Key Global Risks anticipated for 2017

In fact, risks could come from a variety of sources…

In a recent report, global investment bank, Nomura, has identified some key global risks for the year 2017. Here is a summary of the key risks perceived for the calendar year 2017…

Europe in Turmoil…

This is probably the biggest risk for the year 2017. The British have already voted in favor of BREXIT and that will play out in the next year. If UK can’t stitch alliances in time, then the impact on GDP can be huge. The bigger risk is Italy. With political turmoil, economic uncertainty will follow. Italian banks are very fragile and Italy has borrowed heavily from the EU. The biggest risk could be France if its Far Right party wins power in the Spring Elections and pushes for an exit from the Euro zone. The year 2017 could be the year when the Euro as a currency and the EU as a concept may be put to a stern test!

Capital Controls in EMs…

That does look a little far-fetched at this point of time, but may be closer than you can imagine. As US bond yields harden and global investors turn risk-off, EMs may see more rapid outflows. Asian giants like Malaysia, Indonesia and Korea saw the impact of FII outflows during the Asian crisis in 1998. Most EMs would want to pre-empt that. There are whispers of capital controls but in the event of an EM crisis, many emerging markets may adopt capital controls. The larger systemic impact could be huge and could put global capital and EM currencies at huge risk.

Global Banks in Crisis Zone…

We are not just talking about the banks in Europe. Italian banks like Monte Del Paschi are known to be vulnerable. Deutsche Bank is estimated to have open derivative positions to the tune of $52 trillion. Even a percentage negative movement can wipe out the capital of Deutsche Bank. Then there are banks in China and India which are reeling under huge bad debts. Banks form the most important link for the global markets as they provide the gateway to the clearing houses. A major crisis in a large bank could spill over to the clearing houses. The concomitant damage to global markets could be big.

US Rates and Productivity…

Year 2017 could be the year of 2 surprising events in the US. Firstly, the US government could literally have a stand-off with the Fed as the Fed continues to dilly-dally on rate hikes. At the other end, there is the risk of rising productivity in the US. This could create a situation where US equities would start rallying and make a case for more aggressive rate hikes by the Fed. With greater aggression on rates comes greater risk of monetary divergence. The ensuing volatility in global markets could be the biggest risk for 2017!

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