China, Iran, Greece: Game-Changers for Business

The coming week could bring resolution to long-running dramas in China, Iran, and Greece. Media coverage focuses on whether governments will reach agreement and successfully intervene to preserve economic stability. At Frontier Strategy Group, we are evaluating both near-term downside risks, which could still be high-velocity and high-impact, and the prospects for business in the longer term. Here is our current assessment of these three fluid situations and a taste of the recommendations we are giving our clients right now.

China: Unprecedented resilience or uncontrollable bubble?

The bursting of China’s stock market bubble arrested the world’s attention this past week. We recommend that every global company focus serious analytical firepower on two key risks today. First, the stability of the Chinese financial system. The collapse in valuations has left many investors unable to cover margin loans and many small companies who borrowed on the basis of their share price unable to pay their lenders back. The last thing China needs is to lose control of non-performing loans — the number-one risk we have highlighted to clients in our Events To Watch report for two years running. We are increasing the likelihood of our Chinese Financial Crisis downside scenario by 15 percent.

Secondly, stock market losses will indirectly damage the prospects of foreign businesses in China. Unsophisticated retail investors, including many pensioners, have seen their savings wiped out in a matter of weeks. In a nation with a limited social safety net, the resulting financial burden will fall on family members, spreading ripple effects of reduced discretionary income and consumer confidence. This strikes directly at the government’s strategy to migrate China from its investment-led growth model to one sustained by domestic consumption. Next week we will conduct our monthly refresh of our base-case forecasts, and our lead China analyst Danyi Yang will be reducing our GDP forecast for 2015, especially the consumption component. The only silver lining here is that share-price collapses could weaken some of the feisty local competitors that are our clients’ top concern, according to our recent Shanghai roundtable.

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Holding our breath for an Iran deal

After seemingly interminable extensions of the negotiations between Iran and the P5+1 world powers, we are finally entering “deal or no deal” territory. The American political calendar will make it progressively more difficult to gain support for any deal, so it is quite likely that a deal will be reached — or the process will fail decisively — as early as Monday. The salient question for executives is how swiftly deal implementation allows serious business to get done by foreign companies. That helps you determine the right actions to take.

Iran is an untapped gold mine for Western companies across industries, the second-largest market in the Middle East. “Rapid Iran Market Opening” is the lone upside scenario in our 2015 Events To Watch, because the ability to move fast on bringing products to Iran — and taking profits out — would measurably impact 2016-17 growth for companies that are best prepared. Fortunately, 82 percent of our clients are actively reassessing their Iran plan now rather than waiting for a deal.

Please join our MENA Practice Leader Matthew Spivack for a live Iran webinar on July 21 to discuss the latest developments, and more importantly, how our most forward-thinking clients are positioning themselves for success. Anyone can register.

Greek “defeat” doesn’t mean risk is over for eurozone

The Greek drama has alternated between tragedy and farce on an almost daily basis. The negotiations between Greek officials and Eurozone ministers, Germany foremost among them, over a third bailout are near an end. Greece’s parliament has capitulated, approving an austerity package that was roundly rejected in last weekend’s popular referendum. Unfortunately, the media storyline of German winners and Greek losers glosses over the lurking risks that matter to the economy and to business.

Our long-standing analysis of the risk factors and scenarios for Greece’s financial system demonstrate that even agreement on a bailout leaves downside scenarios in play. Since serious debt reduction is out of the question, Greece’s ability and willingness to pay off its massive obligations to European institutions will plague EU relations and Eurozone viability for decades to come. That a deal today relies on Europeans’ trust in future Greek governments’ commitment to fiscal probity is itself a risk factor. The parlous state of Greek banks makes it impossible to rule out accidental default due to a delayed or poorly implemented deal. Several northern European ministers still openly wish for a Grexit, now or later.

The only benefit from Europe’s practice of kicking the can down the road has been the progressive insulation of the broader financial system and other heavily indebted economies from a Greek default or Grexit.  Still, we anticipate euro devaluation under almost any scenario. Check the blog posts of Global Economics practice leader Lauren Goodwin for updates on Greece as the week progresses.

Clearing the fog for 2H and 2016

FSG’s analysts are tracking these and many other events around the world. If you’re a client we’ll keep you updated by email according to the geographic focus areas you’ve given to your account director. You can also use our new customizable Dashboards to get colleagues on the same page about key data for 2016 targets and budgets.

If you’re new to FSG, you can track our blogs and media commentary on LinkedIn and podcasts on iTunes. We welcome your comments and questions.

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