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Expect Economic and Political Risk to Merge in 2016

It has become an annual ritual: at the end of every year, risk managers look into their crystal balls and try to predict what challenges and surprises may be in store over the next 12 months. Since 2009, one may be excused for thinking that, in general, the global economy has been improving. Since 2011, the exact opposite may be said regarding political risk.

The two axes are likely to intersect in 2016 for a variety of reasons, and the result for risk managers is likely to be a real test of fortitude and endurance.

US Interest Rates

Let us begin on the economic front with Janet Yellen, who has finally started raising interest rates after nearly 10 years of rate reductions. My belief is that the reason she has taken this action at this time is that the United States is well overdue (by historical standards) for a recession, and, if the Fed does not raise rates, it will have no ability to reduce them when the next recession hits.

Ms. Yellen has said she believes the US economy is in a relatively good state of health, but there appears to be some storm clouds on the horizon.

Global Economy

Clearly, the global economy is not in a good state of health. Europe continues to limp along, Japan is in its second recession in 2 years, Brazil’s economy is on the verge of collapse, and emerging economies around the world are either already in recession or heading that way. The freefall in commodity prices, significant drop in global consumption, and precipitous and sustained drop in the price of oil have put natural-resource-producing countries in a very difficult spot. Many of those countries’ currencies have been devalued massively. Social unrest is occurring in many of these countries, which has coincided with a rise in political risk for countries as diverse as Venezuela and Russia.

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