Listen: The Decisive | Episode 17 - The G20 in a Disjointed World

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Natznet Tesfay   00:00:15

Hello, and welcome, everyone. I'm Natznet Tesfay, the Head of Insights and Analysis, and I will serve as your moderator today on a discussion related to the upcoming G20 Summit. We're looking ahead at the summit because we've seen this group of countries have had increased prominence as a platform to mobilize alliances and negotiate critical issues in today's disjointed world. India hosted the summit last year in September using it as an opportunity to rebalance influence towards emerging markets. Hosting it this year, how might Brazil use platform. The summit will be taking place in November of a very dynamic year. We will have seen a series of key elections, including amongst the members of the G20 and will also take place after a calendar of gatherings, including the UN General Assembly, the BRIC Summit and COP. So the discussion today will explore whether or not we'll see any progress towards greater harmony and where we're likely to see more discord amongst the G20 group of members and more broadly globally. For that discussion, I'm joined today with speakers, including Aries Poon, the Head of our Asia Pacific Insights and Analysis; Thea Fourie, Head of Sub-Saharan Africa Insights and Analysis; Carlos Cardenas, Head of Latin America Insights Analysis; and Laurence Allan, Head of Europe and CIS Insights and Analysis. So let's start unpacking the discussion as to what type of environment these leaders will be gathering in and what are going to be the critical points of discussion and debate as they go through the course of the summit. I'd first like to start with Thea. Thea, can you paint a picture for us as to what the global macro environment will look like as these leaders gather in Brazil? We've seen over the course of the year, our clients' concern about persistent inflation and relatedly, monetary policy pivots. So what is likely to be front of mind as leaders gather at the summit?

Thea Fourie   00:02:06

So Natznet, of course, one of the big questions at the moment and going into the summit is what is going to happen to monetary policy and to interest rates. At S&P Global Market Intelligence, we expect the U.S. Federal Reserve during the course of 2025 and 2026 to continue lowering its interest rates, reaching a bottom of the interest rate cycle by 2026. While this happens and as we move into the summit, of course, central banks and market watchers will watch very closely if there's any possible reemergence of inflationary pressures in the U.S. and the rest of the global economy. And therefore, they will track any leading indicators to assess the possibility of a rebuild of inflationary pressures.

Natznet Tesfay   00:02:53

And so what are the critical implications of this development? Why are we so acutely focused on monetary policy and inflation going into 2025?

Thea Fourie   00:03:01

For emerging markets, Natznet, this is very crucial because it will determine their growth prospects going forward, particularly if lower inflation can translate into rising consumer spending and more economic resilience. Why the U.S. and interest rates outlook is so important is because due to the slowdown in U.S. interest rates, we do expect a much softer dollar going into '24, '25, which again will translate in lower inflationary pressures for emerging markets. And we also expect that if we see interest rates in emerging markets being a little bit higher compared to developed economies, interest rates, this can translate into stronger capital flows to emerging markets, which will be quite a nice turnaround in what we've seen in recent years. So these factors are very crucial for the growth outlook for emerging markets. I should add to that, there are going to be a lot of emerging markets and particularly frontier markets also that still experience vulnerabilities and that debt servicing costs will continue to be elevated, and this could be a drag on fiscal finances and the economic rebound for these economies. So that's the reason why these developments on the monetary and the interest rate front is so crucial for emerging markets.

Natznet Tesfay   00:04:18

So where does that leave us in terms of the global macro outlook going into the next year? What will be front of mind for policymakers more broadly?

Thea Fourie   00:04:26

They are going to definitely be concerned about the expectation that we are going to see lower growth in the U.S. as well as in China. So there's very limited upside potential for global commodity prices. And again, for some emerging markets and frontier markets, this is a concern given that a lot of the hard currency is sourced from commodity prices. So these are the kind of things that we'll be looking out for. And I think also the G20 partners going into the summit, lower potential growth, particularly in the U.S. as well as China.

Natznet Tesfay   00:05:00

I'd like to use this as an opportunity to pivot and bring in Lawrence Allen here. We've seen that there's been momentum around the rebalancing of the European Union's relationship with China, specifically in consideration of tariffs. This debate has been taking place amid a series of elections within European countries and at the EU level as a whole. So what are you hearing from clients in terms of their biggest concerns regarding implication of sanctions, general European Union policy towards Mainland China and how that might affect policymakers' objectives as members of the European Union...

Laurence Allan   00:05:35

Well, I'm going to come back to China in a second, but just to kind of contextualize a little bit and that -- as you mentioned, we've had a series of elections over the last few months and plus we've got German federal elections for a new government in Germany next year before, if I'm correct, the next G20 heads of government Summit. So over this kind of 12- to 18-month period, there's actually been quite a bit of flux among some of the key players. Most obviously, of course, we've just had a pretty indecisive election in France, one of the EU's 2 largest economies. A lot of uncertainty as to what that's going to lead to both for France's own political stability, but also what that means in terms of inter-EU dynamics and the way that the EU projects itself externally. Outside of the EU, of course, we've got a relatively new government in the U.K. after quite a long period under a conservative government. So we've yet to get a full picture of what this new U.K. government is going to do and how it's going to position itself around some of the issues that we're going to see raised at the G20. It's also worth pointing out, of course, that to some degree, Europe is heavily overrepresented at the G20 because as well as the 4 countries that are there, we have the EU represented. So in effect, we've got the 27 full members of the EU there as well. I think the major overarching question in terms of the way that those European countries interact here is how much they're going to be pulling in the same direction given some of the dynamics that I've just underlined. I think on a couple of the key areas, for example, on Ukraine, Russia and particularly on the support for sanctions, we don't expect to see much difference from what we've seen over the last 12, 24 months, which is broadly speaking, Unity and the EU and the U.K. attempting to lobby other G20 members to get on board with that. And on the question around China that you just flagged, I think it's probably a far more complicated question. There are different positions within the EU as to how the EU responds and reacts to China's different policy aspirations, in particular with regard to EVs. So that, I think, is a far more complicated piece. And the relationship that the EU has with the U.S. and the way that it attempts to balance its relations between the U.S. and China will be one of the key features, I think, for Europe of this particular G20 Summit.

Natznet Tesfay   00:08:04

If I could just quickly follow up on that balancing act that you've highlighted for European countries. How are they attempting to balance interdependency or harmony with protectionism, which could cause discord in the trade environment?

Laurence Allan   00:08:18

Well, probably the clearest example of the difficulties that this poses for some of these countries is exactly the relationship between the EU and China over EVs. And I think the case of Germany is probably the emblematic one here where we've seen that Germany has really been reticent to move with tariffs on China over the EVs issue because it's got some pretty obvious and legitimate concerns about what that might mean in terms of countermeasures because Germany is extremely exposed. 1 out of every 3 German automobiles is exported to China. So there have been pretty clear dynamics where some EU member states are thinking about the strategic issues, they're thinking about perhaps some of the security issues and not so much the commercial relationship. So the interdependency part is less important for some countries than for others.

Natznet Tesfay   00:09:10

And what are likely to be the key trade objectives for the European Union? Important to note the recently launched CS3D, which has raised a number of questions from trade partners. How might the EU use the G20 platform to further its trade priorities?

Laurence Allan   00:09:25

I think as the EU has done with previous kind of regulatory ambitions, -- and I'm thinking here of the carbon border adjustment mechanism. And before that, with some of the stuff around data security that the EU is likely to be lobbying pretty hard in the G20 around this, the EU Corporate Sustainability due diligence directive. It's a pretty wide swath of companies that are going to be affected by this an attempt, of course, to make sure that standards of companies in Europe and everyone down their supply chain are at an acceptable level. But nonetheless, it poses some fairly significant challenges, I think, for a lot of companies in terms of making sure they're able to meet the compliance standards that are demanded. So I think we see this as being something where there's going to be quite a bit of friction between the EU and other regions. And I expect we're going to see some of that, if not openly, then certainly kind of in the corridors and in some of the kind of reporting coming out of the G20 afterwards.

Natznet Tesfay   00:10:30

Carlos, I'd like to come to you and leading the Latin America team and understand what is going to be Brazil's ambition in managing these types of questions? How is it likely to set the agenda accordingly?

Carlos Cardenas   00:10:40

In the case of Brazil, they have very challenging task because even though the majority of the players wanted to go to talk about global economics or about what's happening with inflation and interest rates, the geopolitical elements in a way, influence a lot the bilateral conversations and that led to difficulties in reaching agreement. From the perspective of Brazil, they are aware of that. And when you look at the bureaucrats and what they're saying, they're trying to lift geopolitics out of the equation. but the agenda that they have set pretty much centers on 3 issues. And before I go into that, Brazil is using the G20 to, as always, promote and elevate the position of developing economies when it comes to multilaterals, reform institutions, but particularly because they're aware of those difficulties, they're looking into creating a global alliance against hunger. They're looking into discussing issues related to global taxation and also, in particular, looking to climate issues, especially channeling more financing towards emerging markets.

Natznet Tesfay   00:11:44

So how do you anticipate that Brazil is going to try to achieve this?

Carlos Cardenas   00:11:48

At the moment, they have been working really hard on the parallel meetings that will go in the run-up to the November summit. When it comes to the 3 proposals that Brazil is making, it looks likely that the first one, the one on the global alliance against Hunger could potentially have the greatest traction. That pretty much consists into trying to set up a group of countries to mobilize financing, aid, technical cooperation when it comes to the issue of food security and the self-interest that Brazil has into this is, of course, the promotion of its agribusiness sector, which is critical for Brazil when it comes to this issue. On the second one, trying to enhance cooperation when it comes to tax issues to prevent tax avoidance and tax evasion, trying to come up with some sort of mechanism to look into how profits are made when it comes to the trading of cryptocurrencies. And the #1 after that would be proposing a 2% minimum tax on billionaires. That one, the reaction has been mixed. On one hand, there have been some European countries that have, in a way, welcome the proposal and are trying to study it. On the other hand, we have other players, the U.S. in particular, who have said, it is not the time at the moment, it might not go forward.

Natznet Tesfay   00:13:06

It's also important to note that Brazil will also be hosting in 2025, COP 30. So can you give us an indication of how they're looking at both events as a continuation of holding a global platform?

Carlos Cardenas   00:13:17

Yes, that's particularly important. For them, the issue of climate, it's, I would say, strategic for many reasons. One, when they look at their own country, they are trying really hard to try to separate what happened on the previous administrations when it comes to deforestation and the burden of the Amazon. Now they have a huge issue at the moment because it has fared up again, but they're trying in a way to change the reputation when it comes to local issues and attract investments and also financing into the Amazon fund that Brazil has. But when it comes again to the global picture, they're positioning themselves again as potential leaders across emerging markets, working really hard on trying to negotiate with advanced economies on the matter of the pledge of the $100 billion per year towards the most vulnerable nations on climate issues. And at the same time, again, a proposal to try to speed up those negotiations, the creation of a global climate task force that, in a way, would look into how to mobilize that financing towards the developing economies and in a way, accelerate the aid and support towards emerging markets. So again, with the G20, the opportunity that Brazil has at the moment and that Lula in particularly how he sees it, it's that in a way, positioning and putting the agenda of the emerging markets and developing nations at the forefront and then jump starting from that into next year for COP 30.

Natznet Tesfay   00:14:40

And just one more question on Brazil. How might it leverage the hosting responsibilities of the G20 -- how will Lula administration use this as an opportunity to navigate its own balancing act? Lawrence gave us an indication as to how European countries are approaching it. How might Brazil or more broadly Latin American neighbors use this as an opportunity to balance their exposures to broader strategic competition?

Carlos Cardenas   00:15:03

I think the majority of countries in Latin America have in a way adopted a strategy of trying to get the best out of both sides out of both the U.S. and China, often going to the partner that will offer the best conditions. For Brazil, in particular, it's a bit tricky because in this context of a world in flux and a world of geopolitical realignment and rebalancing, Lula has pursued his strategy of multipolarity his strategy of an autonomous foreign policy. And in doing that, there have been deep misalignments when it comes to many of the G7 economies. Russia, Ukraine and the position of Brazil, it's a case in point. But when it comes to China, in particular, Brazil sees China as extremely important to achieve its own economic growth and its own growth potential. We have seen very deep cooperation trying to strengthen trade. And as you see what is happening in Europe, for example, with EVs, Brazil has actually welcomed and will continue to welcome investments on EVs from China, again, because it sees the country as a strategic partner. The key thing is that it's important to see things in a nuanced way. At the same time, in that context of strategic competition and even though you have those misalignments, you would say, with the U.S., they have signed with the U.S. and with this administration agreements on labor issues, agreements on cooperation against political extremism and also agreements on the environment. So they're taking in a way, a pragmatic approach. And what we're seeing from the G7 economies is that they're also willing to deal with those misalignments to do that. And again, a very pragmatical point of view, they are aware that they have that connection to China being the main buyer of the majority of the commodities that Brazil sells and exports. And to try to mitigate those risks, they're trying to diversify the trade relationships and a big push that they have done so far this year, it's trying to get the interest of countries in the Gulf. There was just a meeting with the Gulf Cooperating Council, and they're trying, again, to position agribusiness. -- as a big opportunity to enhance trade and in a way, try to bring investment from that part of the world to Brazil.

Natznet Tesfay   00:17:19

Carlos, Lawrence noted that the G20 gathering is also a very convenient cover to have critical bilateral conversations on more substantive issues. We saw how leaders use these summits to meet in person after periods of maybe strained relationships. And so I'm keen to hear from the panel, what do you think is likely to be discussed in the sidelines? That's where we're likely to see some of the most interesting outcomes that will shape the environment going into the next year. Carlos, if I could just stick with you for a moment. Timing-wise, this is going to happen just after the BRI Summit in October. So how might the G20 be used as a platform for emerging markets carrying key takeaways from the BRIC Summit into the G20?

Carlos Cardenas   00:17:59

I think because Brazil is sharing and hosting, their emphasis will be mostly on those 3 points of the agenda. But on the sidelines, bricks could potentially be a topic of discussion, particularly when it comes to, again, the historical demands or requests from many of the members in terms of improving loan conditions, reform of the IMF for bank and so on. The brick summit will be in October. It will be a precursor for the G20. When we're thinking about the bricks, I mean, historically, we really haven't seen a major, I would say, advancement or a major agreement that would say, okay, we are here. We have a concrete proposal on many of the historical demands that we have. But it's still a block that we're closely watching because over the past years, we have seen cohesiveness among the block increasing. The amount of countries wanting to join has increased, the latest being Turkey a couple of weeks ago, saying that it is considering to be a part of it. And we have seen again throughout the year, a huge amount of bilateral meetings within this block on issues that range from the potential launch of alternative grains agreement, dedollarization through the use of blockchain technologies, even meetings on aerospace and counterterrorism from this group, also a forum for bilateral meetings and strategic thinking rather than really see a fast change at the moment like sometimes it's been portrayed.

Natznet Tesfay   00:19:22

You've noted that one of the topical issues for the BRIC and the G20 is the Russia-Ukraine war. And it's notable that Russia will be hosting the BRICS Summit in October. How might President Vladimir Putin use the platform of hosting the BRIC to Russia's advantage and setting clear agenda takeaways for discussion at the G20. Laurence and leading our Europe group, I'd like to bring you in for thoughts on that question.

Laurence Allan   00:19:45

We think it's pretty unlikely that he will venture to Brazil for a number of reasons. Brazil has been, from a Russian perspective, quite a balancing force around the Ukraine-Russia war. I think it's quite evident that when it comes to the BRIC summit itself, the main Russian aspiration is going to be to make sure that those BRIC countries, which have not lined up alongside Europe, the U.S. and allied on sanctions remain that way. From what we're seeing, that is likely to be an objective that they reach Brazil continues and India continues to argue for what they call a negotiation between all parties, which is something that clearly is a difficult one for Europe and the U.S. to accept. Aside from that, we see other BRIC countries taking a very similar position. So I think fundamentally, that Russia is pushing an open door in that regard and there key aspiration will be that when they get to the G20 summit that everyone is lined up and firm on that particular issue and that there is no risk of a nasty surprise, if you like, from a Russian perspective when they get there.

Natznet Tesfay   00:20:58

Now let's pan over to Asia for a moment and look at how some Asian heavyweights like India and China will be approaching the G20 in a world where they see increased volatility going into 2025. Many of them feel caught in a balancing act. So Ares, how are each of these countries, specifically focusing on those larger ones, likely to approach the G20? What sideline conversations do you anticipate that they'll want to have?

Aries Poon   00:21:23

So India always sees G20 as a key platform with advanced economy and emerging economies in the same room. So India, as a new coalition government was formed recently, it's likely we take this opportunity to advance its broader neighborhood objective, which is meaning to broaden out its economic and geopolitical influence. For example, we might be seeing some deals or agreements or gestures that is going to cement key commercial relations with, for example, the Middle East because this is actually aligned with India's ambition to remain the fastest-growing major economy in the world, plus it's going to make sure that people know it is going to be an attractive China Plus One destination overall as in a manufacturing hub. And I think that's the harmony part we might be seeing. But however, there is also this court per se because India is quite strong in advocating that both economic growth and energy transition equally important because when it comes to emission controls and other than climate financing, India is pretty stern on the position that the USD 100 billion climate financing pledge has to come through and the demands on emerging markets to reduce emission has to be taken economic growth and development into account. And other areas that might have some division or even friction is how India is going to defend its policy to restrict exports of essential foods because as Carlos has mentioned about food security, which is a key topic in this G20 and India will likely remain on a position that it has to make sure that its domestic population is properly fed before exporting some of the essential foods like rice and stuff, even though other countries might want to see some of the restrictions is being released, if not removed. And for China, China has a narrative calling for less protectionism. And when it comes to EVs or come to solar panels, China's narrative is more focusing on how the low-cost output from China in those areas are going to promote the green transition. It's going to promote a more sustainable planet. And at the same time, in terms of the relationship with the emerging markets, China and actually India as well is always trying to compete for a leadership position in terms of leading the emerging markets in terms of economic development. So I think China is going to build the credential on that front.

Natznet Tesfay   00:24:06

Thea, I'd like to bring you in as we focus on how trade is going to be a prominent feature of discussions, both in the main agenda and certainly on the sidelines. You look after a number of emerging and frontier markets. So I'd like to get your perspective of what priorities they would want to bring to the table, especially since the African Union was only submitted as a permanent member of the G20 last year, and South Africa will be hosting the G20 Summit next year.

Thea Fourie   00:24:31

For Africa and countries like South Africa, of course, trade will continue to be considered as a major growth driver. And Africa and South Africa will continue to look for new trade partners and particularly investment partners during this G20. If we look a little bit at South Africa, for instance, after the formation of the Government of National Unity, there was a big relief locally as well as internationally, but also the expectation that this new government of national Unity will address some of the infrastructural bottlenecks in South Africa, particularly regarding energy, rail as well as port infrastructure. And South Africa will continue to seek relations with investment partners that are willing to meet these gaps in infrastructure availability. That's probably going to be the sense for a lot of other emerging markets as well as countries in sub-Saharan Africa where relations will become solid where this trade and investment needs are being met. What is very encouraging is for Sub-Saharan Africa that more and more trade and investment partners consider the continent as an opportunity and not necessarily as a risk. And you are seeing more solid investments coming from Middle Eastern partners, particularly regarding logistics, but also critical minerals. And critical minerals is one of those sectors on the continent where almost like Carlos said, there's going to be a pragmatic approach, thinking about the Lobito corridor and DRC, Zambia, cobalt, copper production and expansion that's happening there. With the Lobito corridor, the U.S. as well as the EU became involved in financing railway activity. And during the latest China Africa forum, China has also very much played a large amount of money to develop the railway to Tanzania.

Natznet Tesfay   00:26:26

I'd like to do a rapid fire round to end with our traditional signposts. What are the signposts that each of you are watching as we head into the summit in November and in 2025 with regard to the prospects of greater harmony or discord.

Thea Fourie   00:26:40

What is the implications of the U.S. elections on tariffs and what that's going to mean for trade relations, particularly in Sub-Saharan Africa on AGOA side? What is the future of AGOA? And also what's going to happen with tariffs in the EU. Those are the things that we will definitely watch because I think that's going to shape trade and geopolitical alliances in Sub-Saharan Africa in the short term.

Aries Poon   00:27:05

The market will be watching the pathway of China's economic recovery because it what we look at is the possible spillover impact on what it means for trade, investment flows as well as the implication on the outlook of protectionist measures from different export markets.

Laurence Allan   00:27:24

Probably the overarching key one and of course, very closely tied to the outcome of the U.S. election is the situation in Ukraine and whether or not the U.S. is going to maintain the level of support that's shown for Ukraine to this point. Something that will have a significant impact through 2025 is where French government stability gets to and what the impact of the German election does to EU coherence and its ability to actually deliver on the promises that it makes, the support that it offers and the agreements that it would make with not just the new U.S. administration, but anyone else that it's interacting with.

Carlos Cardenas   00:28:08

Yes. At the global level, it's that point I made of whether geopolitics or not ends up making an agreement and a final declaration possible or not. What we understand, and it was in the media is that the first meeting this year of foreign ministers, there wasn't an agreement because the members couldn't agree on the description of the Russia-Ukraine war because of a proposition. Some were saying war on Ukraine, others were in Ukraine. And because of that, there wasn't an agreement. So that's going to be a critical element because what we have seen is that you have too many misalignments that will make it difficult for Brazil to reach that consensus. Secondly, is what will happen in those bilateral meetings. There's going to be bilateral meetings between Brazil and China that we believe that could be, again, a big game changer at least for the region.

Kristen Hallam   00:28:58

Thank you for listening to The Decisive podcast.