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Real risks and fake pathos

Outlook on global risk scenarios

by Thomas Schellen

It is a funny thing with collective risk awareness. Human existence is full of perpetual risk, but our awareness of various risks differ. Even if different risks are equal in frequency and magnitude, some are perceived emotionally and with great and immediate personal involvement, while others only in intellectual terms, distanced from one’s existential core. For example, outcries over the risks of war tend to be highly emotional and gripping to the extent that songs about it can transcend the conflict they were originally about. There are scores of anti-war songs which, like 1960s ballad Eve of Destruction by Barry McGuire, are passionately replayed by several generations. They always have the same sad message of impending doom and lack of progress in defeating war.

By contrast, there are very few songs on capital risk, stock market fluctuations, or anything for that matter that is seriously related to economics – Hank Williams Jr’s Stock Market Blues (2012) or Pink Floyd’s Money (1973) are the few exceptions. This is strange, given the endless supply of market risk data with potential for conversion into lyrics and with very little variation requiring new melodies or rhythms. Economic risk is presented prosaically, in dry reports bare of lyrical elements. There are entire schools of financial analysts who offer variations of only two refrains: the cheerful chorus that money is to be made somewhere and the annually recurrent, but apparently futile, warning that we are on the eve of economic disaster (without ever eradicating the potential for such disaster).

Even without delving into the risk hikes that have been perceived by activist groups in the days since the US elections, global risk assessment in January 2017 was very high. The World Economic Forum’s (WEF)Global Risks Report (GRR), this year in its 12th edition, said last month that: “Polarized societies and political landscapes are taking center stage in many countries, with deepening generational and cultural divisions amplifying the risks associated with sluggish economic recovery and accelerating technological change.” It described political events of 2016 as “a wake-up call” to reassess the capacity to adapt to an evolving risk landscape and ominously warned that we could be at “a pivotal moment in political history” and it is a “febrile [feverish] time for the world”.

The economic uncertainty index is a design by economists to alert corporate decision makers to potential risks that could influence their business. This index, which is produced in collaboration with professors at three American business schools (Kellogg, Stanford and Booth), measures Economic Uncertainty (EU) and Global Economic Policy Uncertainty (GEPU) in the US and in 15 major economies. In 2016, the GEPU reached a record level of over 270 points in October and November that year. The GEPU index has been steadily increasing since the 2000s; it had peaks of 178 points in August 2001, 200 points in September 2008 and 217 points in October 2011.

This index, which is based on key terms found in newspaper reports such as “perception drivers”, demonstrates to its creators that increased levels of economic policy uncertainty are associated with elevated stock price volatility. “At the macro level, innovations in policy uncertainty foreshadow declines in investment, output, and employment” in the United States and major economies, according to the index authors, who declared that historically, economic policy uncertainty in their country has “drifted upwards since the 1960s”.

Perennial risk scenarios

Showing spikes in high-risk moments such as tight elections, wars, large-scale terror attacks and fiscal confrontations in the United States or with American involvement, the index aims to “capture uncertainty about who will make economic policy decisions, what economic policy actions will be undertaken and when, and the economic effects of policy actions (or inaction) – including uncertainties related to the economic ramifications of ‘non-economic’ policy matters, e.g., military action”.

The consistent rise of global economic policy uncertainty and the ever tighter interactions that the WEF’s influencers perceive between diverse risks are notable findings of the GRR and the GEPU index. This perspective is exacerbated if one considers that the list of risk-prone events in the outlook for 2017 from outside of the economic sphere easily numbers about 50 flashpoints and events, beginning with changes in the leadership at the United Nations and the European Parliament in January.

There are also long-term and even perennial crises scenarios in countries from the divided Koreas (a presidential crisis erupted recently in South Korea) and Cyprus to South Sudan, Colombia and Venezuela, and acute ones like the Greek crisis and, above all, the wars in Syria and against Daesh. On top of all this, there are at least a dozen national elections scheduled for 2017 (in addition to the Lebanese parliamentary elections) that by definition constitute events with uncertain outcomes in economic powerhouses like Germany and France, as well as in jurisdictions such as the Netherlands, Norway, Iran, Chile, Argentina, Liberia, Hong Kong and Kenya. Bearing the unexpected outcomes of the Brexit and US elections in mind, 2017 could well be another year of unpredicted changes, and thus of manifest uncertainty.


In economic terms, one person’s risk is another person’s opportunity


Jumping on the bandwagon of uncertainty apostles this January was  also the Bulletin of the Atomic Scientists, which told the world that its Doomsday Clock – a warning clock that has fluctuated between 17 minutes and two minutes before “midnight” since 1947 – is now 30 seconds closer to expected doom, at two minutes and 30 seconds to midnight after it had stood for two years at three minutes before midnight. Designed as a risk alertness tool over the possibility of nuclear war in the post-WWII environment that pulled the US against the USSR, the Doomsday Clock signals the nearness of global extinction. Only once in the past 60 years was it closer to the end of the world than today, when in 1953 it was set at two minutes. In 1991 it was set farthest from the fateful moment, at 17 minutes to midnight.

The Bulletin of the Atomic Scientists is an activist publication that seems nowadays more equipped with climate researchers and environmentalists than with nuclear experts. In 2015, the bulletin set its clock at only three minutes in large part because of their worries over the environment. Now its board of sponsors have decided to adjust the setting half a minute closer to doomsday because 2016 was a difficult year in which “the global security landscape darkened”, citing as the main motivations for the reset their concern over the usage of “cavalier and reckless language” about nuclear weapons (especially in the US in connection with the inauguration of Trump) and disregard for climate research and the views of (most) scientists.

Putting the alarm up by a notch shortly after President Trump’s inauguration earned the organization a lot of media attention, fitting in with an avalanche of worries and protests by civil society that was reminiscent of Soviet rhetoric in the Cold War or the American propaganda hype about Saddam Hussein’s alleged weapons of mass destruction in 2002. In the sum total of exaggerated worries, 2017 is shaping into a dual year of real risks and fake pathos about these risks, meaning that the accumulation of potential risk events could be accompanied by further risk escalation due to waves of protests against some change agents like Donald Trump or change events that are not unequivocally welcome.

Mitigating factors

In economic terms, one person’s risk is of course another person’s opportunity. Consequently, and perhaps helpfully in keeping risks away from a self-fulfilling escalation cycle, the outlook for 2017 from an economic perspective is less problematic than the outlook from a political or social vantage point.

The World Bank confirmed in its Global Economic Prospects report earlier in January that it projects global economic growth to “accelerate moderately” in 2017 and reach 2.7 percent. It expects advanced economies to register 1.8 percent growth this year, slightly better than in 2016; meanwhile emerging and developing markets, “as a whole should pick up to 4.2 percent”. At the same time, however, the World Bank cautioned that “the outlook is clouded by uncertainty about policy direction in major economies” and warned about universally negative repercussions for investment in all countries if a protracted period of uncertainty were to materialize.

Expressions of what economists like to sell as their “guarded optimism” also reverberate in manyprivate sector financial institutions. Take the example of the bankers at Goldman Sachs. The bank is one of the clear winners of the US election in terms of share price gains and also in the sense that a former Goldman president and COO is now joining Trump as head of his Council for Economic Affairs, along with three other people who were also once affiliated with the bank that are now among the president’s men. The bank told the world through videos underlaid with soothing background music (no rap, sadly), that it expects 2 to 3 percent growth in the US and 3.5 percent globally for 2017

Goldman paints something of a mixed picture for Europe with 1.5 percent GDP growth that is consistent with gradual improvements in the labor market and foresees 1 percent growth for Japan. It foresees that China will grow at about 6.5 percent, but with some long-term concerns, and expects commodity producers among emerging market countries to show some recovery after “a lot of pain” in 2015 and early 2016. Brazil is still slow and has yet to move into actual recovery, whereas India is exposed to a slowdown due to currency reform after strong growth in recent years, says Jan Hatzius, chief economist and head of Global Economics and Markets Research at Goldman Sachs in December 2016.

Upbeat sentiments were also reported by Bank of America/Merrill Lynch’s January Global Fund Manager Survey. According to the survey of 215 fund managers, investor expectations for global growth in January improved by 5 percentage points to two-year highs (net 62 percent from net 57 percent in December) and the number of respondents expecting growth to be “above trend” is the highest in five-and-a-half years at 17 percent.

However, risk is never out of the picture. The three tail risks that funds managers most commonly cited as current concerns were trade war/protectionism, US policy error and China FX devaluation, according to Bank of America/Merrill Lynch.

Similar notes were intonated later in January at the World Economic Forum’s closing panel in Davos, as panelists juxtaposed strengthening global economic growth against the increased risks of political uncertainty and trade protectionism. In a panel bringing together IMF’s Christine Lagarde, German Finance Minister Wolfgang Schäuble, the UK’s Chancellor of the Exchequer Philip Hammond, Japan’s central bank governor, Haruhiko Kuroda and from Black Rock USA, chairman Laurence D. Fink, global economic activity was characterized as moving up and consumer confidence was seen as strong according to a press briefing. The WEF quoted Lagarde as saying, “For the first time in years, economic growth is not being revised down,” with IMF projections for global growth of 3.4 percent in 2017 and 3.6 percent in 2018.


What can devalue our collective awareness is that the risks that become reality are often not the ones we are concerned about  


The limitations of forecasting

In the WEF’s GRR, a global risk is defined “as an uncertain event or condition that, if occurs, can have significant negative impact on several countries or industries within the next 10 years.” The survey for the 2016 report did not ask the participants to assess the likelihood of a Brexit or a Trump win in the US elections. Choices in the category of geopolitical risks are more general; the available options in the surveys for 2017 GRR were state collapse, failure of national and of regional or global governance (two separate questions), interstate conflict, large-scale terrorist attacks and deployment of nuclear weapons.

This report highlights the importance of how the questions in a risk survey necessarily influence the outcome. What can devalue our collective awareness is that the risks which become reality are often not the ones that we are asked about or worry about the most in the period preceding their eruption. In the GRR published in January 2016, the top risks listed for likelihood of occurrence were large-scale migrations, extreme weather events and failure to mitigate climate change, while the top risks listed for severity of impact were failure to act on climate change, weapons of mass destruction and water crises.

Four notable risks that did not top the GRR charts last year but materialized against popular expectations in 2016, were financial volatility at the start of the year, Brexit in the middle of the year, the military victory of the Syrian government forces in Aleppo and the outcome of the elections in the United States. If they were discussed at all, or considered seriously before their occurrence, all these events would probably have represented significant risks in the eyes of analysts, academic influencers and economic deciders in developed countries.

Once these events did materialize however, the economic and financial outcomes were quite different from what people warned of during and immediately after their occurrences. The sudden volatility in January did not trigger the financial catastrophes predicted by some analysts. Brexit, shocking as it was at the time, did not instantly drag European markets asunder, and the Republican win in the US elections was followed not by a deterioration in stock indices but by a market rally.   

Risks at home and in the region

Capturing Lebanon-specific risks or even Arab regional ones and assessing them is not in the remits of GRR nor the EUI. Risks, both globally shared and uniquely local ones, are ever present in Lebanon and make up half of Lebanese existence. The dangers include; a war with Israel because of an escalating altercation in south Lebanon; Syrian state collapse; economic problems resulting from troubles in the Gulf region that weaken remittances; domestic political vagaries on top of dangers of irrational US policies or belligerent Israeli politics; dangers of euro-zone inflation or movements in the euro-dollar exchange rate that are to Lebanon’s disadvantage or outright detriment;  as well as the danger of conflicts between larger global or regional powers that play on the Lebanese stage – and 90 percent of countries are bigger or more powerful than Lebanon. All of the above are on our national risk list alongside the dangers related to the environment, from pollution and weather events to earthquakes and social issues, whether an ageing population or unemployment. Continuing to live happily against all these risks is the other half of Lebanese existence, and the name of the Lebanese game.

While there is an international awareness of factors, such as growing irrationality of voters, the exploitation of this irrationality by populists, the decoupling of wealth from democracy and the shifting of global power centers (broadly from West to East in the current scenario and from North to South a few years ago), risk cycles on smaller levels and their impacts on a country like Lebanon are commonly not mentioned in the global picture.

But there are some reports of regional relevance, just like there are a handful of fun songs about economics. As the World Bank’s regional outlook for the Middle East highlighted last month, the region-wide pace of economic growth this year is forecast to reach 3.1 percent in 2017, after having experienced – for an emerging region unsatisfactory – estimated growth of 2.7 percent for 2016. The outlook, which estimates Lebanese GDP will increase 1.8 percent in 2016 and modestly accelerate to rates of 2.2 percent this year and 2.3 percent in 2018, sees oil importers achieving the strongest gains. Specifically, Saudi Arabia is forecast to grow by a quite meager rate of 1.6 percent in 2017, but this will be an improvement in comparison  to  the estimate for 2016.

The factors to watch in this regard are regional developments involving friends as well as more distant neighbors and those, whether states or non-state actors, that have shown themselves as outright foes of Lebanese progress. Besides the hope for positive change from the Lebanese parliamentary elections, it seems prudent to pay careful attention to developments in the economies of the Gulf Cooperation Council countries.   

Shuaa Capital observed in December that Saudi Arabia allocated SAR 890 billion to spending in its 2017 fiscal budget, above both budgetary and actual spending in 2016, and is also  planning for a budget deficit of SAR 198 billion in 2017, 40 percent lower than the deficit for 2016.   


It seems there are reasons, but not enough reasons, to keep on predicting doomsday in the global economy


A mixed regional outlook

Estimates by officials in the United Arab Emirates imply that Dubai’s economy will be increasingly on the mend in 2017. In a presentation at the UAE Economic Outlook 2017 event in January, the Chairman of Dubai’s Economic Development Committee Sheikh Ahmed Bin Saeed al-Maktoum said the emirate was expected to grow by 3.1 percent in 2017, after growing 2.7 percent in 2016 in real terms amid an unfriendly regional and global economic climate. 

By watching Arab equities – an exercise that is not found everywhere – Credit Suisse in January spoke of “an impressive rally” in Middle East markets, whereby the region’s 17 percent gains in Q4 of 2016 marked the “by far the strongest performance by any region and allowed the Middle East to post a modestly positive return for 2016 overall.”

“After experiencing a contractionary economic environment over the past two years, economic indicators across the Middle East are beginning to show signs of improvement. The oil exporting GCC economies are set to reap the benefits of higher oil prices and progress made on subsidy reform, while Egypt has successfully initiated the politically difficult steps towards preserving its foreign exchange reserves,” wrote Fahd Iqbal, Head of Middle East research at Credit Suisse.

In other moderately encouraging news from the region’s financial industry, the annual investment banking report for the Arab region by Thomson Reuters, which was released last month, said that investment banking fees in the Middle East reached $820.8 million during 2016, an 18 percent year-on-year increase and the highest annual fee total in the region since 2008. According to Thomson Reuters’ analysis, debt issuance in the region was the highest in over 35 years and jumped year-on-year by 145 percent to almost $78 billion, bolstered by Saudi Arabia’s $17.2 billion bond sale in October of last year. On the other hand, merger and acquisition activity, as well as equity issuances in the Middle East, were described as low in comparison to other years, with values of announced M&As with regional participation at $47 billion – the lowest since 2013 – and equity and equity-related issuances at $2.6 billion, which a director at Thomson Reuters said was “a 55 percent decline year-on-year and the lowest annual issuance total in the region since 2004”.

Meanwhile, the outlook for GCC banks is mixed according to ratings agency Standard and Poor’s. S&P Global said the agency expects the financial profiles of GCC banks to “continue to weaken in 2017-2018”, but added that this expectation had been incorporated in ratings and that it considers most GCC banks to have created “sufficient capital buffers to remain resilient to their weakened operating environment”.

In this altogether complex landscape of regional assessments, global risks and more or less fearful anticipations, Lebanon will have to find its place for the best possible economic performance, as well as conduct its domestic politics and business to the best of its capacity. By consensus of many economists, it seems there are reasons, but not enough reasons, to keep on predicting doomsday in the global economy. More likely is that we will muddle along, with risks building underneath and erupting every now and then, without us being able to evade them but also without being destroyed. Same procedure as every year.

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Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail

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