2014 – A year of turning points
As we approach the conclusion of 2014, I would like to reflect on the significant turning points we experienced during the year and what they could mean for us going forward. Some of these turning points were positive, but many of them were negative, adding to an uncertain future for all of us. All of them warrant further discussion, so please feel free to add your comments.
The declining oil price
During the course of 2014, the oil price declined by almost half from over $110 per barrel to under $60 per barrel, driven by excessive supply relative to demand. Oil demand is lower than expected (c.30m barrels per day in 2014 vs. c.32m barrels per day in 2007) due to relatively weak economic growth in the developed world and developing economies such as China, with factors such as increased efficiency and substitution (increased use of natural gas) playing a role. Supply is higher than expected for 3 reasons: 1)the USA is now the largest oil and gas producer in the world,increasing its production by almost 30% since 2000, largely by expanding its shale gas and oil production; the turmoil in Iraq and Libya has not affected their production as expected (still producing c.4m barrels per day), although this may change; and OPEC (largely driven by Saudi Arabia) has opted not to cut production, choosing market share over price.
On the positive side: A declining oil price should lead to lower fuel and energy prices, which should reduce inflationary pressures and provide a boost to consumption. However, in SA and other countries that are suffering from a concurrent currency depreciation (the rand has depreciated by 10% vs. the dollar over 2014), the positive impact will be diminished.
On the negative side: Countries that are dependent on oil revenues (Russia, Middle East, Venezuela and Nigeria) are likely to face meaningful economic pressure. This could have a detrimental impact on the people living in these countries and could lead to geopolitical pressure in regions that are already unstable.
What could 2015 bring us? One of two outcomes is possible and both are likely to be supply driven. If OPEC sticks to its guns and maintains supply, if the US continues with shale gas exploration despite the reducing economics (as a result of the low price) and troubled regions (Libya and Iraq) maintain production, the oil price will remain low. If any of the above factors change, the oil price may rebound, but is unlikely to return to the levels prior to the decline.
After decades of being ignored as a major risk to global health, Ebola became a meaningful threat to West Africa during 2014 and started to be noticed by the rest of the world. According to the latest estimates, c.7 600 people have died from Ebola during 2014 with c.19 340 cases confirmed by the World Health Organisation (c.8 939 in Sierra Leone, c.7 830 in Liberia and c.2 571 in Guinea). For the countries most affected, the economic impact has been devastating with meaningfully lower economic growth in 2014 (compared with strong growth previously) and negative growth forecast for 2015. As a result, the Ebola epidemic will touch many more people indirectly through hunger and financial hardship, in part due to the reaction to the disease (isolating communities and reducing their access to food and economic activity).
On the negative side: Many more people will die from Ebola and from the economic devastation as a result of the disease and West Africa, that has started to become a strong economic growth area within Africa, will languish for some time to come.
On the positive side: Ebola is finally being taken seriously by governments and pharmaceutical companies globally and there are 2 viable vaccines that could hit the market in 2015 with a number of other vaccines being in early stages of development.
What could 2015 bring us? We are likely to see an initial escalation in Ebola cases and deaths, but we are likely to see a positive turning point in the fight against this disease during 2015 as vaccines start to be rolled out.
Russia and the Ukraine
During 2014, Russia started to exhibit imperialistic tendencies by choosing sides in the Ukrainian conflict and supporting Ukrainian opposition forces (although disputed by the Russian authorities). Two meaningful turning points were the annexation of the Crimean Peninsula by the Russian Federation in March 2014 and the downing of Air Malaysia (reportedly by Ukrainian opposition forces) in July 2014. Despite outrage from the USA and many European countries, the response has been soft-handed with limited sanctions being imposed on Crimea and Russia. These sanctions have only served to increase tensions in the region.
On the negative side: Ukraine remains vulnerable to Russian interference, driven by its strategic importance, political uncertainty and low oil prices. Ukraine lies at the heart of Eastern Europe and is home to two vital Russian oil pipelines (the Druzba pipeline being the most significant). The country is a top Nuclear power producer in the world and gets almost half of its electricity from Nuclear power plants. The Ukrainian political system is teetering on a knife’s edge as a coalition between two power centres (President Petro Poroshenko’s and Prime Minister Arseniy Yatsenyuk).
What could 2015 bring us? Pressure on the Russian economy from a low oil price and collapsing Ruble (it lost more than 40% of its value vs. the dollar in 2014), combined with uncertainty within the Ukraine may lead to further Russian incursions into Ukraine with the possibility of further annexations. This may force the West to take stronger actions against Russia, which could lead to a military build-up on both sides.
The rise of the Islamic State in Iraq and Syria (ISIS or ISIL) was big feature of 2014. In the wake of the Iraqi insurgency and the subsequent withdrawal of US forces and the civil war within Syria, ISIS gained meaningful power and territory during 2014 and now controls half of Syria and a third of Iraq. The rise of ISIS was accompanied by extreme violence, executions and fear tactics. The response to ISIS by Western countries, led by the US has been in the form of air strikes and “advisors” on the ground, but has had limited effectiveness. The main stumbling blocks to effectively dealing with the ISIS threat is: 1) the civil war in Syria and the unwillingness of Western forces to support the Bashar al Assad government after the atrocities they perpetrated; and the isolation of Sunni Muslims in Iraq from the political process.
On the negative side: ISIS is creating devastation in Syria and Iraq and is persecuting anyone that does not agree with its ideology. They could expand their territory further and cause pain and suffering to more people in the region. Further, by attracting increasing numbers of foreign fighters, they could export terrorism to other countries in the world.
What could 2015 bring us? We are likely to see an expansion of ISIS territory and more violence in the region. We are also likely to see terror attacks in other countries, perpetrated by foreign fighters returning home. However, we may also see a thawing in the relationship between the US and Iran as they find a combined purpose in trying to eradicate ISIS. There may be positive moves from the Iraqi government to become more inclusive, which may lay the groundwork for an effective ISIS pushback, driven by Sunnis in the region.
In July 2014, Israel launched a military operation into Gaza following the kidnapping of 3 Israeli teenagers and sustained rocket fire into Israel. The operation lasted 7 weeks, killed 2200 people (mostly Gazans of which up to 75% are claimed to have been civilians) and destroyed a large amount of infrastructure. In the wake of the operation, c.273 000 Palestinians were displaced, c.1.8m were affected by a halt or reduction in water supply, power supply was limited to 2 hours per day and almost 500 000 people required emergency food assistance. The Gazan economy was devastated.
On the negative side: People in Gaza are suffering and there appears to be no end to this. The Western response to this tragedy appears muted and this is fuelling anti-western and anti-Semitic tensions all over the world. This absence of a resolution to the Gaza issue could add flames to the ISIS threat and increase the risk of domestic terrorism.
What could 2015 bring us? Israel will have a general election in March 2015, which is likely to lead to a change in government. The two politicians that are currently considered king-makers are Avigdor Lieberman (if left untainted by the current corruption scandal) and Moshe Kahlon. Kahlon’s platform is very internally focused, while Lieberman has mentioned a UN mandate for Gaza as a possible solution to the conflict. A change in the Israeli government is likely to lead to a change in stance on Gaza.
Changing SA political landscape
During 2014, there were a number of political turning points, many of which should be seen as red flags by the SA government. In the 7 May 2014 general election, the ANC obtained 62.2% of the vote, down 3.7% from 2009, while the DA gained 5.5% to end on 22.2% and the EFF obtained 6.4% in its maiden election. The ANC’s decline in support could have been more meaningful were it not for the collapse of COPE and a continued decline in the support of the IFP (thanks to Jacob Zuma). The Johannesburg and the Nelson Mandela Bay Metropoles were both meaningful areas of loss and could be at risk during the municipal election of 2016. A second turning point was the ructions within Cosatu and the expulsion of NUMSA (the largest single trade union in SA) from the trade union federation in November 2014. Additional pressure was brought to bear on the government due to extensive load-shedding by Eskom, weak annual national assessment (ANA) results and the Nkandla scandal.
On the negative side: The turning points during the year have created increased uncertainty within SA. The rise of the populist left with their policies of nationalisation and aggressive redistribution has raised the spectre of potential class conflict in our future. At the same time, poor outcomes (education, electricity) combined with a vocal opposition and press, increases the risk that government opts for a laager mentality rather than openness and collaboration.
On the positive side: The loss of political support by government and the potential for further loss could increase the pressure for delivery. There are many areas where government can perform better and are able to perform better, given sufficient political will. It is possible that political pressure could expedite this.
What could 2015 bring us? Although NUMSA has initially distanced itself from the EFF, there remains the potential for these two groupings to move closer together, increasing government opposition to the left. We are likely to see an improvement in government delivery during 2015, driven by both internal and external pressures. Load shedding should become less prevalent over the year. Cyril Ramaphosa is likely to take a larger role within the ruling party at the expense of Jacob Zuma.
Other turning points
There are other turning points that I do not have the space to address in this blog (but feel free to comment below), including the rise of Boko Haram in Nigeria, the Oscar Pistorius and Shrien Dewani trials, rhino poaching, the American congressional election and the increased unilateral actions of Barrack Obama, the detente between the USA and Cuba, positive developments on global warming and the decline of the Rand.
To my readers, are there any turning points you would like to add to this list? Please let me know what you think.
In the mean time, all the best for 2015! Keep your talk straight!