers. However, looking beyond the economic impact, a loss of funding for government activities and services further raises the risk of political instability – possibly even regime change – in already-struggling petro-states such as Venezuela, Iran, and Iraq.