This week we cover developments in 4 major regions of the world: Europe, Sub-Saharan Africa, China, and Latin America. First, we take a look at the economic crossroads that the Eurozone is facing. Next, we assess the implications of Sub-Saharan Africa’s latest coup in Gabon. Adding to our analysis from last week, we take a deeper dive into China’s real estate crisis. Finally, we learn about Latin America’s FDI boom which has come despite political upheaval in much of the region.

Eurozone Economics

Europe’s Geoeconomic Revolution

Matthias Matthijs & Sophie Meunier, Foreign Affairs

Europe’s economy looks to be heading for trouble

The Economist

The European Union has found itself at an economic crossroads. Since Ursula von der Leyen became European Commissioner, she has expanded the European Union’s mandate away from being a stalwart of liberal economic internationalism and moved towards “open strategic autonomy” in a political economy that is rapidly moving away from the prior order as China and the US bend the rules of the game. Additionally, the EU under Lagarde’s European Central Bank finally succeeded in floating Eurobonds for the first time in order to finance pandemic recovery spending, signaling an EU that is becoming more tightly wound around the European Commission as a political entity.

These major political shifts, however, come at a time of increasing economic concerns for the EU as a whole. Like the US, the EU has had to manage significant inflation post-pandemic. While the EU has managed to avoid a recession so far, inflation numbers within the eurozone remain high at 5.3%, causing the ECB to signal its intent to further hike interest rates and positioning the EU for a hard landing. To complicate matters further, the EU is facing the twin forces of record-low unemployment with rising wages, pitted against weakening demand in the face of inflation, which is weakening profits overall. As such, the EU is facing the potential for serious economic turmoil at a time when its political cohesion is more important than ever, and more at risk to Euroskeptic backlash. Time will tell if the EU will weather the storm successfully and come out strong, or come out more fragmented.

Implications of Gabon’s Coup

The broader lessons of Gabon’s coup for democracy in Africa

Danielle Resnick, Brookings

The coup in Gabon is part of an alarming trend

The Economist

Gabon has been ruled by the Bongo family for over 50 years, who have cared little about electoral legitimacy. The country’s most recent election, held in August, had Ali Bongo winning with 64% of the votes in an election unlikely to be free or fair. Then, the commander of the Gabonese Republican Guard, Brice Clotaire Oligui Nguema, led a coup that toppled Bongo. This has made Gabon the latest Sub-Saharan African country that has experienced a military overthrow of its leadership, following others in Mali, Burkina Faso, and Niger. These countries have some factors in common, especially weak institutions and flawed elections, which has led to widespread disillusionment with democracy. This disillusionment has been harnessed by military officers who either care about better governance or see an opportunity to grab power. On an international scale, military officers in neighboring countries see the few consequences that come with grabbing power – sanctions, suspensions from multilateral institutions – do little to offset the incentives and create a domino effect. The future of Gabon is clouded; there is little agreement on whether or not the coup leaders will be true to their word and hand over power to a civilian government, or if they will cement their grip. What can be derived, however, is that this wave of military coups does not bode well for the other civilian leaders in Sub-Saharan Africa.

China’s Downturn Affects Landlords and Developers

China property downturn spreads to trophy office buildings

Echo Wong, CK Tan, & Peggy Ye, The Financial Times

China real estate developers face insolvency risk if property values tumble

Noriyuki Doi, Nikkei Asia

As businesses seek to reduce their rental expenses during China’s economic downturn, vacancies in the country’s most exclusive office buildings are rising. Soho China, an owner of office buildings in Beijing and Shanghai, recently reported a 93% decrease in first-half profits in the second quarter. Occupancy rates in the two cities’ Grade A offices both fell to their lowest since 2015. Coupled with the pressure from the weaker-than-expected economy is the new supply hitting the markets – during 2023’s first seven months, office building completions were up more than 20% from last year. The property market troubles are keeping away foreign investors, too – total corporate investment in Chinese office space was the lowest since 2018. This has diminished liquidity as both foreign and domestic investors pull out.

Not only landlords are being hit by the slowdown. Developers face the risk of their total liabilities being below the value of their properties if property values plummet. Properties yet to be completed stay on a firm’s balance sheet until the finished unit is handed to buyers, exposing developers to risk if housing prices fall in the meantime. These properties under development make up around half of the biggest developers’ assets. If their value falls by a third, then the developers’ liabilities will exceed their assets, pushing them into negative net worth. As the biggest names, such as Evergrande or Country Garden, continue reporting troubling outlooks, this risk appears to be rising.

Latin America’s foreign investment boom defies political turmoil

Michael Stott, Financial Times

Political upheaval in Latin America did not forestall foreign direct investment across the region, as FDI figures hit $225 billion, surpassing the previous peak in FDI set a decade ago. The bounce in FDI is in part explained by the post-pandemic recovery; however, new project announcements likewise drew capital into Latin American countries. A great deal of the money, the majority of which came from the US and EU combined. Investment went towards fossil fuel projects, which were propped up by Latin American countries keen to use their reserves before those reserves become stranded assets, while US and EU interest was driven in part by diversifying supply as global supply chains reoriented following the war in Ukraine. The biggest winner in FDI terms was Brazil, the largest Latin American economy, which received 41%, while Mexico received just 17% due to the business climate under Mexican president Obrador. While Latin America has proven the ability to attract capital, Latin American countries have to-date done a poor job of selling foreign investment, which is holding down FDI levels below where they could otherwise be if Latin American countries more aggressively advertised themselves in the international market.