Americas: Puerto Rico defaults; teacher protests in Mexico; security issues at the Olympics
On 1 July Puerto Rico defaulted on US$911m of bond payments, paying roughly half of the US$2bln of debt due on 1 July. The biggest missed payment was for US$780m of general-obligation bonds, which marked the island’s first default on its constitutionally guaranteed debt. Legislation signed on 30 June by President Obama will temporarily protect the territory from creditor lawsuits. The recently approved Promesa bill is expected to help Puerto Rico orderly restructure its debt, and a federally appointed fiscal control board will oversee the island’s finances.
In Mexico, striking teachers from the CNTE union will likely continue to intensify protests across the country. The southern states of Chiapas and Oaxaca continued to be severely affected in the past week. Disruptive demonstrations and the blockade of major routes have been ongoing since 15 May, and have reportedly caused around US$150m in losses. On 4 and 5 July demonstrations reached the capital Mexico City, which will likely remain one of the focal points of the protest movement. Negotiations with the central government began on 22 June and are currently stalled. Further supply shortages, disruptive unrest and associated violence should be expected.
On 4 July Brazilian police officers and firefighters demonstrated at Rio de Janeiro International Airport to protest against working dire conditions only a month ahead of the 5-21 August Olympic Games to be hosted in the city. Protesters warned that should the government not address their concerns public safety would not be guaranteed during the Games. The federal government recently announced a US$850m bailout for Rio de Janeiro to meet its Olympic obligations. Heightened security should be expected over the coming days, as around 85,000 security-force personnel deploy in the city as part of Rio’s security strategy. The risk of crime and the potential for a lone-wolf attack will nevertheless remain high both in the lead up to and during the Games.
Asia-Pacific: Islamic State takes on Asia, with mixed results
Over the past week Islamic State (IS) has been linked to several terrorist attacks across Asia-Pacific. On 1 July seven gunmen stormed a cafe in the upmarket Gulshan district of Bangladesh’s capital Dhaka, taking dozens of people hostage, mostly foreigners. The subsequent siege only ended after 11 hours when Bangladeshi special forces stormed the restaurant, killing six of the attackers. Over 50 police officers were injured and two killed, while 20 civilians were hacked to death by the hostage-takers. IS subsequently provided evidence that it at the very least had prior knowledge of the attack.
Just two days after the attack ended Malaysian police revealed that a grenade attack that injured eight patrons at a nightclub in a Kuala Lumpur suburb on 30 June had been conducted by IS-affiliated militants. The incident was both Malaysia’s first-ever successful IS attack and the country’s first jihadist attack on a civilian target. Just a day after the revelation an IS-linked suicide bomber detonated his explosives outside a police station in the Indonesian province of Central Java, injuring one police officer.
The attacks demonstrate the clear threat IS’s rise poses to the region, both by inspiring nascent jihadists and by providing guidance and training. The Dhaka attack in particular has shattered the government’s constant denials of IS activity in the country. Although it remains unclear to what extent IS actually orchestrated the raid, the attackers had clearly received weapons training from someone. The incidents demonstrate that cities throughout the region are vulnerable to IS-style casualty- and publicity-maximising attacks on ‘soft’ targets. Delhi, Bangkok, Singapore, Jakarta, Manila and Kuala Lumpur are all potential targets.
However, the varying scales and success rates of the different attacks simultaneously show that the risk is not uniform. The professionalism of the Dhaka attack demonstrates the comparative strength of the country’s extremists, for whom protracted divisions in domestic politics and social instability have provided a fertile breeding ground. The poor response from the Bangladeshi security forces demonstrates the struggles they in turn have in tackling the country’s jihadist threat. In South-East Asia, meanwhile, the better-funded security forces are more capable of limiting the terrorists’ room for manoeuvre. More IS-linked attacks are certainly likely across Asia, but their frequency and intensity will be decided by domestic conditions rather than global developments.
Europe: The spectre of 23 June returns on 2 October
British voters delivered the European Union its biggest shock, after 52 per cent of voters backed leaving the European Union on 23 June. Reverberations were felt in financial markets, and the leadership of the UK’s major political parties. While uncertainty over how the United Kingdom responds to that decision, particularly given a lack of clarity over the country’s new leadership, will continue to drive market and forex volatility for at least the next few weeks, two additional elections in EU states could be destabilising.
On 5 July, Austria’s Chancellor scheduled the re-run presidential election, and Hungary announced that it would its own referendum on whether it should accept EU migration quotas on 2 October. The vote in Austria is likely to again be extremely narrow; with the initial result thrown out over irregularities in how postal votes were handled, after independent Alexander Van der Bellen defeated the far right Austrian Freedom Party’s Norbert Hofer by 30,000 votes. In Hungary, Prime Minister Viktor Orban may secure a major domestic victory through holding a referendum on the EU’s mandatory migrant resettlement programme, which is highly unpopular in the country. A vote against the quota would pose the vexing question to the EU of whether it is willing to grant special dispensation to certain countries.
Italy is also due to hold a constitutional referendum on changes backed by Prime Minister Matteo Renzi by the end of October. Renzi has warned he will resign if it fails to pass, warning the changes to the Senate and regional governments were necessary to end grid-lock in the political system while granting Renzi additional political capital to provide financial support to Italy’s failing banking industry. While the date has yet to be finalised, 2 October has been frequently floated in the Italian media. 23 June may have provided a shock to the EU but in October it will have to survive passing through a lighting storm.
MENA: Summer increase in Islamic State activity not yet over
Saudi Arabia witnessed a flurry of likely Islamic State (IS) and sympathiser activity across the kingdom on 3 and 4 July. The attack on state security personnel in a car park of the Prophet Muhammad’s mosque in Madinah fits IS activity in the kingdom so far, which concentrates on targeting isolated security forces or less-protected security buildings, instead of the headline mass-casualty attacks like that of al-Qa’ida in the early-2000’s. Although a severe crackdown against suspected Islamist militants in the wake of the several incidents early this week will already have begun, the risk of further similar attacks is likely in the coming weeks.
IS has sharply increased its activities in Iraq in the last several weeks, leading to a suicide car bomb late on 2 July which resulted in 250 fatalities and over 200 people wounded. This was the largest death toll from a single incident since 2003. The incident itself has led to even louder calls for prime minister Haidar al-Abadi to improve security and crackdown on corruption, neither of which are easy tasks. Large protests are likely in Baghdad and elsewhere, and there will likely be further attempted and successful attacks in major urban centres by IS as the end of the working week and weekend coincides with Eid al-Fitr, marking the end of the month of Ramadan.
Despite the significant multi-faceted attack by suspected IS militants on the international terminal of Turkey’s Istanbul Ataturk Airport (IST) on 28 June, the group’s activity in the country will remain unclaimed and occasional. This is in sharp contrast to attacks carried out by the Kurdistan Workers’ Party (PKK) and other armed, more radical affiliates. IS attacks are likely to remain aimed at those targets related to the tourism industry, as opposed to the government- and security force-related targets chosen by Kurdish groups. In the coming week the risk of an attack by a Kurdish militant group, such as the Kurdistan Freedom Falcons (TAK) is higher than another IS attack, although with the Eid al-Fitr holiday an IS attack cannot be ruled out.
Sub-Saharan Africa: Impact of low oil prices continues to be felt, yet opportunities remain
The Banco Nacional de Angola increased its benchmark interest rate by 200bps to a record 16 per cent on 1 July, the third increase in 2016 to date. The country is struggling to deal with the slump in crude oil prices that have cut government revenue and led to a depreciation of the kwanza against the dollar. The move also follows IMF reports that the country had withdrawn its request for Extended Fund Facility assistance to steady the economy. The continent’s largest oil producer relies on oil for foreign exchange revenue, however last month President dos Santos reported that state oil company Sonangol had not remitted anything to the central government coffers since January – and added on 30 June that money flowing in from oil sales was insufficient to meet the needs of the central bank.
Oil also accounts for approximately 70 per cent of Nigeria’s revenue, and the country has similarly suffered from the prolonged drop in crude oil prices. On 5 July, Nigerian President, Muhammadu Buhari, replaced Oil Minister Emmanuel Ibe Kachikwu as group managing director of state oil company NNPC with Dr Maikanti Kacella Baru, previously group executive director for exploration and production. The move also comes amid reports from the central bank that billions of dollars of oil revenue had failed to make it into state coffers, and signals the government’s approach to implement proper oversight and accountability. Corruption expected to decrease further during the remainder of Buhari’s period in office.
However, plans for extraction are underway in East Africa. Beginning on 4 July, Ministry of Energy officials from Uganda and Tanzania met to review progress of the implementation plan for the development of the proposed crude oil export pipeline, with representatives from Tullow, Total and CNOOC also attending. This follows April’s statement that Uganda will develop a pipeline to the Indian Ocean coast via Tanzania. Construction is scheduled to begin in August 2016, and the pipeline completed by 2020, and demonstrates increasing regional integration.
