China in Transition
The New Silk Road
Coping With a Nuclear North Korea
Asia-Pacific: Among Great Powers
Southeast Asia: Burdened By Consensus
A Japanese Awakening
China in Transition
Chinese President Xi Jinping’s push to consolidate his grip on power will enter a critical phase in the coming months amid preparations for October's 19th Party Congress, the quinquennial meeting where senior party officials select the next Politburo Standing Committee, the country's top governing body. With as many as five of the current seven committee members expected to step down this year, the plenum will offer Xi a momentous opportunity to stack the country’s leadership with his supporters, fortifying his position as China’s most powerful leader in decades. In the lead-up to the congress, Xi’s core task will be to eliminate remaining checks on his influence, while reshuffling personnel to move allies into key posts. Broadly speaking, these efforts will be successful.
The stakes riding on the Party Congress will compel Chinese leaders this quarter to focus overwhelmingly on stabilizing the economy, sustaining low unemployment and avoiding social disruptions, meaning much-needed but risky reforms will take a back seat. Beijing will continue to push industrial restructuring and consolidation programs, environmental initiatives and limited financial reforms. Major new initiatives, however, that would threaten to erode business confidence or destabilize the economy are unlikely in the near future. And on existing issues that the government chooses to expand, such as corporate debt-equity swaps and bankruptcy tribunals and the introduction of a nationwide property tax, authorities will delay full implementation until after the congress. In the meantime, Beijing will maintain robust support for key industrial sectors such as home construction and manufacturing while introducing piecemeal measures to strengthen the economy's defenses against potential external shocks, especially those threatened by impending shifts in U.S. trade and currency policies.
Outside the mainland, Beijing will face a bigger challenge in managing persistent discontent in Hong Kong over China’s interference in the city’s political affairs, a situation that the recent election of its preferred candidate, Carrie Lam, as Hong Kong’s next chief executive will do little to alleviate. As the special administrative region prepares to mark the 20th anniversary of its reunification with China on July 1 (Lam’s inauguration date), conditions will be ripe for an escalation of protests.
The ongoing evolution in U.S. trade policy will continue to be felt across the Asia-Pacific and will pose the greatest potential threat to Chinese economic stability — and therefore to Xi’s drive to consolidate power — in the second quarter. In the next three months, Washington may not impose new barriers to trade with China beyond anti-dumping and countervailing duties, but Beijing will gird itself for the possibility that the Trump administration follows through on the new president's promises to name China a currency manipulator or levy new controls on U.S. imports of Chinese goods such as steel or automobiles. Chinese authorities will work to build up buffers against U.S. threats or punitive measures while seeking to deter Washington by outlining the retaliatory measures Beijing can take. China may also introduce its own anti-dumping measures. Beijing's most likely course of action, however, will be to try to use its influence on regional security matters as leverage in economic discussions with Washington. Toward this end, China may offer to cooperate with Washington on issues such as cybersecurity, military affairs and even North Korea — a rare area where U.S. and Chinese interests overlap. At the same time, it will become more openly confrontational in the South China Sea or on other regional matters.
Though China has been the primary target in Asia of Washington’s attacks on trade and currency manipulation, Japan and South Korea — the United States’ two most important security allies in Asia — have by no means been exempt from prospective U.S. policy changes. This will compel both countries to explore other options, including expanded investment into and potentially imports from the United States, to hedge against pressure from Washington and prevent economic frictions from undermining their security partnerships. Nonetheless, even rhetorical pressure from Washington on trade will be painful for South Korea as Seoul attempts to move on from the fall of President Park Geun Hye while also facing Chinese economic retaliation over the deployment of the Terminal High-Altitude Area Defense (THAAD) missile defense system. China may ease pressure on Seoul in an effort to open diplomacy with the next South Korean administration after the upcoming election. But the new president's attention will be divided between a range of priorities: not only the perennial North Korean threat but also reform of South Korea's scandal-prone chaebols (giant, family-run conglomerates) and broader economic restructuring.
Elsewhere in the Asia-Pacific, moderate recoveries in the global economy — particularly in commodity prices — will continue to provide much-needed relief for regional exporters. Nonetheless, countries such as South Korea and Thailand will struggle to regain their growth momentum because of internal political constraints, increased regional competition and regional geopolitical pressures. Moreover, few countries in the region will be immune to the long-term impact of the surge of protectionism across the globe or the potential fallout from a prolonged Sino-U.S. trade or currency spat. As major powers reconfigure their trade strategies, smaller economies will seek to insulate themselves from potential shocks by more proactively pursuing regional cooperation and economic diversification. In addition to Asia-centric multilateral frameworks such as the 16-member Regional Comprehensive Economic Partnership (RCEP), trade-dependent economies such as those of Malaysia, Australia, Vietnam and South Korea will explore free trade options farther afield.
The New Silk Road
Beijing will be well-positioned to exploit regionwide uncertainty over Washington’s potential retrenchment to press Chinese interests elsewhere in its periphery this quarter. In response to the Trump administration’s withdrawal from the Trans-Pacific Partnership trade pact, China will redouble its efforts to draw regional economies further into its orbit by touting regional trade initiatives such as RCEP.
In addition to trade, expanded investment, particularly in infrastructure, will be core to China's diplomatic outreach throughout its periphery, with Beijing using its One Belt, One Road summit in May to portray itself as an economic anchor and promote its vision for the region as a favorable alternative to the Western-led order. But its efforts to build out vast road and rail networks will be constrained by localized unrest and suspicions in target countries, particularly Pakistan and Sri Lanka, as well as at home in Xinjiang. Domestic economic pressures will also complicate implementation of Beijing's grand plans.
Coping With a Nuclear North Korea
The fraught efforts by China and the United States, as well as South Korea and Japan, to contain North Korea’s nuclear weapons program will remain a singular driver of regional dynamics in the quarter. As North Korea nears the successful development of an effective nuclear deterrent against the United States, Pyongyang will continue to use every opportunity to demonstrate its expanding defense capabilities. Another North Korean nuclear test would undoubtedly elicit heated rhetoric and defense posturing by Seoul and Tokyo, including moves that Beijing views as antagonistic. This will reduce room for diplomacy between Washington and Northeast Asia’s leading powers and intensify pressure on Washington to consider alternative measures to deter Pyongyang.
Direct, pre-emptive military action against Pyongyang — particularly its nuclear weapons infrastructure and arsenal — is possible but unlikely this quarter absent a complete breakdown of diplomatic efforts by the United States and China. Instead, Washington will most likely focus on pressuring Beijing to rein in Pyongyang. Beijing may use its economic pressure over North Korea to hedge against Washington’s agenda on other fronts, particularly U.S. pressure on trade. But Beijing will avoid fully severing North Korea’s economic lifelines in China or substantially undermining Kim Jong Un's rule in Pyongyang.
Asia-Pacific: Among Great Powers
Where possible, Beijing will work to separate its tension with Washington over trade and the Korean Peninsula from other pivotal issues in China’s periphery. Beijing will be particularly on guard against any moves by Washington to use Taiwan as a bargaining chip in other negotiations. Though the Trump administration reversed course and pledged in February to continue the “One China” policy, a long-standing diplomatic formula underpinning Washington's relations with Beijing and Taipei, the White House may still seek to boost arms sales or diplomatic contact with Taipei this quarter. Meanwhile, Taiwan will also expand its economic outreach to other countries, particular Japan, India and Southeast Asian states, to lessen the impact of diplomatic isolation by Beijing. China would heartily protest any new U.S. arms sales to Taiwan and possibly reduce military cooperation with Washington, but it will avoid inflaming cross-strait tensions in any way that would threaten Xi’s goals at the upcoming Party Congress.
Meanwhile, Beijing will further its evolving strategy for managing the backlash in Southeast Asia to expanding Chinese maritime activities in regional waters. Following last year’s international tribunal ruling invalidating China’s territorial claims in the South China Sea, Beijing has continued a carrot-and-stick strategy, paring maritime and economic concessions with coercive measures — all while continuing to build out its regional military presence. In recent months, this strategy has helped China and some South China Sea claimant states, particularly the Philippines, achieve a tentative conciliation, even as China’s broader confrontation with the United States has threatened its capacity to manage South China Sea affairs.
But numerous potential flashpoints in the second quarter will put this reconciliation to the test. For example, the upcoming fishing season will create ample opportunities for flare-ups between Chinese fishing fleets and coast guard forces and their counterparts from littoral states such as Indonesia and Vietnam. Perhaps the biggest test will be the joint fishing arrangement between China and the Philippines in waters around the Scarborough Shoal, a long-standing flashpoint some 200 kilometers west of Luzon. Though large-scale, sustained conflict in the disputed waters is unlikely, the growing number of civilian and naval ships on the seas raises the risk of accidents and miscalculations capable of spawning an international crisis.
Landmark bilateral Sino-Philippine maritime consultations in May will not fundamentally alter the dynamic in the region. With Philippine President Rodrigo Duterte’s erratic rhetoric and efforts to reorient the country's foreign policy toward China beginning to draw some pushback at home — and given China’s unwavering goal of cementing its regional maritime dominance — Sino-Philippine relations will remain fraught, creating opportunities for a warming of ties between Manila and Washington. This, in turn, could affect how other states in the region deal with Chinese assertiveness. Ultimately, claimant states will continue to pursue omnidirectional foreign policies marked by greater ties with a range of outside powers, including Russia and Japan. And Beijing will work to maintain its current strategy of balancing coercion with concessions and cooperation (including on energy development in disputed waters) to temper the sharpest tensions and limit opposition to its maritime actions.
Southeast Asia: Burdened By Consensus
China and the Association of Southeast Asian Nations (ASEAN) will likely make some progress in negotiations on a Code of Conduct for the South China Sea. But divisions within ASEAN over how to deal with Beijing, combined with deepening concerns over China’s growing military power and perceived assertiveness, will limit the negotiations.
Moreover, across Southeast Asia, domestic political factors will continue to hinder pan-ASEAN cohesion and complicate broader regional issues. Even as the Philippines’ temporary detente with China enters rough waters this quarter, for example, so will Duterte face new challenges to his initially unquestioned authority at home. As long as Duterte’s domestic popularity is high, he will face no serious threats to his power. But the threat of power struggles within the government and political establishment will grow as he pushes forward with contentious initiatives such as his violent war on drugs, peace talks with Muslim Moro and Communist rebels, and a plan to shift the government to a federal system — all while seeking to limit domestic backlash to his reorientation away from the United States, which retains deep ties throughout the Philippine defense establishment. A Duterte administration bogged down by domestic pressures would have less room to sustain a politically risky outreach to China or, as this year's ASEAN chair, steer the body toward a semblance of consensus on the South China Sea.
Meanwhile, in Cambodia — under the current government, China's most stalwart supporter in ASEAN — upcoming commune elections will test the public's support for Prime Minister Hun Sen and the grip of his Cambodian People's Party on power ahead of 2018 general elections. Similarly, an April runoff election for Jakarta governor will serve as a barometer of the ruling party's ability to solidify support to the degree necessary to expand substantial fiscal, regulatory and economic reforms and play a more decisive role in regional trade and security affairs.
A Japanese Awakening
Barring a significant change in U.S. policy toward the South China Sea, claimant states and U.S. allies alike will remain cautious about undertaking bilateral naval patrols with Washington or taking other actions that might antagonize Beijing. Such concerns will be unlikely, however, to deter Japan from deepening its diplomatic outreach to and defense cooperation with South China Sea claimant states. Tokyo will use arms sales and military aid to ASEAN states, along with joint exercises with regional navies and a generally increased regional maritime presence, to bolster its position as an increasingly robust check on Chinese influence in Southeast Asia.
Japan’s diplomatic, economic and security offensives in Southeast Asia are just one piece in its broader push to revive the country's standing and influence abroad. In the second quarter, Japanese Prime Minister Shinzo Abe will meet with Russian President Vladimir Putin as the two countries seek to improve ties and resolve a long-standing dispute over control of the South Kuril Islands. Even incremental progress here would help Tokyo hedge against Chinese influence in Northeast Asia. Meanwhile, Japan will continue with efforts to counter China's expanding presence in the East China Sea by increasing naval and coast guard patrols and research activities. But Tokyo's attention will be dominated by relations with Washington this quarter, with several meetings between senior Japanese and U.S. lawmakers on the docket, as the government seeks to build on the momentum generated by Abe's recent visit to Washington and Japan’s promise to invest in the United States.
The Abe administration will use political capital gained from its diplomatic successes here to push for structural reform legislation at home, along with a constitutional revision allowing the emperor to abdicate. The quarter will likely see concrete progress on reform legislation in areas such as agriculture and labor. Meanwhile, the Abe administration will rely on aggressive monetary and fiscal policy to sustain overall economic stability at home.
North America Unrivaled
The Importance of Mexico
Colombian Peace Process
Brazil's Economy Recovers While Its Leaders Founder
Argentina Undertakes Subtle Reforms
North America Unrivaled
Now that the key members of U.S. President Donald Trump's trade team have been appointed and are likely to be confirmed this quarter, trade issues will move up on the White House's agenda. Washington will use the next three months to conduct an internal review on the United States' existing trade agreements and decide which aspects of the deals to amend in negotiations. At the top of the new administration's priorities will be the revision of the North American Free Trade Agreement (NAFTA).
NAFTA's members — Canada, Mexico and the United States — will open the discussion within a trilateral framework. Though the United States has said it would prefer to pursue trade talks on a bilateral basis, Canada and Mexico have made clear that they prefer to stick to three-way talks. But even if the United States is willing to kick off the negotiations in this format, differences between Washington and its North American trade partners could eventually force the parties to move to one-on-one discussions instead. This cannot happen, however, until the negotiations formally begin in the second half of the year. (The White House has said it plans to use the Trade Promotion Authority law to renegotiate NAFTA, but doing so would require the administration to give 90 days' notice before entering into official talks — notice it will almost certainly issue in the second quarter.)
In the meantime, all parties will see a flurry of preparations and lobbying take place in the coming months, ahead of the talks. The United States will use its 90-day consultation period to draft specific negotiating points for congressional review. Chief among them will be NAFTA's rules of origin: Washington will argue that products imported from Mexico and Canada should be made up of more inputs sourced from NAFTA members in order to qualify for tariff exemptions. The White House will also probably seek to reshape the bloc's Chapter 19 dispute settlement mechanism, introduce more labor and environmental requirements, and expand the deal's purview to cover modern sectors such as the digital economy that were not included in the initial agreement.
Mexico's strategy going into the negotiations also began to take shape over the first quarter. Mexico City has already triggered its own 90-day consultation period and has begun reaching out to business leaders and groups at the state and municipal levels in Mexico and the United States to lobby against any substantial alterations of NAFTA. Mexico has also outlined the sectors most likely to be affected by a breakdown in negotiations or new U.S. tariffs on Mexican goods so that it may respond in kind if it must. But with few practical means of immediate leverage against the United States, Mexico is at a distinct disadvantage. As a result, it will have no opportunity to pressure Washington without jeopardizing the NAFTA talks as a whole. Threats of scaling back intelligence sharing, for example, will probably emerge from Mexico only if Washington attempts to impose unfavorable constraints on Mexican goods during the talks.
Though Trump's harshest criticism of NAFTA has so far centered on Mexico, Canada is taking no chances. Following Mexico City's lead, Ottawa has reached out to U.S. states that frequently trade with Canada, including in the Midwest, in an attempt to minimize disruptions to NAFTA. Several of those states voted for Trump in November, but Ottawa is hoping to make the case that preserving close trade ties with Canada is in their best interest. Its lobbying and outreach efforts will continue through the second quarter. Canada has also pointed out that its own free trade agreement with the United States, which predates NAFTA, has only been suspended and could easily be resurrected should Washington choose to replace the trilateral deal with two bilateral arrangements.
Beyond its immediate neighbors, the United States will seek to more tightly enforce its existing trade deals with other partners, particularly China. Washington, however, is unlikely to make much progress on larger trade issues during the coming quarter. Though the White House has threatened to ignore the rulings of the World Trade Organization (WTO) as it sees fit, the issue probably will not come to a head in the next three months. With its health care plan on ice, the Trump administration will instead shift gears toward trying to implement its proposed tax cuts and reforms. Congress will pass a budget resolution in the second quarter that will allow it to try to approve tax adjustments through budget reconciliation before the end of the 2018 fiscal year. Meanwhile, the Trump administration will unveil its own proposed changes to the tax code this quarter, though its plan will face an uphill battle in Congress. Among the most controversial amendments that Republicans in the House of Representatives have proposed is a border tax adjustment. Many are concerned that the measure may violate the United States' obligations under the WTO by rebating "direct taxes" on exporters (potentially constituting an export subsidy) and by taxing imported goods differently than domestically produced products. EU members and other countries have expressed concern about these issues and have promised to challenge the changes if they are approved by Congress. That said, it is unclear whether these aspects of the tax reform will be eliminated, adjusted or kept before the bill is presented to lawmakers. Moreover, though Washington will kick off the process of overhauling the U.S. tax code this quarter, Congress will not face as tight a deadline to complete it as it did with health care reform earlier this year. The tax proposals' actual passage, then, will not occur until at least the second half of 2017.
The Importance of Mexico
Mexico's relationship with the United States — its most important in terms of trade, security and diplomacy — will take center stage in Mexico City this quarter. Though the Mexican government will take small steps to try to limit any alterations to its ties with Washington, it will also hedge its bets by searching for ways to diversify its economy away from its northern neighbor. Mexico will explore its options for expanding trade with the European Union and Asian partners, including Japan, China, New Zealand and Thailand, while seeking to partially substitute U.S. food imports with goods from South America. To that end, it will try to lay the groundwork for deals to purchase more soybean, beef, pork and corn imports from Brazil and Argentina.
The White House's plans to renegotiate NAFTA and insistence that Mexico do more to restrict immigration could translate into political gains for populist politicians south of the border. The campaign season for Mexico state's gubernatorial election on June 4 will heat up during the second quarter, and given the state's size and political diversity, it is widely regarded as a bellwether for the country's presidential race, which will be held in 2018. At the moment, populist figure Andres Manuel Lopez Obrador's National Regeneration Movement (Morena) appears ready to give the country's traditional political heavyweights — the Institutional Revolutionary Party (PRI) and National Action Party (PAN) — a run for their money in this year's election. As Morena squares off against the PRI and PAN for control of Mexico state's governorship, its performance will give some indication as to whether the PRI's numerous corruption scandals and Mexico City's deteriorating relationship with Washington will result in populist backlash during next year's presidential race. Lopez Obrador will no doubt capitalize on Mexican voters' dissatisfaction with the ruling PRI and U.S. antagonism to further his own campaign for the presidency over the next few months.
This year will be the toughest the ruling United Socialist Party of Venezuela (PSUV) has ever encountered. Chief among the government's concerns will be its high risk of defaulting on debt owed by state oil and natural gas firm Petroleos de Venezuela (PDVSA). PDVSA is counting on a $600 million loan from Russian oil giant Rosneft a stake in a joint venture to make its $3.1 billion in debt payments due in April and May. If the loan falls through, Venezuela will be in dire financial straits. Should the company default on its upcoming bills, the threat of unrest spreading throughout the country will rise. But even if PDVSA successfully makes its payments in the second quarter, it will owe another $3 billion in October and November — bills it will probably fail to pay without additional foreign assistance.
If Venezuela proves unable to avoid default, whether in April or November, its full impact will not be felt for several months. But eventually imports, including food supplies, will plunge and the country's already high inflation will soar. Each of these effects would pose a significant threat to the PSUV's continued rule. Political elites would likely close ranks and crack down on signs of dissent from within their own party and from the opposition in hopes of fending off potential challenges to the state.
Faced with mounting discontent, the Venezuelan government will also maintain — and perhaps increase — its surveillance of the country's armed forces. The ruling party fears that military officers in Venezuela's regional commands may someday rise up against the central government. Though no coup seems to be in the making at present, Caracas will use human intelligence sources and electronic surveillance to keep a close eye on its troops to ensure that does not change.
In addition to its predicament at home, the Venezuelan government will have to grapple with the uncertainty surrounding the new U.S. administration's foreign policy. The White House began to adopt a tougher stance toward Venezuela in the first quarter, and it may choose to build on that pressure by slapping new sanctions on Caracas, through the U.S. Treasury Department, in the second quarter. If the sanctions target Venezuelan officials, their impact on the country as a whole will be minimal. But if they are leveled against PDVSA — the government's primary source of revenue — the punitive measures will do considerable damage to Caracas' finances and the ruling party's position in power. Such sanctions (or the mere threat of them) will therefore give the United States substantial leverage over Venezuela in any future negotiations.
Colombian Peace Process
Colombia, meanwhile, will continue the process of winding down its longest-running insurgency. Rebels belonging to the Revolutionary Armed Forces of Colombia (FARC) will stay in their demobilization zones awaiting commanders' orders to surrender their weapons. At the same time, the Colombian Congress will pass legislation that will permit the FARC to continue laying down arms. Though the group originally agreed to give up all of its weapons by June 1, this deadline may be delayed since FARC members have been slow to gather at the country's predetermined demobilization zones.
The disbandment of Colombia's largest guerrilla group, coupled with rising demand for cocaine in the United States, Europe and Asia, will fuel violent competitions among smaller rebel and criminal organizations for the FARC's former coca-producing territories in the months ahead. Now that most FARC rebels are preparing to reintegrate into society, the National Liberation Army (Colombia's second-largest insurgency) and the Clan del Golfo crime syndicate will vie with each other for control over key drug trafficking routes and resources, bringing greater violence to the Colombian hinterlands in the Choco, Cauca and Meta departments.
Brazil's Economy Recovers While Its Leaders Founder
The second quarter will bring new promise for the Brazilian economy. Buoyed by higher oil and iron ore export revenue as well as rising domestic consumption, the country will continue to pull itself out of recession in the months ahead. But Brazil's politicians will not fare as well. President Michel Temer's tenure may be cut short in the second half of the year by an ongoing Supreme Electoral Court investigation into charges that he knowingly accepted campaign funds in 2014 that were obtained through acts of corruption. Though the court is unlikely to issue its ruling during the second quarter, the accusations will continue to hang over the president in the coming months.
Several other leading figures from Brazil's major political parties have been swept up in the scandal as well. Politicians who would have otherwise been obvious candidates for the country's presidential election in 2018, such as Aecio Neves, Jose Serra and former President Luiz Inacio Lula da Silva, have been plagued by allegations of corruption. As the popularity of Brazil's established elite has fallen, political outsiders have seized the chance to make their own gains. Chief among them is a highly conservative former military officer, Jair Bolsonaro, who came in third place in recent polls. Bolsonaro's rise is troubling to Brazil's traditional parties, such as the Workers' Party and the Social Democracy Party of Brazil, which may have a hard time defeating him if they cannot carve out a clear majority in the first round of the presidential race. (Even da Silva, who is popular among voters, would run the risk of losing to Bolsonaro in the event of a runoff.) Still, the campaign season has only just begun, and Bolsonaro's chances of proceeding to a runoff are remote — especially if new candidates enter the race on behalf of Brazil's entrenched leaders.
For now, Temer will focus on bringing his pension reform — a key part of his austerity agenda — to a vote in the lower house of the National Congress. But protests against the proposal and government corruption could stall the vote, particularly as Eliseu Padilha (Temer's chief of staff and lead negotiator with the National Congress on the reforms) comes under scrutiny for graft. The threat of an investigation into and indictment of Padilha, or of Brazilian lawmakers, may sideline Temer's effort to rally the fractured National Congress' support for his policies.
Argentina Undertakes Subtle Reforms
Argentina's leaders will be in a no less precarious situation this quarter. President Mauricio Macri will have to balance between satisfying the demands of organized labor and attracting foreign investors as he continues to steadily make fiscal adjustments over the next few months. These measures will include hikes in the price of natural gas and likely water for consumers across the country.
There are limits, however, to how heavy a burden the government in Buenos Aires can place on taxpayers. The country will hold legislative elections in October that are considered a prelude to the presidential race in 2019. Determined to remain in power, the ruling party will shy away from implementing heavier austerity measures or spending cuts ahead of this year's vote that would directly harm labor unions or provincial governments.
India's Own Worst Enemy
The India-Pakistan Rivalry
South Asian Militancy
India's Own Worst Enemy
The second quarter will be a benchmark for India's ambitious tax reforms. The Goods and Services Tax (GST) bill has weathered a halting journey in the 17 years since it was first proposed, spurring debate and disagreement as it wound its way through India's democratic system. Thanks to Finance Minister Arun Jaitley's "cooperative federalism" strategy, however, the dual value-added tax legislation clinched a major victory during the Parliament's recent budgetary session when the lower house passed all four of its component bills. The bills' passage marked a big step toward simplifying India's convoluted tax system and unifying its fragmented market — two key components of Prime Minister Narendra Modi's plan to boost economic growth.
Having passed the measures at the federal level, the ruling Bharatiya Janata Party (BJP) will now shift its attention to India's 29 state legislatures, each of which must pass a local version of the GST. This will be a lengthy undertaking, of course, especially considering that the BJP is in the minority in 14 state assemblies. Consequently, Modi's government probably won't meet its July 1 implementation deadline. But that doesn't mean the measures will fail. Through concession and compromise, Jaitley and his state counterparts in the GST Council have addressed local governments' major grievances, including the issue of compensation for lost tax revenues in manufacturing-heavy states. Ever since Parliament passed the GST constitutional amendment in August 2016, moreover, India's state and federal governments have become more aligned on the issue of tax reform. And so, notwithstanding the usual politicking, each state will pass its version of the GST eventually — though not necessarily in the second quarter.
In fact, India's economic reform project as a whole is entering the new quarter with renewed momentum after the recent state elections in the country. The BJP achieved a resounding victory in the all-important state of Uttar Pradesh, and it also formed governments in the states of Goa, Manipur and Uttarakhand. This string of successes is good news for the BJP for a couple of reasons. The ruling party, for instance, will get to send more representatives to the upper house of Parliament, easing the way for economic reforms — though this is a benefit that will take some time to pay off. More immediately, the party's strong electoral performance is a vote of confidence for Modi's demonetization campaign, despite the many inconveniences it caused.
Now that the Reserve Bank of India has removed ATM cash withdrawal limits, the demonetization process has ended, and "remonetization" is in full swing. As Indians regain access to cash, their country's economic growth should pick up a bit. At the same time, however, digital transactions — something demonetization tried to encourage — will keep falling, albeit not necessarily to pre-demonetization levels. New Delhi has yet to address the underlying reasons that have kept cash king in the Indian economy. The country's financial infrastructure remains inadequate, the cost of credit card transactions still exceeds that of cash payments, and the legal protections against credit card fraud are lacking. Until New Delhi fixes these issues, cash will continue to reign supreme.
The quarter also promises several important foreign policy visits for India covering defense, energy and investment. In April alone, Modi will host the prime ministers of Bangladesh and Australia, as well as the president of Nepal and Singapore's foreign minister. The Indian prime minister will chalk up a success in his country's quest to join multilateral institutions in June at the Shanghai Cooperation Organization summit in Astana, Kazakhstan, where India will receive full membership in the bloc. Pakistani Prime Minister Nawaz Sharif will also be in attendance to represent his country, which is also being admitted to the alliance. Their meeting will mark the first exchange between the two leaders since 2015 and offer a chance to gauge the state of South Asia's most consequential bilateral relationship.
The India-Pakistan Rivalry
With state election season behind it, the BJP has less political incentive to lambaste Pakistan, and relations between the two will stabilize during the second quarter. The two nuclear rivals will continue to bicker over a host of issues, of course, including the disputed territory of Kashmir. But since the fourth quarter of 2016, the number of cease-fire violations along the Line of Control in the region has fallen. The drop coincided with Gen. Qamar Javed Bajwa's ascension to the powerful post of Pakistan's army chief. Bajwa is redirecting his country's strategic attention away from India and toward Afghanistan (though securing the eastern border will still be a priority for Pakistan). Consequently, Islamabad will take pains to avoid antagonizing New Delhi. And as Pakistan's next general elections approach in 2018, a Supreme Court decision on Sharif and his family's involvement in the Panama Papers scandal could give the opposition useful campaign fodder.
India, likewise, will shift some of its attention from Pakistan — which will remain its biggest regional foreign policy challenge nonetheless — to another country in its periphery, Nepal. The Madhesi, an ethnic group of Indian origin living along the Terai plains near the Nepalese border with India, have renewed their demands for greater autonomy, including the creation of two Madhesi-majority provinces in the area. What's more, they have promised to boycott Nepal's May 14 local elections, the first such vote in 20 years and a milestone for the country's democracy. The opposition Communist Party of Nepal (Unified Marxist-Leninist), meanwhile, has vowed to counter the Madhesi's demands for fear that the two new provinces would give the ethnic group control over the Nepal-India border. The party's stance alone will cause greater discord as the election approaches.
Unless Nepalese Prime Minister Pushpa Kamal Dahal's Maoist Centre party concedes to negotiations over the Madhesi's requests, the local elections will hit a snag. Either the vote will be delayed, or its legitimacy will come into question, sparking protests along the Terai. Each scenario will increase the probability that India and China stage a diplomatic intervention, as they did in 2016 to try to keep former Prime Minister Khadga Prasad Oli's administration from toppling. (New Delhi will be careful not to intervene too directly, though, lest it push Kathmandu closer to Beijing.) Even so, given that Dahal's alliance holds a majority in Nepal's legislature — even without the Madhesi parties' support — his administration will survive through the quarter.
South Asian Militancy
Back in Pakistan, the army will continue its efforts to vanquish anti-state militancy, particularly in the restive Federally Administered Tribal Areas along the border with Afghanistan. Bajwa, the new army chief, is currently overseeing Operation Radd-ul-Fasaad as part of that initiative, which has already contributed to a decline in the number of militant-related civilian deaths in Pakistan. Though the campaign will help further reduce the casualty rate, progress will come at the cost of high-profile retaliatory attacks by the Islamic State's Khorasan chapter and the Jamaat-ul-Ahrar, a breakaway faction of the Tehrik-i-Taliban Pakistan. The threat of militant attacks in South Asia, in fact, will rise during the second quarter because warmer weather heralds the start of the annual spring offensive. The Taliban will ramp up their attacks across Afghanistan — not just in their strongholds of Helmand and Kandahar provinces in the country's south. The Islamic State's Khorasan chapter may also increase its activities. The uptick in attacks, in turn, will encourage more militants to seek refuge across the border in Pakistan, complicating Operation Radd-ul-Fasaad and perpetuating a cycle of militant violence and military crackdowns in the region.
In addition, the second quarter will test Afghanistan's peacemaking skills. Notorious warlord Gulbuddin Hekmatyar is expected to end his 20-year exile from public life in the next few months as part of a deal that Kabul struck with his party, Hizb-e-Islami Gulbuddin, in fall 2016. Should he return to Kabul as anticipated, Hekmatyar will reintegrate himself into the political wing of his party to begin laying the foundation for a return to politics. This quarter, moreover, Russia will continue to increase its efforts to jump-start the peace process in Afghanistan as it joins with Pakistan and China to mediate in prospective negotiations between the Afghan government and the Taliban. Despite its bloody history with Russia, Kabul is cautiously optimistic about Moscow's involvement.
Nigeria: Obstacles to Prosperity
The Post-Apartheid Era Ends
Old Leaders in New Africa
Mozambique’s Financial Mess
East African Integration
Nigeria: Obstacles to Prosperity
Nigerian President Muhammadu Buhari has had a tough year so far, made all the more complicated by lingering concerns over his health. The public's fears were significantly heightened after what was supposed to be a 10-day medical trip to London turned into a nearly two-month convalescence abroad. Should the president be unable to finish his term, which ends in 2019, the center of Nigeria's political power and patronage would shift southwestward toward the base of Vice President Yemi Osinbajo, who would assume the presidency. Aggrieved northern politicians may respond by boosting their support for the country's militant groups, while the oil-rich and restive Niger Delta's expectations of concessions from the federal government may rise. (In its negotiations with Abuja, the southern region has demanded money and other perks.) Even if Buhari's rule continues, opposition from within and outside of his ruling All Progressives Congress party will mount in the face of the country's persistent financial difficulties. This will be especially true if the president fails to allay fears over his health before potential successors begin jockeying for a place in Nigeria's 2019 election — now less than two years away — in earnest.
Regardless of who rules the country, Nigeria's numerous economic challenges will not lessen in intensity in the second quarter. Weak oil prices, high inflation and the possibility of a stronger U.S. dollar will be a difficult combination for the Nigerian state and its citizens to weather. After all, a stronger dollar relative to the naira, Nigeria's currency, would hike up the costs of food and other imports, sparking protests and other forms of unrest. Meanwhile, international financial institutions such as the International Monetary Fund will continue to pressure Nigeria to lift its foreign exchange restrictions, which have proved costly for the country's currency reserves. But the government will likely limit its actions to small steps, avoiding a completely free-floating naira in the name of price stability. Nevertheless, Abuja will make minor progress in reforming the country's business environment as it pursues its 2017-2020 Economic Growth and Recovery Plan. This progress will likely include increasing transparency in service-level agreements (such as permits) and improving efficiency in the entry and exit of people and goods, which Nigeria's plan is slated to target first. More ambitious reforms, however, will suffer if Buhari — who has reportedly reduced his working day to only a few hours — remains in ill health.
As government coffers come under increasing strain, the president will have to forgo expensive projects that could win over new allies and prevent the fissures within his party from widening. Deals intended to placate militants and stakeholders in the Niger Delta will likewise be modest, thus lacking the broad appeal needed to please the region's fractious groups and keep them from resorting to politically motivated violence. The possibility that Niger Delta militants will try to increase pressure on the federal government in the second quarter by holding protests and conducting attacks as Abuja builds a peace package for the region cannot be ruled out.
The Post-Apartheid Era Ends
The contest over who will succeed South African President Jacob Zuma as the head of the African National Congress (ANC) will continue to heat up this quarter. Finance Minister Pravin Gordhan and other Zuma detractors were dismissed in a March 30 Cabinet reshuffle that removed several ministerial roadblocks constraining the president's actions. Zuma has since appointed his close allies as replacements. Over the next three months, opposing factions within the country's ruling party will press for their favored styles of reform as Zuma further emphasizes the need for radical economic change, including greater black economic empowerment, to energize his base and improve the odds that his successor will emerge from his ethnic Zulu and pro-labor circle. One possible candidate is his political ally and former wife, Nkosazana Dlamini-Zuma, who returned to the country in March after serving at the African Union for four years. She has since begun campaigning for the ANC's top position.
Meanwhile, the president's dismissal of Gordhan, whom the international community views as a steady hand over the economy, prompted S&P Global to downgrade South Africa's credit rating on April 3. The move will only further weaken the country's fragile financial position. Judicial proceedings related to corruption allegations and other cases that involve Zuma and his inner circle may prove an additional distraction as revelations of politically damaging information threaten to complicate matters for the president.
Zuma's options will be further constrained by the countermoves of the ANC's more market-oriented faction as it seeks to strengthen its own candidate ahead of the party's December leadership congress. This wing will continue to push for restrained spending measures and budget cuts that are anathema to Zuma's need to shore up support among his followers. Its ability to hamstring the president, however, was weakened by the March 30 Cabinet reshuffle. As the country's ongoing leadership struggle intensifies, the government will have a harder time pushing through difficult reforms in the months ahead, and rifts within the ANC will widen.
For the most part, labor relations will remain calm in the second quarter — at least compared with previous years — as numerous agreements remain active until the end of the year and as the government seeks to avoid a credit downgrade. Nevertheless, tensions within the coal industry will continue to mount as the opposing sides debating the structure of wage negotiations struggle to find common ground. (In January, the previous policy of holding negotiations at a centralized level will be replaced by negotiations at the company level.) Tense labor relations in the coal sector could worsen if Zuma and his camp politicize the talks in order to energize their base for the brewing leadership battle.
Old Leaders in New Africa
In the Democratic Republic of the Congo, President Joseph Kabila's political alliance will continue seek a successor who can protect the well-entrenched system of patronage it depends on to maintain power. As it stands, a 2017 election is still a possibility, even as the ruling party and portions of the opposition struggle to implement a Dec. 31 deal to transition power away from Kabila. With the president still in office despite finishing his constitutionally mandated final term in 2016, the deal's collapse looks increasingly likely. Progress on voter registration in some provinces has been made, yet millions of Congolese citizens have yet to be registered, and it is unclear how a presidential contest would be paid for, given its hefty price tag.
The political obstacles that arose after the Dec. 31 deal was signed will endure in the second quarter, causing little progress to be made between the ruling party and the opposition. This means that the time available for Kabila, who oversees a weak and fractious political order, to find a successor before 2017 ends is running out. And in the absence of an acceptable successor, the president will be more likely to resort to additional delaying tactics — such as citing election costs — to push the election (and by extension, his rule) until 2018, risking sustained unrest in the process.
Mozambique's Financial Mess
Within the next three months, the government in Maputo will be forced to strike a deal with bondholders to restructure its debts. Negotiations became necessary when it was revealed in 2016 that bond proceedings were misused to buy military equipment and large amounts of debt were hidden. The ultimate success and timing of the negotiations will be crucial since the country, hoping to secure a bailout before the year ends, seeks to open talks with the International Monetary Fund in a bid to restore its support. A bailout would help ease the burden on the cash-strapped state, where patronage networks are strained (which could open splits within the ruling Mozambique Liberation Front) and investment in its oil and natural gas sector has stalled. Should Mozambique fail to reach a bailout deal, suspended energy industry investments could hamper development over the next few years and increase the risk that its burgeoning natural gas sector won't get off the ground amid the pending glut in the liquefied natural gas market.
Last year, social unrest directed against the Tigray minority-led government in Addis Ababa spread, challenging its control of the country. But Addis Ababa's use of heavy-handed security measures in the latter half of 2016 and into 2017 has blunted the opposition movement's ability to unite, grow and intensify its pressure on the government. In the second quarter, the crackdown will continue to constrain the opposition, keeping the conflict to a low boil even as flare-ups posing significant risks to foreign businesses operating in Ethiopia persist. Ethiopia's waning internal security concerns will give it additional maneuverability in neighboring Somalia, where Addis Ababa is currently reshaping its presence.
East African Integration
East Africa will continue to see crucial infrastructure projects come online this quarter. Following the inauguration of the Addis Ababa-Djibouti Railway in early 2017, another Chinese-funded project — the standard-gauge railway connecting Mombasa and Nairobi — is on track to be completed around June or July. The railway, which is Kenya's largest infrastructure project since independence, will provide the country with greater transport efficiency and supply-chain redundancy from its biggest port to the capital city.
Meanwhile, the European Union's proposed economic partnership agreement with the East African Community remains troubled. The deal, which has been in the works since 2007, would give member states duty-free and quota-free access to the European Union's market. In exchange, the community would remove tariffs on 80 percent of its imports from the bloc by 2033. But Tanzania and Uganda have serious reservations about the deal, and Burundi continues to be isolated diplomatically, leaving only Kenya and Rwanda to have signed onto the agreement. During the second quarter, the European Union and Kenya will keep lobbying the community's dissenting members for their support, but Tanzania will continue employing delaying tactics in hopes of killing the deal.
Matthew Paul Malloy
Veteran: USAR, USA, IAANG.
Duty! Honor! Country!