May 16, 2022

What We're Reading:

China continues ‘zero-COVID’ tactics despite economic slump. China’s leaders are struggling to reverse an economic slump without giving up anti-virus tactics that shut down Shanghai and other cities, adding to challenges for President Xi Jinping as he tries to extend his time in power. (PBS)

Finland moves toward joining NATO amid Russian threats. Finland’s leaders Thursday came out in favor of applying to join NATO, and Sweden could do the same within days, in a historic realignment on the continent 2 1/2 months after Russian President Vladimir Putin’s invasion of Ukraine sent a shiver of fear through Moscow’s neighbors. (AP)

Among the many losses of the war in Ukraine: nearly 5 million jobs. Russia’s invasion of Ukraine has wrought significant destruction and disruption, with millions of people displaced as refugees, thousands of civilians killed and worldwide implications for the supply of necessities like food and energy. (NPR)

US inflation rate slows but remains close to 40-year high. Prices slowed in the U.S. in April but the annual inflation rate remained close to a 40-year high, leaving many Americans struggling to afford necessities. (The Guardian)

Sri Lankans running out of food, fuel and medicine. Many of Sri Lanka’s 22 million people are facing acute shortages of food, fuel and medicine as the island nation finds itself battling one of the worst economic crises since it became independent in 1948. (DW)

UK warns ‘no choice but to act’ to change Brexit deal. Britain’s foreign secretary warned the European Union on Thursday that the U.K. will have “no choice but to act” to revoke parts of a Brexit agreement on Northern Ireland if the EU does not show flexibility. (AP)

More oil, slower demand mean world can weather Russian losses — IEA. Lower output from Russia due to the fallout from its invasion of Ukraine will not leave the world short of oil, the International Energy Agency (IEA) said on Thursday, as supply ramps up elsewhere and Chinese lockdowns tamp down demand. (HSN)

Recession fears grow as rising prices hit spending. Higher prices are “beginning to bite,” the U.K. statistics body said, with people spending less and cutting down on car journeys due to high fuel costs. (BBC)

The ripple effects of Russia’s war in Ukraine are changing the world. Far from Russia’s war in Ukraine, stores are running out of cooking oil, people are paying more at the gas pump, farmers are scrambling to buy fertilizer and nations are rethinking alliances. (NPR)

Supply side in focus as mounting snarls weigh on world economy. In the usually routine world of global logistics, the shipping system underpins globalization: Production on one side of the planet, and consumption on the other. (HSN)

Climate chaos certain if oil and gas mega-projects go ahead, warns IEA chief. The world’s leading energy economist has warned against investing in large new oil and gas developments, which would have little impact on the current energy crisis and soaring fuel prices but spell devastation to the planet. (The Guardian)

Global growth worries send dollar to new 20-Year high. The dollar climbed to a fresh 20-year high on Thursday as concerns persisted that central bank actions to drive down high inflation would crimp global economic growth, boosting the currency’s safe-haven appeal. (Reuters)

EU starts considering delay in oil sanctions as Hungary digs in. Some European Union nations are saying it may be time to consider delaying a push to ban Russian oil so they can proceed with the rest of a proposed sanctions package if the bloc can’t persuade Hungary to back the embargo. (Bloomberg)

Costa Rica declares emergency in ongoing cyber attack. After a month of crippling ransomware attacks, Costa Rica has declared a state of emergency. In theory, the measure usually reserved to deal with natural disasters or the COVID-19 pandemic would free up the government to react more nimbly to the crisis. (AP)

Finland and Sweden recently have announced plans to apply for North Atlantic Treaty Organization (NATO) membership, a move not taken kindly by Moscow. Russian President Vladimir Putin has been vocal about his opposition toward NATO expansion, blaming it for one of the reasons he invaded Ukraine. “Moscow warned Finland on Thursday it would face consequences as it seeks to apply for NATO membership,” reads an article from Reuters.

But Finland and Sweden, which both have long remained neutral, say Russia’s invasion of Ukraine has left them little choice but to join the alliance for protection, per a recent report from the Swedish government. “NATO is a key actor for European and transatlantic security,” the report reads. “NATO has made a major contribution to international crisis management. With Sweden as a member, security in northern Europe would be higher on the NATO agenda.”

The two nations also say joining NATO would help stabilize the Nordic and Baltic regions, particularly the Baltic Sea. "It is clear that [with] the accession of those two countries, the Baltic Sea region airspace and maritime space will become a new, coherent space that is belonging to NATO nations," Undersecretary for Defense Policy Tuuli Duneton said during a press conference. "So, there is much room for future cooperation. And I think we will be stronger together against Russia."

However, it is unlikely the decision for the pair to join NATO will be taken lightly by Russia. In April, Putin warned that if Sweden or Finland joined the alliance, “Russia would deploy nuclear weapons and hypersonic missiles in a European exclave,” per Reuters.

Turkish President Recep Tayyip Erdogan also came out against the move for Sweden and Finland to join NATO, but for different reasons. Erdogan noted that Turkey could use its membership to veto the admission of the two countries. “The Turkish leader explained his opposition by citing Sweden and other Scandinavian countries’ alleged support for Kurdish militants and others whom Turkey considers to be terrorists,” reads an article from the Associated Press.

Sweden’s Social Democrats is scheduled to have a parliamentary debate about joining NATO today (Monday). If the party backs joining, the government could call a vote about sending through an application. And Finland intends to apply “without delay.” “Nato Secretary General Jens Stoltenberg said they would be welcomed if they did apply, and joining would be quick,” per the BBC.

The war in Ukraine is shaking the global economy and raising uncertainty about the outlook for Latin America and the Caribbean. The impact is being felt in Latin America through higher inflation that is affecting real incomes, especially of the most vulnerable. Policymakers are reacting to this challenge by tightening monetary policy and implementing measures to soften the blow on the most vulnerable and contain the risks of social unrest.

But there are other risks looming. A possible escalation of the war could eventually lead to global financial distress and tighter financial conditions for the region. In addition, the ongoing tightening of monetary policy in the United States, as the Federal Reserve takes a more hawkish stance, could eventually affect global financial conditions.

Higher global and domestic financing costs can accelerate capital outflows and represent a challenge for the region, given large public and external financing needs in some countries and the limited resources to finance investment in the region. Any greater growth deceleration in China, because of the pandemic or other reasons, also could have an impact on key export prices and trade in the region. All these risks cloud growth prospects for Latin America and require policy action.

Latin America’s Rebound Poised to Slow

Even before the war, the region’s recovery from the growth-sapping pandemic was losing momentum. After a sharp rebound last year, growth is returning to its pre-pandemic trend rate as policies shift, slowing to 2.5% for 2022. Exports and investment are resuming their role as main growth drivers, but central banks have had to tighten monetary policy to combat an increase in inflation.

We forecast Brazil’s expansion will slow to 0.8% this year following last year’s growth of 4.6%. Mexico will decelerate to 2%. Colombia will likely post a lower deceleration with growth at 5.8%. Growth in Chile and Peru will be 1.5% and 3%, respectively, pointing to very significant reductions relative to their prior year’s double-digit rates.

Responding to Higher Food and Energy Prices

Poverty and inequality remain key concerns as well given that the increase in inflation has an uneven impact on the population. The most vulnerable groups in the region are being hit hard by the increase in basic food and energy prices, while still struggling to recover from the economic impact of the pandemic. Indeed, since the war began, several countries in the region have acted to contain the effects of rising prices on vulnerable groups—ranging from tax and import tariff reductions to price caps or social transfers.

Close to 40% of countries have introduced new measures, mostly on the tax side, with an estimated average fiscal cost equal to 0.3% of gross domestic product for this year.

To ensure social cohesion and reduce the risk of social unrest, governments should provide targeted and temporary support to low-income and vulnerable households, while allowing domestic prices to adjust to international prices. This would help vulnerable groups and contain fiscal costs, while also incentivizing production and restraining consumption. In countries with well-developed social safety nets, access could be expanded to temporarily cover larger groups of the population.

Where safety nets are not well developed, governments can implement temporary mechanisms to smooth the pass-through of international price surges to domestic prices. Although this strategy would protect households from the volatility of commodity prices, it may also have a significant fiscal cost while distorting price incentives for consumers and producers.

Countries benefiting from improvements in their terms of trade—a measure of prices for a country’s exports relative to its imports—may find it easier to finance these new measures. However, any additional fiscal space should be used wisely given the unusually high risks surrounding the global recovery and the evolution of commodity prices, as well as the increasing costs for government financing.

Inclusive Consolidation Is Needed

With public debt-to-GDP ratios above pre-pandemic levels and borrowing costs rising amid higher local and global interest rates, countries will need to ensure the sustainability of public finances to help preserve credibility and rebuild fiscal space. However, it will be equally important to implement measures that protect the most vulnerable.

This will require a strategy that focuses on inclusive consolidation. Spending on social programs, health, education, and public investment should be protected, while implementing tax reforms (such as strengthening personal income taxes) that will bolster growth in an inclusive manner and help countries maintain fiscal sustainability.

Reprinted with permission IMF Blog.

Rising competition for supremacy over soil, sea and space will fuel future global geopolitical tensions as nations seek to stake their claims on sea-based borders, previously untapped mineral resources and the all-but-unregulated cosmos, according to a new report from insurance broker and risk advisor, Marsh.

The Political Risk Report 2022, which is published by Marsh Specialty, notes that while land borders between countries remain key delineators of political risk—as exemplified by the current Russia/Ukraine conflict—competition for ocean territory, minerals and space will increasingly influence interstate relations.

“The conflict between Russia and Ukraine is a stark reminder of how quickly geopolitical risks can escalate and have a terrible local humanitarian impact as well as affect businesses and investors around the world,” said Nick Robson, head of credit specialties, Marsh Specialty. “However, this is also a moment for businesses and investors to consider how developments in the environments of sea, space and soil could influence future geopolitical tensions between countries and regions.”

Oceans cover more than 70% of the planet. With more than 80% of the sea depths unexplored, there remains immense potential for exploration and investment to meet the growing demand for food and raw materials, the report notes. However, this “blue exploration” raises the risk of heightened geopolitical tension given that the broader challenge of climate-related risk is significantly dependent upon the care of the oceans and most potential resources are located in exclusive economic zones (EEZs), which cover territorial rights offshore that may be contested, especially where they overlap.

“Just as companies may look to political boundaries to describe degrees of risk across countries and regions, they may also look at oceans and their bounty as drivers of political risk,” the report says.

Demand and competition for strategic minerals such as cobalt, copper, lithium, manganese, thorium, titanium, uranium and vanadium, which are crucial to the energy transition, also will shape future geopolitical risk, the report notes. With just a small number of countries, often with autocratic systems of government, producing these minerals, alternatives such as mining the sea bed are increasingly being investigated. However, this exploration could cause irreversible damage to underwater ecosystems and further disrupt already fragile global food and supply chains.

“Mineral production is concentrated in relatively restricted areas of the planet, with well-known political risks,” the report notes. “The search for new mineral suppliers may produce additional consequences.

The growth in the space economy, when combined with the increased militarization of space, also could risk an escalation of geopolitical tensions. This could be further exacerbated if there is a failure to collaborate on a robust governance framework as more countries turn to space for intelligence gathering, navigation and military communications, the report says. Within the next decade, the low Earth orbit could host 100,000 satellites, leading to an increase in orbital debris. The impact of even a small piece of space junk, Marsh notes, could seriously damage orbiting equipment and risk triggering conflict.

Week in Review Editorial Team:

Diana Mota, Editor in Chief

Annacaroline Caruso, Editorial Associate