Global Risk Monitor

2. US deflationary trap

The danger that the United States could experience a deflationary trap -- similar to Japan’s experience after the collapse of its equity and property price bubbles in 1989-1992 -- is currently very low. However, were this to occur, asset prices of all kinds would come under intense pressure, and the consequences for long-term GDP growth would be severe.

3. End of the euro

The Greek, Irish and Portuguese debt crises have demonstrated how interconnected European monetary union (EMU) economies have become through cross-border bank lending, however unwise that may have been in some cases. Sovereign default is being strenuously avoided, largely because of the unforeseeable ramifications on EU financial systems. That is why the ECB is intervening in bond markets, well outside its mandate as the guarantor of monetary policy, and the EU has joined the IMF in funding bailouts.

If the EMU does collapse, or if the euro-area contracts by jettisoning the weaker economies, it will be seen as a political defeat, whatever the economic arguments. While still highly improbable, the end of the current legal or economic framework of the EMU is no longer unthinkable.

4. Saudi popular uprising

Saudi Arabia has so far remained insulated from the Arab uprisings of 2011, thanks to an effective crackdown on initial signs of dissent, and a generous subsidy programme that has in effect bought off potential protesters. Yet because of the extreme potential consequences of such an uprising taking hold in Riyadh, we are monitoring the risk of mass civil, political or social unrest. A popular uprising among the Sunni majority would encourage comparable regime challenges throughout the GCC and revolt by the Saudi Shia community. This scenario could also spark a sharp spike in global oil prices and a major weakening of the ruling House of Saud.

5. Iran military conflict

Iranian threats to close the Strait of Hormuz risk exacerbating its battle for influence with Saudi Arabia across the Middle East and the wider Muslim world. Lebanon has long been the traditional arena for Iranian-Saudi regional rivalries, but the Arab uprisings of 2011 have widened this arena to include Bahrain -- where Saudi troops were instrumental in putting down a Shia uprising against the Sunni minority monarchy -- and Syria, where Saudi Arabia has led Arab diplomatic efforts to oppose the embattled pro-Iran regime of Bashar al-Assad. Iran’s influence in post-Saddam Iraq also deeply rankles Riyadh.

The conflict is currently in a soft phase, playing out through state-owned media, financial and materiel support for rival local actors on the ground, and pitched rhetoric from official and ‘semi-official’ voices in both camps. However, an intensification of this rivalry into full-scale military conflict would unsettle the politics and economic development of the entire region.

6. Pakistan state collapse

A failed state in Pakistan that created space for non-state actors to pursue their own agendas regionally and internationally would destabilise the region, enable militant organisations to orchestrate terrorist activities within and beyond the country, and put the safety of its nuclear installations at risk.

While many actors have political, strategic and economic interests in the survival of the Pakistani state, they may not have the power to ensure it. We are monitoring the risk of state collapse in Pakistan, defined as:

• the disintegration of the military as well as of federal and provincial-level government institutions;
• eruption of widespread political violence following the military’s collapse; and
• an overt rejection of norms governing the state, such as the law and the constitution.

7. Russia authoritarian resurgence

Vladimir Putin is currently facing the most serious challenge to his authority since he came to power twelve years ago. While there has been much speculation about the possibility of a ‘Slavic Spring’ -- where Putin would resign under mounting popular pressure -- such a scenario is not necessarily destabilising, nor is it inherently risky for foreign investors and interlocutors. The real risk arises from the possible resurgence of the ‘siloviki’ -- the ‘men of force’ in the elite with backgrounds in and loyalties to the security agencies.

This would entail:

• the ouster of most (if not all) of the reform-minded economic liberals who currently exercise substantial influence on policy-making;
• a further increase in populist spending on the military and security services; and
• a crackdown on re-emergent political pluralism in the streets and on the internet.

One consequence would be an intensification of resource nationalism, increasing the risk of large-scale expropriation and greatly diminishing any prospects for an improvement in the business environment.

8. North Korea regime implosion

The death on December 17 of Kim Jong-il, North Korea’s leader since 1994, increases risk on a volatile peninsula that has long been a major potential flashpoint in East Asia. The surprisingly rapid acclamation of Kim’s son, Kim Jong-un, as ‘great successor’ is a façade. Young and untried, Kim Jong-un is a figurehead for older elites, whose unity may not hold in the face of mounting pressures, both domestic and external.

This may cause a hitherto tight regime to begin to unravel, fracture or even implode. If contained, it could stop at a coup, which thereafter stabilises the situation via reforms. However, it might spiral out of control, threatening first Kim family rule, then the power of the Party and army (which may be at odds with each other), and finally the existence of North Korea as a state.

9. South China Sea conflict

The risk of a conflict has increased significantly since 2011, as members of ASEAN have become seriously concerned that China’s assertive behavior implies a willingness to enforce its dominance and claims in the South China Sea.

Conflict could arise from a local confrontation over fishing rights, resource exploration rights or any work being done to the disputed islets escalating unwittingly as assertive behavior by officers on one side is met by equally robust responses on the other. No government in South-east Asia wants a military conflict with China. Nor does the Chinese government want one with any of them. But the high emotion involved and tendency for Chinese officers to behave assertively means the risk of an unwitting conflict is no longer out of the question.

10. Mexico state capture by cartels

Powerful drug cartels have challenged the Mexican government successfully in some urban areas, and proven able to regenerate constantly despite the enormous firepower the government has used against them since taking office in December 2006.

A 'capture' of the Mexican state would mean that the functions and institutions of government gradually would be surrendered to cartels. Senior officials repeatedly have been revealed to be on the payrolls of cartels and acting on their behalf. The enormous amounts of money gangs have at their disposal permeates easily through weak institutions. While the government would probably continue to function, the cartels would exert significant influence on government actions, exercising pressure on failed public institutions. The risk would be deemed to have crystallised at the point that the Mexican state effectively ceases to exercise the functions of government, including control of the military and efficient civil administration.

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