Fourth Quarter Forecast 2013

At the beginning of the year, we outlined how U.S. foreign policy increasingly would be defined by its restraint as the United States attempts to reorient its priorities away from the Middle East. At the same time, we noted that the Syrian chemical weapons issue would be the wild card that would challenge this policy of restraint and compel the United States to cobble together a coalition in haste. That forecast materialized in the third quarter, with the United States trying -- and failing -- to build a coalition for an intervention that it was not particularly enthused about. Both Iran and Russia were quick to seize on the opportunity, and out of the diplomatic fog emerged two aggressive negotiating tracks that will feature prominently in the final months of 2013.


Related Links

Stratfor's Annual Forecast 2013

Stratfor's Second Quarter Forecast 2013

Stratfor's Third Quarter Forecast 2013

While both Iran and the United States are serious about pursuing a dialogue, the transition from making positive gestures to negotiating substantial concessions will be difficult. Iran will expect some give-and-take from the United States on sanctions in negotiating the nuclear issue, but the U.S. president will have a limited range of choices for highly visible concessions he can make independently without having to consult an obstinate Congress. A nervous Saudi Arabia and Israel, meanwhile, will exercise their respective levers to undermine the negotiation, though they will face limits as the United States and Iran try to fast-track the talks while Iranian President Hasan Rouhani still carries support at home.

The United States simultaneously will try to sustain another highly ambitious negotiation with Syria and Russia to eliminate Syria's chemical weapons stockpile. Political, logistical and security complications will arise this quarter in planning and carrying out an operation of this magnitude, though neither Washington nor Moscow will allow the plan to collapse. Russia, while trying to manage rising economic pressure at home, will ensure its heavy involvement in both the Syrian and Iranian negotiating tracks to keep the United States dependent on Moscow for managing the Middle East.

Russia will then use that leverage to make sure the United States keeps its distance from an intensifying competition between Russia and Europe this quarter over a number of former Soviet states. Ukraine, the most critical state in this competition, will likely end up balancing any favorable actions toward the European Union with energy concessions to Russia.

Germany will stay out of that fight, focusing instead on battles within the eurozone after a relatively quiet summer. Headline statistics out of Europe on marginal growth improvements and the debate over a banking union will lead many observers to conclude that the crisis is abating, but we will instead be focused intently on the amount of consumer debt quietly piling up in Europe as unemployment levels remain critically high and banks continue to refrain from lending in the buildup to the next phase of the crisis.

Developing economies vulnerable to short-term capital outflows will get some reprieve from a U.S. decision to delay or at least move more slowly in its policy to taper quantitative easing, but the structural deficiencies exposed in the last quarter for many of these economies are now on full display. A number of Southeast Asian states will try tactical adjustments to prepare themselves internally for the coming capital crunch, but the reforms will necessarily remain shallow to manage social unrest and populist demands. Even as India tries to pass long-awaited legislation to encourage more stable and long-term foreign direct investment, those measures may end up being too little, too late for New Delhi and other governments trying to implement long-deferred structural reforms under mounting political pressures.
Middle East





Iran Seeks an Opening for Dialogue

As we saw last quarter, Iran has attempted to use a U.S.-Russian diplomatic framework for Syria to edge itself into a more comprehensive dialogue with the United States. Under the direction of Iranian President Hasan Rouhani, and with the approval of the supreme leader, the Iranian government will make conciliatory gestures on a political settlement for Syria and on the Iranian nuclear program in laying the groundwork for a diplomatic rapprochement. The United States will move cautiously toward dialogue, beginning in a multilateral setting, but the U.S. president will also be sensitive to Rouhani's limited timetable to show progress in the negotiation back home. The attempt to fast-track the talks will eventually run into hurdles, and the U.S. president faces limits in what he can concede, particularly on energy sanctions, without the consent of an intractable U.S. Congress. For this quarter at least, the negotiation will move forward.

Given Washington's cautious approach to talks, Iran will try to diplomatically re-engage the United Kingdom to build a Western channel to Washington. Iran will also make quiet diplomatic outreaches to Saudi Arabia as it tries to convince Riyadh that a U.S.-Iranian accommodation is inevitable. Saudi Arabia does not face enough pressure from Iran at this stage to enter a negotiation with its main adversary and will instead focus its efforts in boosting weapons, money and fighters to the Syrian rebels from the Arabian Peninsula to compensate for U.S. inaction. Saudi Arabia, along with the other members of the Gulf Cooperation Council, will draw negative attention to Iranian and Hezbollah activity in the region in an effort to undermine a U.S.-Iranian dialogue.
The Plan for Syria

The U.S.-Russian diplomatic plan to strip Syria of its chemical weapons will encounter a number of political and logistical hurdles this quarter, particularly in forging a cease-fire and providing adequate protection for weapons inspectors. Nonetheless, the United States will rhetorically maneuver around these obstacles to sustain the diplomatic option and thus avoid another ill-fated campaign to rouse support for a military response against Syria.

Another large-scale chemical weapons attack would be a deal-breaker for the plan, but the Syrian regime likely will avoid such a provocation and focus instead on using this period of diplomatic limbo to attack rebel positions using conventional assets. As we emphasized last quarter, the regime will be constrained in this multi-pronged offensive, resulting in an overall stalemate on the battlefield. Though Syrian rebel factions will try to derail the U.S.-Russian diplomatic initiative through attacks and propaganda, they will remain too weak and divided to undermine the plan and force a military intervention. In fact, rebel frustrations over U.S. inaction in Syria will only heighten rebel infighting this quarter and complicate external considerations to arm seemingly moderate factions.

The Syrian Conflict's Other Effects in the Region

Spillover sectarian violence in Lebanon will remain steady in the coming months. Hezbollah will concentrate its fighters along the Syria-Lebanon border and boost its security presence in its neighborhood strongholds to counter Sunni militant provocations. Israel will maintain a pre-emptive military posture to target any attempts by the Syrian regime to transfer advanced weapons systems to Hezbollah.

Turkey will try to balance this quarter between maintaining a stable relationship with Iran in the evolving diplomatic environment and maintaining its support for the Syrian rebels. The Syrian regime will in turn try to enhance its working relationship with Kurdish factions in Syria, Iraq and Turkey to sabotage Turkey's broader containment strategy with the Kurds. Turkey's ongoing struggle in trying to push forward its shaky peace agreement with the Kurdistan Workers' Party and continued economic stress will be exploited by the ruling Justice and Development Party's political opponents, preventing Prime Minister Recep Tayyip Erdogan from trying to reshape the Turkish presidency through a constitutional referendum with Kurdish backing.
Iraq's Sectarian Tensions to Continue

Sunni militant violence in Iraq will remain at a relatively high but steady level as the overall regional jihadist focus stays on the Syrian battlefield. In northern Iraq, Turkey and the Kurdistan Regional Government will advance construction on a pipeline and alternate pumping and metering station designed to circumvent Baghdad's veto on Kurdish exports and investment deals with foreign firms. As the project enters its final stage, the long-standing political impediments to the plan will overshadow any announcements on the pipeline's near-completion. Turkey will not be able to convince Baghdad to accept its proposed payment mechanism for exports. Moreover, heightened intra-Kurdish political competition and potential unrest will limit the ability of a divided Kurdish leadership to challenge Baghdad on energy exports this quarter.
Egypt's Military Tries to Combat Militancy

In Egypt, the military's ongoing crackdown against the Muslim Brotherhood will radicalize more Islamists and result in a steady increase in low-level attacks on police stations and other state infrastructure across Egypt. An increase in religious violence by radical Islamists against Coptic Christians will be exploited by the military to justify further crackdowns. At the same time, Salafist-jihadists will sustain near-daily attacks against security forces in the Sinai Peninsula. Some of these groups will continue to expand their target set and launch attacks in mainland Egypt and tourist areas. These attacks will be more infrequent, but will have the potential to inflict more casualties and structural damage.

In trying to contain the Salafist-jihadist threat and keep the Islamist political landscape divided, the Egyptian military will maintain relations with Salafist political groups and former jihadists and try to keep them politically engaged with the government and constitutional committee. Political friction within the committee over the drafting of the Constitution will extend the process into next year, prolonging the political transition.

The Egyptian military's growing distraction with Islamist militancy will increase pressure on Hamas in the Gaza Strip, where it will see its influence challenged by competing Palestinian and jihadist factions. Faced with limited means to force Egypt or Israel into a negotiation to reopen its borders, Hamas will remain caught between efforts to threaten the Egyptian military by facilitating attacks in the Sinai and an imperative to not completely alienate Cairo.
North Africa: Tensions in Libya, a Succession in Algeria

In Libya, Tripoli will face significant challenges to its authority from regional power centers in Zintan, Misurata and Benghazi. At the same time, the local city councils will struggle in trying to rein in competing militias and tribal groups in their respective regions, resulting in a highly fragmented political landscape overall. Libyan Prime Minister Ali Zeidan will also face external pressure to stabilize the country's political and security environment enough to revive Libya's oil production. However, oil production will continue to fluctuate significantly this quarter as power struggles on multiple levels persist.

Ailing Algerian President Abdulaziz Bouteflika will proceed with the final steps of his succession plan this quarter. Constitutional amendments, including the creation of a vice presidential position, can be expected. Any objections to this carefully choreographed succession plan will be mitigated by increases in social spending.

As Algeria maintains relative calm on the domestic front, it will gradually deepen its involvement in its periphery in response to growing political instability and militancy in both Tunisia and Libya. As Stratfor highlighted in the annual forecast, Algeria will use security cooperation with its neighbors and its energy relationships with the West to strengthen its regional role. In Tunisia, in particular, Algeria will mediate a slow-moving political negotiation, in which the embattled Ennahda party will try to avoid replicating the mistakes of the Egyptian Muslim Brotherhood in seeking a compromise with its political rivals. Morocco, meanwhile, will be inwardly focused as it attempts to balance the implementation of political and subsidy reforms.
Europe






Europe Focuses on Finances

After a period of relative paralysis in the lead-up to the German elections over the summer, Europe will be thrown back into a lively debate over the creation of a banking union, the expansion of credit to small and medium-sized companies and the granting of additional financial assistance to crisis countries. The debate itself will expose growing polarization on the Continent as economic pressures migrate north, but little headway will be made in addressing the structural roots of the crisis.

As a first step toward creating a banking union, the European Union agreed last quarter on a centralized bank supervision authority (due to start in 2014). Over the next three months, EU leaders will probably arrive at a generic agreement on the decision-making process for bank resolutions in the eurozone, the so-called Single Resolution Mechanism. However, critical points regarding its implementation will be deferred until next year.

After a quiet summer, high unemployment and lack of credit for small and medium-sized companies will again top the EU agenda. Member states and institutions (such as the European Central Bank and the EU Commission) will issue various proposals designed to fight unemployment and dearth of credit, especially in the eurozone periphery. Though some positive economic indicators will give the impression that the crisis is abating, Stratfor expects unemployment to remain critically high during the quarter and credit for households and companies to remain tight, particularly in the periphery.

EU members will approve their budgets for 2014, which will lead to political friction at the state level. Most countries will push for a relaxation of fiscal consolidation measures, seeking to avoid an escalation in social unrest. The budgets for next year will still primarily involve spending cuts, but they will not be as deep as initially thought. While we expect the European Union to criticize some countries for their lack of reforms, no meaningful sanctions will be applied.

Europe and the Syrian Crisis

France and the United Kingdom, which have been the most vocal EU member states in trying to pressure Syria, will join the United States in its attempt to sustain the diplomatic proposal to destroy Syria's chemical weapons. European member states will lend their diplomatic support for the plan and may pledge to send funds or technical experts and equipment, but will not be willing to play a leading role in providing the security necessary for such a mission. Moreover, after the traumatic experience at the British and French parliaments, London and Paris will not provide troops without formal parliamentary approval. Increased rebel infighting in Syria will complicate and likely delay any proposals to upgrade support for rebel factions with arms shipments.

As the economic crisis in Europe lingers and the civil war in Syria continues, the high flow of Syrian refugees into southern Europe will pressure southern European countries politically and economically. These countries will push for an EU-wide solution for the refugee issue, but to no avail. Nationalist (and, to some extent, center-right) parties in the European Union are likely to use the refugee situation to increase their anti-immigration rhetoric.
The Eurozone's Core: Germany and France

As we identified in the annual forecast, the economic crisis will continue spreading northward in Europe. After relatively positive news in the second quarter, economic performance will remain modest in Germany, weak in France and contracting in the Netherlands.

In the general elections held Sept. 22, Angela Merkel's Christian Democratic Union party secured a strong presence in the German parliament, but not enough seats to form a government by itself. Coalition talks with smaller parties will take place during the first weeks of the quarter. As a result, the decision-making process in Germany is likely to be frozen for several weeks, thus delaying the debate over structural reforms at the European level during the first half of the quarter.

France will approve a pension reform this quarter. While this could spark additional protests from some unions, we do not expect demonstrations to derail the approval of the reform. The EU Commission will keep pushing France to apply deep structural reforms, but Paris will keep its gradual and slow approach to reforms, favoring increased taxes over spending cuts.
Peripheral Eurozone: Italy, Spain, Portugal, Greece and Ireland

Ireland, Portugal and Greece (three countries that previously received bailouts) will push for additional assistance from the European Union and the International Monetary Fund. The Irish and Portuguese bailouts end in January and June 2014, respectively, and Dublin and Lisbon will push for extra assistance to secure a safe transition once their programs end. Ireland will probably reach an agreement on a precautionary credit line this quarter, but we do not expect a formal agreement with Portugal in the next three months.

Negotiations between the so-called troika (the European Commission, International Monetary Fund and European Central Bank) and Greece for additional financial assistance for 2014 will take place during the quarter, but an agreement is unlikely this year. Greece will be under pressure to apply additional reforms, including privatizations and layoffs in the public sector, which will spark protests in Athens and other cities. As we predicted in our annual forecast, Athens will continue to struggle to meet its lenders' demands, but the troika will still be lenient and will release further aid tranches under the current program.

In all the bailout countries, visits by troika inspectors will lead to clashes over structural reforms and conditionality between national governments and their international lenders. The lenders will grow more resistant to offering additional financial help as parties aim to show they are protective of their taxpayers, who feel the effects of the crisis as it moves north. Following a trend that we identified in our annual forecast, we expect the European Union and International Monetary Fund to be flexible with crisis countries, and bailout tranches will be disbursed where needed. This will prevent a major financial crisis in the eurozone in the next three months.

The Italian government will remain extremely fragile and under the long-standing threat of collapse. This will undermine its ability to apply substantial economic reforms. The Italian economy will continue to contract during the quarter. While the situation in Italy will generate concerns in the European Union and the financial markets, the European Central Bank's promise of intervention in sovereign markets will be enough to prevent a substantial escalation of the eurozone crisis because of Italy during the quarter.

In Spain, the pace of economic decline will slow, and unemployment levels will probably stabilize, but significant job creation is unlikely during the quarter. The Spanish government is likely to approve a reform of the pension system during the quarter as it seeks to reduce public spending. Any resulting protests will not impede Madrid from proceeding with the reform. As a corruption scandal involving the Popular Party deepens, Prime Minister Mariano Rajoy will reshuffle his Cabinet in an effort to refresh his government's image. However, this will do little to improve the ruling party's popular support.
Beyond the Eurozone: Hungary, Poland and the United Kingdom

In a continuation of Hungary's unorthodox economic policies, Budapest will apply a plan to convert foreign-denominated loans into forints. Additionally, as the elections scheduled for early 2014 approach, Budapest will intensify its populist and anti-European Union rhetoric and increase public spending. EU officials and banks operating in Hungary will protest these measures and rhetoric, but we do not expect any substantial sanctions against Budapest.

The political situation in Poland will remain fragile during this quarter, as Prime Minister Donald Tusk attempts to strengthen his government through new alliances with smaller parties and independent lawmakers. Tusk will try to stabilize the government with a Cabinet reshuffle, but its popularity is likely to remain low. Moreover, former members of the ruling Civic Platform party will establish new factions, and the opposition and labor unions will intensify their rallies against the government's economic policies. Despite these pressures, Tusk will be able to remain in power during the quarter.

In the United Kingdom, Prime Minister David Cameron will use criticism of the European Union to try to appease the more rebellious members of his coalition and compensate for a drop in support following his government's failure to approve a military intervention in Syria. Intra-coalition frictions will remain high, but Cameron's government will survive the quarter. On the EU level, Cameron's government will continue its anti-immigration rhetoric and its push for a re-evaluation of its links with the European Union.
Former Soviet Union





Diplomacy Over Syria

The United States and Russia will sustain a diplomatic arrangement over Syria through this quarter. The details of the U.S.-Russian plan for the elimination of chemical weapons in Syria are still vague enough that both the United States and Russia can manipulate the plan to avoid another major standoff. Russia will manage the diplomatic negotiations in such a way that Washington will remain dependent on Moscow for the sustainability of the plan.

The Kremlin will try to play up its diplomatic success in striking an agreement with the United States over Syria to divert attention away from a deteriorating economic situation at home. Moscow can also leverage the negotiations over Syria to keep Washington from bolstering Europe's efforts to expand its influence into a number of former Soviet states.

Russia-EU Competition in the Periphery

The fourth quarter will be important for the intensifying competition between Russia and the European Union for influence in the Russian periphery. A summit of the Eastern Partnership in Vilnius at the end of November is designed to increase political and economic cooperation between the European Union and the former Soviet states of Ukraine, Belarus, Moldova, Georgia, Armenia and Azerbaijan. The European Union has expressed hopes that several countries will either initial or sign association and free trade agreements during the summit, but Russia will take steps to dissuade the target states from further integration with Europe. Moldova and Georgia are likely to move forward with the EU agreements, while Ukraine -- the most important state in the competition -- will balance any movement toward the Europeans with concessions to Russia, particularly in the energy sector. Belarus, Armenia and Azerbaijan -- states with which Russia has increased ties -- will not enter into association and free trade agreements with Europe.

Caught in the middle of the EU push toward Russia's periphery is Germany, which is more cautious about such EU integration projects than Poland or Lithuania. Berlin has shown in the past that it will block any major Western move to integrate certain former Soviet states into its alliances, as it did when Germany blocked NATO expansion to Ukraine and Georgia in 2008. Poland will take the lead among Central European states in making an appeal for the United States to become more involved in the region, but, to the Poles' disappointment, the United States will be more cautious in balancing against Russia this quarter.
Domestic Russian Issues

The Kremlin will be heavily focused in the fourth quarter on its economic situation. The country's gross domestic product has dropped with each passing quarter this year. Russia's economic troubles have not reached the level of its 2009 financial crisis, though stagnation has already set in due to tight financial conditions facing the private sector (exacerbated by capital flight and high interest rates), a significant drop in export values, relatively high inflation and significantly decreased investment into Russia. As a result, the government has revised its growth expectations down to 1.8 percent from 3.4 percent for 2013. This will represent a significant slowdown from 2011 and 2012, when growth was above 4 percent.

Starting in the late third quarter, the Kremlin maintained high interest rates in order to control inflation and began implementing other policies, such as pricing caps in energy and transportation. An increase in hiring in the public sector has compensated for job losses in the private sector. These policy shifts will continue into the fourth quarter. The most important driver of growth in the fourth quarter will be increased investment, primarily through the implementation of stimulus packages that will see the Kremlin pump billions into expanding ports, roads and railways. Even as private businesses struggle, the Russian government still has the cash to spend due to high oil prices.

The Kremlin will also debate in the fourth quarter how it will trim at least 5 percent of the 2013 government budget through possible cuts to military expenditures or by tapping Russia's reserve funds, which total $685 billion. The government will also revise downward its budget and spending in the fourth quarter for 2014-2016, as the Kremlin is anticipating drops in future energy revenues. The Kremlin's policies to keep the Russian economy stable in the short term will have negative long-term consequences, particularly in future investment in the energy sector and in military industrial procurement -- both sectors that the Kremlin uses to expand its influence beyond its borders.

With only four months until the Winter Olympic Games in Sochi, the Kremlin will remain highly cautious on domestic security issues. Crackdowns against suspected militants in the Russian Caucasus republics will continue. Russian security forces in Moscow, the primary transit point for most travelers attending the Olympics, will broaden their target set to include militants, criminals and illegal migrants in crackdowns.
Shifting Geopolitics in the Caucasus

Presidential elections in Azerbaijan and Georgia this quarter will underscore the regional shift in Moscow's favor that Stratfor has tracked in previous forecasts. The Georgian elections likely will end the decade-long hold on power that Georgian President Mikhail Saakashvili's camp has maintained, resulting in a closer relationship between Georgia and Russia. This reorientation, combined with the beginning of Armenia's integration with Russia via the Customs Union, will compel Azerbaijan to cooperate more closely with Russia on political and energy matters.
Central Asian Instability

Central Asia will continue to see low-level violence and political instability in the fourth quarter. Particularly at risk is Tajikistan, which will hold presidential elections in November. These elections will test stability in the country from a security perspective and could re-aggravate regional divisions (especially in the rebel strongholds in the east) amid concerns over the implications of the drawdown of U.S. and NATO forces from neighboring Afghanistan.
East Asia





China Launches its Reform Agenda

As we wrote in the annual forecast, China will struggle to balance between the competing domestic needs for economic growth and reforming its economic model. By letting annual gross domestic product growth slip to the mid-7 percent range this year, the Communist Party of China has attempted to show its greater tolerance for the short-term effects of slower growth (such as rising unemployment) for the sake of shifting from an economic model overly reliant on exports and state-led investment to one grounded in greater domestic consumption.

But the fourth quarter, like the third, will show that such tolerance has its limits. In the coming months, Beijing will shift between measures to prop up weak sectors and other measures to tighten monetary and credit policy and better control the increasingly volatile shadow lending and real estate markets. The ability to tighten may be aided in the near term by the seasonal uptick in external demand for Chinese exports, temporarily relieving some of the pressures on Chinese manufacturers pinched between rising costs and competition from overseas. Nonetheless, this will not forestall the deeper trend of decline in China's export sector, nor will it remove the economy's continued reliance on state-led investment. In the fourth quarter, the government will ease credit conditions as needed to maintain stability and growth in the short term, even if doing so runs counter to long-term efforts to rebalance the economy.

The Chinese government's ongoing tactical struggle to balance investment-led growth against small, targeted reform initiatives will be overshadowed in the fourth quarter by the Third Plenum of the Communist Party. At the November meeting, President Xi Jinping and Premier Li Keqiang will introduce the reform platform that will guide their administration's domestic policy over the next five years. The reforms will include relaxing the hukou system to improve living conditions for migrant workers and create a more flexible, mobile labor force; adjusting the fiscal relationship between central and local governments to give locals more responsibility over their budgets; and enacting financial liberalization to make capital allocation more efficient.

Beijing will be slow and cautious in implementing each of these new policies, and any concrete effects probably will not be felt until well into 2014. Regardless, the Plenum meeting in November will be an important moment for the Party to establish the direction and credibility, both at home and abroad, of its planned reforms. It will also help clarify the nature and scope of economic reform that the administration deems possible within the constraints of a one-party system.

Regional Responses to China's Transition

As we forecast at the beginning of the year, China's transition away from its two-decade reign as the world's leading low-end manufacturer will have enormous ripple effects in the region. The fourth quarter will provide a microcosm of those effects.

The region's emerging economies, including Vietnam, Philippines and Indonesia, will continue trying to capitalize on the gradual shift of manufacturing investment away from China. But they are facing a more immediate challenge as exports and commodity prices fall, since these were key factors in the region's prosperity over the past decade. China's slower growth rates are thus forcing another turnaround to growth prospects.

Adding to the pressure is the ongoing concern over the United States' eventual withdrawal of easy monetary policies. While the Federal Reserve decided to delay the withdrawal of quantitative easing in September, the inevitable transition will pressure countries to begin adjusting their policies now.

In the next quarter, Indonesia will face weakening energy exports while currency volatility continues to threaten its efforts to bring down inflation and policymakers become increasingly preoccupied with elections scheduled for 2014. Falling external demand is exacerbating Thailand's slowing economy, which has already entered a technical recession, creating another challenge for the ruling party as it struggles with national divisions.

Malaysia, while better situated in the current correction cycle, nonetheless needs to cope with its rising deficit while managing internal party politics and rising ethno-political divisions. For Vietnam, despite signs of recovery, the ruling party will struggle to maintain stability while pressing forward with restructuring efforts centering on improving efficiency in state corporations and clearing debts away from the financial sector.

Japan's Revitalization

In the coming quarter, Japan will take advantage of a rare moment of government unity and public support to pursue domestic reforms and burnish its international prestige. Prime Minister Shinzo Abe will balance his proposed structural reforms with measures to maintain short-term growth. Under his party's leadership, the parliament will vote on bills intended to spur corporate investment and internal competition, including a plan to break up the power sector oligopoly over the next decade.

Japanese diplomacy will seek to improve relations particularly with India, Russia, and emerging markets in Europe and the Asia-Pacific states as Tokyo attempts to expand infrastructure exports, energy investments and free trade deals. Meanwhile, Tokyo will speed up military normalization by boosting defense spending, creating a National Security Council to coordinate diplomacy and military affairs, and broadening its range of military activities with the United States and other allies.

The government will also ignite debate as it discusses a new national security strategy, revisions to defense guidelines and a reinterpretation of the Constitution that allows for collective self-defense. These policies face resistance from vested interests opposed to structural reform, public disagreement on the scope of military expansion and ongoing problems managing nuclear issues. But the Abe administration will maintain policy momentum this quarter and project an image of a revitalized Japan.

Balancing Against China's Assertiveness

In the fourth quarter, two themes will give prominence to the regional responses to China's military modernization and territorial assertiveness identified in our annual forecast. First, U.S. President Barack Obama's visit to the Asia-Pacific region will demonstrate Washington's commitment to the region through its trade and security agenda. Second, China and the Association of Southeast Asian Nations will continue to address their maritime disputes through the slow process of negotiating on an official Code of Conduct for the South China Sea.

The Obama administration will show determination in developing the Trans-Pacific Partnership, a key trade framework, when the president attends the Asia-Pacific Economic Cooperation meeting. As a number of highly sensitive particulars remain unresolved, the negotiations and framework will require a host of compromises and concessions. But Washington is courting the Southeast Asian nations and other regional partners with its trade agenda as it positions itself to take a greater role in the region, per its "pivot" strategy.

Washington will also continue to work with allies to enhance its security presence in the region. The fourth quarter will see a U.S. agreement with the Philippines that could allow U.S. forces to gain greater access to the Philippines' military bases and to step up training and exercises. The growing U.S. military presence could further complicate the maritime environment in the long term. In the fourth quarter, despite the slow process on the Code of Conduct between China and the Association of Southeast Asian Nations, rhetorical exchanges and tensions in the East and South China seas will continue to dominate the security environment, particularly ahead of regional summits.

Developments in Myanmar and Cambodia

Myanmar has continued to open up its nascent economy in a way that has gained credibility with international investors. In a move critical to the country's economic transformation, Naypyidaw will push forward its proposed cease-fire with ethnic armies in the fourth quarter. But as the rainy season draws to a close, freeing up the military option for Napyidaw, the slow progress of cease-fire negotiations is likely to translate into an offensive against a few ethnic armies. Thus, Naypyidaw will not abandon its dual strategy of military offensives and peace negotiations.

In Cambodia, a political settlement is likely to alleviate the current political deadlock and tense security situation. Nonetheless, the opposition's strong showing in recent elections could open a longer-term rise in political tensions as the ruling party struggles to retain political domination while winning back public support and accommodating the interests of the opposition, which has gained prominence and support.
South Asia




New Delhi's Economic Challenges

Economic issues will dominate India's concerns in the fourth quarter as the country continues to face significant domestic political gridlock ahead of national elections in 2014. Agricultural output and hydropower projects will benefit from this year's bumper seasonal monsoon rains, but inflation, especially of key food prices for goods such as onions, will continue to challenge the ruling United Progressive Alliance's attempts to manage the domestic economy amid lagging foreign investor interest and the fluctuating value of the rupee.

The U.S. Federal Reserve's decision not to taper off quantitative easing will bring some relief to India and other emerging markets, but New Delhi will struggle to stymie inflows of hot money in lieu of the more permanent infrastructure and development investment it needs. The United Progressive Alliance government will attempt to pass more foreign direct investment liberalization reforms and economic measures through the winter session of parliament, but strong resistance from opposition political forces led by the Bharatiya Janata Party ahead of 2014 elections will reduce the effectiveness of these measures.

India's External Relations

Beyond its borders, India will continue to work with countries within its periphery -- Sri Lanka, the Maldives, Bangladesh and Nepal -- in an attempt to prevent the erosion of its sphere of influence. Most of these countries will balance against Indian attempts to influence their domestic policy by pursuing development and trade plans with China.

New Delhi will reinforce security forces along its eastern border to limit the effects of Bangladesh's domestic destabilization, specifically the steady outflow of illegal immigrants, on the security and social stability of West Bengal and northeastern India.

New Delhi and Islamabad will continue a slow but deliberate dialogue as the NATO drawdown of troops in Afghanistan approaches, though no breakthroughs should be expected. Iran's efforts to renegotiate the current unfavorable terms in its energy deals with India amid its diplomatic outreach to the United States could contribute to some friction in the Indo-Iranian relationship even as the countries maintain robust energy ties.

A stabilizing domestic economy -- even temporarily -- will again allow for Indian state and private energy firms to pursue energy assets abroad. As India continues to normalize relations with China, New Delhi is expected to resume negotiations with Japan and Australia regarding nuclear cooperation, trade and regional issues of mutual concern, namely energy and China.

Growing Instability in Bangladesh

The current government's term expires Oct. 25, ushering in another period of uncertainty in Bangladesh's difficult post-independence history. The ruling Awami League has seen some of its support falter since it was elected in 2008 with a landslide of popular support. However, it has made military-backed caretaker regimes -- once a hallmark of Bangladesh's political system -- unconstitutional, and the upper body of the Supreme Court is currently made up entirely of Awami League nominees. Thus, the opposition Bangladesh Nationalist Party will attempt to create a level of public unrest and political instability sufficient to force the army to re-enter the political scene and oversee fresh elections and the transition period between the outgoing ninth and future 10th parliament session.

The ruling Awami League will most likely attempt a negotiation with the military and opposition that aims for fresh elections and a transitional period on its own terms to prevent a military intervention. Though elections can take place anytime within 90 days following the dissolution of the current government, conditions probably will not allow a vote to be held before the end of 2013.

Clashes between supporters of the Awami League and the Bangladesh Nationalist Party, including Islamist groups such as the recently sanctioned Jamaat-e-Islami, can be expected in the fourth quarter. Bangladesh's textiles and manufacturing operations could be affected, but long-term disruptions in production and exports are unlikely. Both sides of the political spectrum rely on the garments sector's significant contributions to the Bangladeshi economy.

Sri Lanka's Balancing Act

The strong local showing of the Tamil National Alliance in September's provincial council elections will force the Rajapaksa administration to balance between northern demands for greater autonomy and the ruling Sinhalese imperative to maintain firm control over the entirety of the island. This will complicate President Mahinda Rajapaksa's efforts to modify the Constitution's 13th Amendment, which allows for significant self-rule under the provincial council system. Colombo will try to undermine Tamil autonomy through indirect channels, such as the Supreme Court, and by working to maintain a strong security presence in the north and east. At the same time, Colombo will balance this strategy with offers of economic and infrastructure development, funded by foreign investors including China, to better integrate Tamil areas with the rest of the island.

As India moves closer to its own national elections, Sri Lanka's internal Sinhalese-Tamil divide will become a rallying point for politicians seeking votes in India's state of Tamil Nadu. New Delhi and Colombo will manage these domestic pressures as both sides try to redefine a relationship strained by India's decadeslong support of northern Tamil militant separatists.

Pakistan's Troubled Negotiations with the Taliban

Pakistan's attention will be split in the fourth quarter between trying to manage the cross-border Taliban insurgency and the country's deepening economic problems. Islamabad will struggle to facilitate a negotiated settlement between the Afghan Taliban and Kabul while engaging in a dialogue with its own Taliban rebels. It will be harder for Islamabad to try to negotiate with the Pakistani Taliban, as militants in Pakistan are likely to step up attacks in an attempt to boost their leverage in talks. The Pakistani establishment will also be divided in how to proceed with talks; the army, which is undergoing a leadership transition, will resist Pakistani Prime Minister Nawaz Sharif's plan.

A small boost in relations between Pakistan and Afghanistan after Islamabad's recent release of a former deputy of Mullah Mohammed Omar, Mullah Abdul Ghani Baradar, will help facilitate negotiations with the Afghan Taliban. However, that negotiation will still be constrained by an intensification in President Hamid Karzai's efforts to put forth a preferred candidate for the presidential elections scheduled for April 2014.

The Sharif government in Pakistan will put forth proposals to improve tax collection and power generation, but progress on both of these fronts will remain limited. Building upon the Sept. 5 signing of a three-year, $6.7 billion International Monetary Fund package, the government will also unveil a new national strategy to modernize the economy in an attempt to attract foreign investment. Militant violence, however, will largely keep investors away, especially given the uncertainty of post-2014 Afghanistan.
Latin America





Mexico's Push for Reforms

As anticipated, Mexico's ruling party -- the Institutional Revolutionary Party -- presented its tax and energy proposals to the public in the third quarter. While tax reform will likely pass in the coming months, reaching a conclusive agreement on the comparatively more controversial energy reform will likely extend into 2014. The leftist Democratic Revolutionary Party will unsuccessfully try to sink the bill, while the conservative National Action Party will condition its support on the passage of electoral reform.

Stratfor suggested in the annual forecast that the energy reform could result in the implementation of production-sharing agreements. According to the Institutional Revolutionary Party's proposal, profit-sharing, not production-sharing, agreements will be the middle-ground licensing scheme to balance the interests of more left-leaning elements within the party with those of the National Action Party, with which an alliance is necessary for approval.

Mexico will continue to see a fragmentation and reorganization of its major organized crime networks, particularly among the Zetas and the Gulf cartel, both of which have had top commanders killed or arrested in recent months. Stratfor originally forecast that the government would attempt to increase control over the local-level law enforcement bodies by implementing the so-called "Mando Unico," or "Unified Command," and by rolling out a new gendarmerie in 2013. Nationwide implementation of the Mando Unico is highly unlikely in the next three months. The rolling-out of the gendarmerie has been delayed and is unlikely to occur by the end of the year.


Colombia Continues Talks with Rebels, Farmers

Neither a definitive peace deal nor a complete breakdown in the negotiations with Colombia's largest rebel group -- the Revolutionary Armed Forces of Colombia -- is likely to occur by the end of the year. Negotiators may reach a deal on the second point of negotiation -- political participation -- but the rebels will continue to drag out the process as long as possible while continuing to attack energy infrastructure and the military in the periphery. The Colombian government will continue preparing to initiate formal peace talks with the country's second-largest rebel group -- the National Liberation Army -- though a breakthrough by the end of the year is unlikely.

In the previous quarter, we underestimated the momentum behind the Colombian agricultural producers' protests. The protests have moderated but could reappear in the final quarter if the government does not make good on its promises. The government will do everything in its power to reduce social unrest ahead of the legislative elections in March 2014 and the presidential elections in May 2014, but will not heed protesters' calls to reverse the recently implemented free trade agreements with the United States and European Union.

Venezuela Struggles with Economic Woes

The Maduro administration in Venezuela will spend the remainder of 2013 attempting to stabilize the country's dire economic situation and ameliorate persistent challenges such as food shortages, declining central bank reserves, limited access to foreign currency, crumbling infrastructure and high inflation. The government will make piecemeal adjustments to the economic system but will ultimately stop short of radically changing the direction of the economy.

One of these measures will be the development of yet another currency exchange system, the details of which will likely be announced by year's end. This mechanism will complement the Commission for the Administration of Currency Exchange and Complementary System Administration of Foreign Exchange mechanisms already in place and attempt to allocate foreign exchange more effectively, at a more market-determined rate. Nevertheless, foreign exchange will remain scarce, and high inflation will persist.

With broad support in the National Assembly, President Nicolas Maduro may try to pass an enabling law by the end of the year, which will grant him extraordinary powers and the ability to pass decrees without the approval of the National Assembly. Even if Maduro decides to pass the controversial law, it will not free him from the fundamental political and economic constraints inherited from his predecessor.

Brazil Focuses on Economic Stability

Brazil's policymakers will spend the fourth quarter of 2013 focusing on the country's economy amid a turbulent global economic environment. The stewards of the Brazilian economy will attempt to prevent increasing inflation and currency fluctuations, even at the expense of economic growth. The Central Bank of Brazil will continue to intervene in the currency derivative markets where necessary to shore up the value of the real, especially so if the U.S. Federal Reserve begins its slow taper of quantitative easing, and will likely raise the benchmark interest rate if inflation remains high. The government may raise the price of subsidized fuel to ease pressures on state-controlled energy firm Petroleo Brasileiro.

In the fourth quarter, the Brazilian government will continue its efforts to attract investment into its energy and infrastructure sectors. The country will hold its long-anticipated auction of pre-salt hydrocarbon deposits Oct. 21. This is the first round of pre-salt licensing since the new regulatory framework was put into place and will serve as a litmus test for future investor interest. In late November, Brazil will hold its first auction of unconventional shale gas deposits onshore, and in December, the government will attempt to auction off its several road and rail concessions to improve its transportation infrastructure. While these auctions will continue to face bureaucratic hurdles and delays and could struggle to attract sufficient investor interest, they nonetheless bring the country one step closer to increasing energy production and decreasing the country's infrastructure deficit.

Argentina Faces Elections, Tough Economic Climate

Argentina will hold its midterm parliamentary elections Oct. 27, signaling an inflection point in the country's domestic politics. Due to the underwhelming performance of the ruling party in the August primaries, the prospect of President Cristina Fernandez de Kirchner's Front for Victory party gaining the two-thirds majority needed to allow for Fernandez' re-election is now negligible. This legislative election will begin a two-year process culminating in the 2015 elections characterized by intense political maneuvering as both the Fernandez camp and opposition factions position themselves for the succession.

In the wake of the elections, with less urgency to keep growth up and prices down, the Argentine government will make minor adjustments to long-neglected economic issues to prevent an economic crisis from further damaging the president's legacy and the electoral chances of her successor. Nevertheless, Central Bank reserves will continue falling, the currency will remain distorted, monetary expansion will continue to fuel high inflation, and public spending will remain high.

Finally, the government will continue to negotiate with energy firms to stimulate investment in the sector and attempt to increase domestic production. Despite the Neuquen provincial legislature's approval of Chevron's $1.2 billion investment and a raft of financial incentives in August, the response from international energy firms has been and will continue to be lukewarm as a result of general wariness about the Argentine government's role in the economy and energy sector. Select deals could be signed, but a general reversal in investor sentiment on the Argentine market is unlikely in 2013.

Mercosur Changes Stall

In the annual and third quarter forecast, Stratfor posited both that Paraguay would rejoin Mercosur after the inauguration of now-President Horacio Cartes, and that Ecuador and Bolivia would become Mercosur's new members. While both trends are still developing, our timing appears to be off. Paraguay's re-entry has been approved by the customs union's full members, but the country has delayed re-entry. Because Paraguay still enjoys Mercosur's trade benefits, the urgency to rejoin as a full member was considerably less than we anticipated. Ecuador and Bolivia's progress toward Mercosur membership has been slower than predicted and is not likely to occur in 2013. In the fourth quarter, Brazil will continue its efforts to reach a trade agreement with the European Union. Brazil is expected to present to the rest of Mercosur a proposal for a Mercosur-EU trade agreement in October. Even if this is tactic is unsuccessful, Brazil will push Mercosur to make tariff reductions on raw materials to bring down industrial costs.
Sub-Saharan Africa








South Africa Manages Strikes Ahead of Elections

South Africa's ruling African National Congress will use the fourth quarter to build up its re-election campaign ahead of national elections scheduled for April 2014. The country will wrap up its strike season with wage agreements in the mining sector (no agreement has been reached for coal miners as of yet) and other industrial sectors. There may be a brief strike or two in the early weeks of the quarter, but these will be manageable. The government will use wage agreements that balance labor and private industry interests to show voters it is the best-qualified political manager of the country's economy. Political rhetoric by South African opposition parties will attempt to portray the African National Congress as failing to fulfill socioeconomic expectations, but the ruling party will counter these claims as insubstantial and coming from narrow elite interests.

Nigeria Prepares for Party Primary Elections

Nigeria will see heightened political rhetoric geared toward political party leadership primaries to be held next year. The ruling People's Democratic Party will likely hold its primary in December 2014 ahead of national elections in April 2015, but political frictions and campaigning will commence well ahead of those dates. The political future of incumbent President Goodluck Jonathan will be at the center of the political debate as rifts within the ruling party persist in the fourth quarter. To avoid losing political influence, Jonathan will conduct a campaign as if he is running for re-election. Although he will not formally announce his candidacy, he will promote his right to stand for re-election. Jonathan will also be hesitant to push through controversial legislation, notably the Petroleum Industry Bill, as he seeks to avoid further opposition to his administration.

The political debate will extend into the militant sphere, as politically motivated violence continues unabated in the oil-producing Niger Delta region and in northern Nigeria. Neither the Niger Delta militants nor Boko Haram militants operating in the north are expected to launch attacks outside of their core areas of operation.

Mozambique Anticipates Violence Ahead of Vote

Mozambique also will see a rise in political agitation and low-level violence ahead of national elections, which are scheduled for October 2014. The ruling Mozambique Liberation Front party faces an emerging challenge to its authority because of the recent development of significant natural resources -- coal and natural gas -- in territory controlled by the opposition Mozambique National Resistance party. The government wants to profit from these resources through definitive investment decisions, especially by international energy companies in the offshore natural gas sector, which will be made during the fourth quarter. Although violence will be infrequent, popular agitation including protests stirred up by the Mozambique National Resistance will lead the ruling party to begin adjusting its unilateral decision-making style to include opposition concerns and inclusion in government decision-making and spending.

East Africa Focuses on Infrastructure

East African countries will advance plans for infrastructure projects that facilitate greater economic integration. Because of the amount of capital required and the length of time it takes to rehabilitate and construct new infrastructure ranging from ports to rail to roads, planning for projects in Tanzania, Kenya, Uganda and Rwanda will advance, but the projects will remain in early stages of development. Greater regional coordination will lead the "northern corridor" from Kenya's port at Mombasa to the Great Lakes region to see more advanced planning and development than the "southern corridor" linking Tanzania's ports at Dar es Salaam and Bagamoyo with central Africa.

A Relative Calm in Mali

Mali will see a calmer security situation in the final quarter of the year. Considerable foreign political, economic and security support will continue during the quarter and beyond, as will governance consultations within Mali among ethnic groups. Jihadists in Mali will not be able to unite into a strategic threat, though surviving members of al Qaeda in the Islamic Maghreb could still carry out infrequent attacks in the Sahel and Maghreb regions.

Sudan, South Sudan Reach an Understanding

Sudan and South Sudan will maintain cautious cooperation with each other as crude oil drilled in South Sudan is exported via Sudanese pipelines. There will be an attempt in the fourth quarter to resolve the issue of sovereignty over the disputed Abyei region, with a possible referendum in Abyei as early as October. Sudan will try to retain influence over the region, and especially its oil revenues, through efforts to inflate the population of pro-Sudanese voters in the region and through Abyei's longer-term dependence on pipelines running through Sudan.

Operations Against al Shabaab Continue in Somalia

In Somalia, Kenyan and African Union peacekeepers will increase their efforts to degrade the capabilities of al Shabaab militants. Kenyan and other African military forces in Somalia, supported by foreign intelligence providers, will try to hunt down al Shabaab leader Abdi Ahmed Godane following Godane's likely instigation of the September attack on Kenya's Westgate shopping mall. Al Shabaab could attempt guerrilla attacks on soft targets in Somalia this quarter, but will mostly avoid large-scale confrontations to try to preserve its leadership and fighting capabilities.