A Divided U.S. Tops Pandemic in Eurasia’s List of Market Risks

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Deepening divisions in the U.S. as President Donald Trump refuses to accept the election result tops Eurasia Group’s list of top risks to markets in 2021, beating out even the pandemic and its drag on the economy.

President-elect Joe Biden may face challenges never seen before by a Group of Seven leader, with about half the country seeing his leadership as illegitimate, Eurasia President Ian Bremmer and Chairman Cliff Kupchan said in a note.

At the same time, the lack of global leadership on how to address the economic consequences of Covid-19 means “everybody has a problem,” Bremmer and Kupchan said.

Developing nations will be slow to receive vaccine doses, dragging on a recovery and deepening the risk of a debt crisis as fiscal pressures mount and lenders become more discriminating. Brazil, South Africa and Turkey will probably be early indicators of emerging-market distress given their large economies, weak fundamentals and reliance on international capital.

A Divided U.S. Tops Pandemic in Eurasia’s List of Market Risks

“Emerging-market economic crises could undercut nascent recoveries in advanced markets and significantly decrease global growth; the inequitable recovery will drive political instability,” they said. “This year will reveal that the lingering symptoms of Covid-19 threaten not just our health but also the global economy.”

The risk for social unrest and political instability and populism is also higher.

Here’s a look at the firm’s top risks:

1. U.S. Division

Trump’s refusal to accept the outcome of the election underscores a deep split in the U.S. While Biden may win some political capital with Republicans if a smooth roll out of vaccines helps control the pandemic, he still faces serious challenges.

2. Lingering Virus

Vaccines should help the world regain a sense of normalcy in 2021, yet Eurasia expects “countries will struggle to meet vaccination timelines, and the pandemic will leave a legacy of high public debt, displaced workers, and lost trust.” Underdeveloped infrastructure in emerging markets will slow vaccination progress, especially for shots that must be kept cold. Plus, developing countries won’t get large numbers of doses until their wealthier peers get their share, which will mean tougher travel restrictions and slowing growth.

3. Going Green

With the U.S. poised to rejoin net-zero carbon emission goals and other climate initiatives under Biden’s leadership, “there will be costs for companies and investors from greater climate ambition and risks from overestimating how coordinated new climate plans will be,” according to Eurasia. China, the European Union, the U.K., Japan, South Korea and Canada are also committed to making their economies greener.

4. Broader U.S.-China Tension

While the relationship between the world’s top economies will be less confrontational in 2021, tensions may reignite due to a spillover of stresses from the U.S. to its allies, competition to distribute vaccines to other countries and a rivalry in green technologies.

5. Data Reckoning

Competition between the U.S. and China will be center stage as the flow of digital information across borders slows, weighing on businesses that rely on data. Beijing will probably keep reducing its reliance on external technology, while the U.S. works to keep its citizens’ personal information secure.

6. Cyber Risks

The potential for attacks and stolen data has risen as more people access technology from home and both governments and the private sector make almost no headway in writing global rules for state behavior in cyberspace. It may also be cause for a downturn in U.S.-Russian relations as Biden enters the presidency with a lower tolerance.

7. Turkey on the Edge

While Turkey was able to avert a crisis last year, the nation remains vulnerable going into 2021, according to Eurasia. President Recep Tayyip Erdogan may again face pressure in the second quarter and look to spur expansion. Doing so could stoke social tensions.

8. Tough Year for Oil

Protests may intensify and reforms could slow as energy-producing nations in the Middle East and North Africa face further challenges. Iraq, which gets the vast majority of its government revenue from oil, will struggle to cover basic spending or stop its currency from depreciating. Algeria will hold elections, but low energy prices will make it hard for the government to reform.

9. Merkel’s Legacy

German Chancellor Angela Merkel has been Europe’s most important leader, and her departure later this year will drive the continent’s top risk as it weakens the bloc’s leadership, according to Eurasia.

10. Latin America in Trouble

Latin American nations could run into sharper versions of the political, social and economic issues they faced before the pandemic. These risks will play out through legislative elections in Argentina and Mexico, as well as presidential votes in Ecuador, Peru and Chile. Social upset could lead to more populists candidates, especially in Ecuador, where a departure from moderation could jeopardize the country’s IMF program and economic stability.

©2021 Bloomberg L.P.

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