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Oil recently hit a 3-year high as tensions in the Middle East have escalated and President Trump has pulled out of the Iranian nuclear deal. However, this has distracted attention from elsewhere in the resource rich region.
A major geopolitical crisis involving Egypt, Ethiopia and Sudan has erupted over who controls the Nile, the world’s longest river. The cause of this conflict is the $5bn hydroelectric dam in Ethiopia, known as the Grand Ethiopian Renaissance Dam (GERD), which could generate over 6,400 Megawatts for the country, a significant boost to the current production of 4,000 Megawatts. This project is due to be completed by the end of 2018.
Most of Egypt’s current water usage comes from the Blue Nile and most of its 94 million population live along its cultivated banks with the rest of the country virtually uninhabitable. Under a 1959 agreement between Egypt and Ethiopia, the former gets 55.5bn cubic metres of water from the river. However, the Egyptians are concerned that it might not get this amount while the Ethiopians fill the 74bn cubic metre reservoir. To complicate matters, Sudan is not a signatory to the 1959 agreement, but is in favour of the dam as it will stop flooding and allow it to expand its agriculture.
Talks between the three countries broke down at the end of last year. The Egyptians have proposed the World Bank is included in future talks as a neutral party. Ethiopia wants the energy, Sudan the agriculture and Egypt the water. This is another sign that, as the global population grows and urbanisation increases, more strain is put on the world’s natural resources. While fossil fuels will gradually be replaced by greener technology, water resources remain scarce. Will we one day see conflict over water resources?
What have we been watching?
Last week’s events were defined by tensions between the US and the EU, after President Trump decided to announce the withdrawal of the US from the Iran nuclear deal. As a result, some EU leaders expressed their intention to press Washington to exempt European companies from fresh US sanctions.
On the other hand, global trade tensions between the US and China eased slightly as President Trump announced a U-turn to help save ZTE, one of China’s biggest telecom companies. ZTE had suspended operations, having been subject to US sanctions after making illegal shipments to Iran and North Korea.
In terms of central bank action, the Bank of England left interest rates unchanged as a result of a “temporary soft patch” mainly caused by bad weather. On the other side of the pond, US inflation fell short of expectations, helping the pound recover some lost ground against the dollar.
Another important development to highlight is the potential coalition between Italy’s two populist parties, after Silvio Berlusconi gave an effective green light to a deal. The Italian 10-Year bond yield rose to 1.9%, a six-week high, as the potential implementation of populist policies could have a material impact on the country’s fiscal stability.
In the UK, following the sharp slowdown in growth to 0.1% in the first quarter, the Bank of England said the UK economy has hit a “temporary soft patch”, reflecting the impact of bad weather, as it kept interest rates on hold at 0.5%. However, Mark Carney also mentioned that the “underlying pace of growth remains more resilient than the headline data suggests”, which implies that the prospect of rate hikes is still on the cards. The pound fell on the news as the pace of rate increases has now become unclear.
In the midst of concerns about potential job losses as a result of the proposed merger of Asda and Sainsbury’s, last week saw one of the biggest rounds of corporate redundancies a British company has ever seen, as BT announced its intention to cut 13,000 jobs over three years, representing about 12% of its workforce. This news highlights the challenges faced by a number of sectors where increased competition and structural change have become the main factors driving performance.
In Europe, one of the most important developments last week concerned politics, as Italy’s populist parties could be close to forming a government. The potential coalition between Five Star Movement and the League has been considered the most destabilising outcome as both parties have challenged EU fiscal rules and treaties in response to widespread discontent expressed by part of the country with the way the EU has handled economic policy and migration. The two parties took a populist approach during the campaign, and the combination of cutting taxes and raising spending could represent a potential threat to the financial stability of the third-largest economy of the Eurozone, which also happens to be one of the most indebted in proportion to their GDP.
In the US, fears that Trump may pull the US out of the Iran nuclear deal became a reality. Furthermore, Trump announced that the US was to reimpose sanctions on entities that continued to trade with the country. These actions could generate tensions between the US and the EU, as European politicians consider countermeasures to nullify any US sanctions and continue to trade with Iran in order to protect billions of euros of European business.
Another important piece of news that broke last week was the date Donald Trump’s long-awaited meeting with Kim Jong-un, which has been confirmed to take place in Singapore on June 12th. Considering how tense the rhetoric has been in the past, it seems unimaginable that the two leaders are able to meet in person.
As Brexit negotiations continue, disputes around joint projects such as Galileo, the new satellite navigation system launched by the EU, have deteriorated as the managing director of Airbus announced that a potential €200m contract between the European Space Agency and the aerospace company will be moved from Portsmouth to France or Germany, should Airbus win the bid. This would be done in response to the European Space Agency’s rule that only EU member states can be lead contractors on the project.
A number of analysts have raised their forecast for Brent crude, with some estimating that oil prices could rise to $100 a barrel as a result of renewed sanctions on Iran.
Finally, if you ever wonder whether you may be “too old” to do something, remember that Dr Mahathir Mohamad was elected last week as Malaysia’s Prime Minister at the age of 92, becoming the world’s oldest prime minister. Who said working isn’t fun?
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