ISA Region Report North America

1. ISA Region Report North America January 2014 Edition

2. Recent Political Events Recent Economic Events Other Recent Events Table of Contents Current Events: Economic Outlook: • Economic Overview • GDP Growth Forecasts • Keys to Regional Economic Growth • Inflation Forecasts • Regional Exchange Rate Forecasts • Labor Force Overview • Foreign Investment Outlook • Key Regional Economic Issues • Regional Economic Risk Outlook Political Outlook: • Regional Political Overview • Recent Elections or Government Changes • Upcoming Elections • Key Regional Disputes or Conflicts • Potential Conflicts • Regional Military Outlook • Key Regional Political Issues • Regional Political Risk Outlook Demographic & Environmental Outlook: • Population Overview • Population Characteristics • Development of Leading Urban Centers • Key Demographic Issues • Key Environmental Issues • Regional Demographic and Environmental Risk Outlook

3. Current Events and Recent Changes Overview

4. North America: Recent Political Events and Changes Key Political Events and Changes: • The United States Congress approved an agreement on financing the US government for the next two years, a move that will alleviate fears of another budget showdown in the US in the coming months. According to the terms of the deal, the US federal deficit will be reduced by $23 billion, while the $63 billion in automatic defense and domestic spending cuts that were triggered last year will be offset. • Polls taken in Canada showed that the opposition Liberals were once again the most popular political party in Canada, while the government Conservatives and the opposition New Democrats were six to ten percentage points behind the Liberals. • The Canadian government announced that it intended to claim the continental shelf under the North Pole as Canadian territory. This angered Russia, which also claims the waters around the North Pole. • The candidate of the conservative National Party, Juan Orlando Hernandez, won Honduras’ presidential election. Mr. Hernandez won 36.9% of the vote. The second place finisher was the wife of former left-wing President Manuel Zelaya, Xiomara Castro, who won 28.8% of the vote. The Liberal Party’s Mauricio Villeda finished in third place with 20.3%, while the anti-corruption candidate Salvador Nasralla finished in fourth place with 13.4% of the vote. After the presidential election, Ms. Castro accused the election of being rigged and demanded a recount, which was held shortly after the election. Afterwards, she demanded that the election results be annulled and a new presidential election to be held. • Cuban President Raul Castro shook hands with United States President Barack Obama at the funeral of former South African President Nelson Mandela. This raised hopes of a thaw between the US and Cuba. • In Nicaragua, the National Assembly approved a constitutional reform that would allow President Daniel Ortega to seek a fourth term in office by abolishing the two-term limit on presidents in Nicaragua.

5. Economic growth in the United States in the third quarter of this year was upgraded to 4.1% on an annualized basis during that period. The unemployment rate in the United States fell to 7.0% in November 2013, its lowest level in five years. 203,000 new jobs were created in the US that month, a much higher figure than had been expected. Fears mounted that the US territory of Puerto Rico could default on its debts in the near future. Canada’s economic growth accelerated to 2.7% on an annualized basis in the third quarter of 2013 thanks to strong performances by the country’s mining and manufacturing sectors. North America: Recent Economic Events and Changes Key Economic Events and Changes: • Mexican President Enrique Pena Nieto signed a new law that will allow for foreign investment in the country’s oil and gas industry for the first time since the industry was nationalized in 1938. Oil and gas output has been falling in recent years as existing reserves are being exhausted. • Panama’s GDP growth rate accelerated to 8.9% on an annualized basis in the third quarter of 2013, with growth rising in most sectors of the economy during that period. • El Salvador’s economic growth accelerated slightly to 1.6% on an annualized basis in the third quarter of 2013. Nevertheless, El Salvador continued to have one of the slowest growing economies in Latin America.

6. The Mexican government introduced plans to tax sugary soft drinks and other foods and drinks that are perceived to be the cause of Mexico’s obesity crisis. The merger of American Airlines and US Airways created the world’s largest airline, leaving the United States with three major air carriers. A severe winter storm knocked out power for hundreds of thousands of households in the northeastern United States and eastern Canada. Canada Post announced that it would phase out home mail delivery in Canada over the next five years due to persisted financial losses. The Cuban government relaxed the restrictions on Cubans buying foreign-made cars. North America: Other Recent Events and Changes Other Key Events and Changes:

7. Regional Political Outlook

8. Honduras: Most Recent ElectionsPresidential and Parliamentary Elections – November 2013 • Presidential Election Results: • Parliamentary Election Results: Source: National election authority • The conservative candidate Juan Orlando Hernandez won a tough-fought presidential election in late 2013, despite claims over electoral fraud by the left-wing candidate, Xiomara Castro, who finished second. The conservative National Party (PN) also won the largest number of seats in the Congress, but failed to secure an outright majority.

9. President Barack Obama defeated his Republican challenger Mitt Romney in November 2012’s presidential election in the United States by virtue of his ability to win nearly all of the hotly contested swing states. President Obama defeated Mr. Romney by the narrow margin of 50% to 48% in terms of the popular vote in the presidential election, although he won 332 of the 538 votes in the Electoral College. The president’s larger-than-expected victory in the Electoral College was the result of his ability to win nearly all of the swing states that ultimately decided the winner in this election, often by much larger margins than had been anticipated. Furthermore, the president benefitted from strong support from minorities in the US, while his management of the recent storm disaster in the northeastern US also boosted his support in the final days of the campaign. Once again, the economy was the dominant theme in the election as the US economy’s economic recovery remained tepid at the time of the election. Foreign policy played a relatively small role in this election, despite the war in Afghanistan and the volatile changes underway in the Middle East. United States: Most Recent ElectionsPresidential Elections – November 2012 • Summary of the Last Elections: • Results by County and State: • Red – Romney • Blue - Obama Source: US Federal Election Commission

10. While President Obama won a larger-than-expected victory in November 2012’s presidential election, the US Congress remain firmly divided between the two leading parties. The Democrats retained their control of the US Senate, while the Republicans remained firmly in control of the US House of Representatives. As a result, the balance of power in Washington will remain unchanged as the United States prepares to deal with a number of immediate economic and political risks that will have to be dealt with by both parties. Overall, the Democratic Party made small gains in both the Senate and House of Representative elections. In the Senate, the Democrats managed to gain two seats, giving them 55 of the 100 seats (the two independents in the Senate primarily support the Democrats). In the House of Representatives, the Republicans remained in firm control, although they lost a total of eight seats in that body. United States: Most Recent ElectionsCongressional Elections – November 2012 • Summary of the Last Elections: • Control of the Congress: Source: US Federal Election Commission

11. Mexico: Most Resent ElectionsPresidential and Congressional Elections - July 2012 Source: National election authority • The PRI was the big winner in 2012’s presidential and congressional elections in Mexico. In the presidential election, the PRI’s Enrique Pena Nieto was a clear victory, returning the PRI to the presidency for the first time in 12 years. The PRI also won the largest number of seats in the congressional election.

12. The candidate of the governing PLD party, Danilo Medina won May 2012’s presidential election to succeed outgoing President Leonel Fernandez. Mr. Medina won 51.2% of the vote in the first round of voting, enabling him to avoid a second round election. The opposition candidate, former President Hipolito Mejia, won 47.0% of the vote in the first round. Following the election, the political opposition accused the government of rigging the election through vote-buying and other methods. This claim was supported by some international observers, although the overall opinion was that the election was largely free and fair. Dominican Republic: Most Recent ElectionsPresidential Election – May 2012 • Summary: • Election Results: Source: National election authority • The election of Danilo Medina means that the policies of former President Leonel Fernandez will remain in place, with the former president continuing to exercise significant political power in the Dominican Republic.

13. Key Regional Disputes in North America The United States and Cuba • Key Issues: The US government’s continued opposition to the Castro dictatorship has resulted in the US maintaining an embargo on Cuba for more than four decades. • Outlook: Relations between the United States and Cuba are likely to improve in the coming years as Cuba’s old guard begin to leave political life. El Salvador and Honduras • Key Issues: Both countries claim land along the Pacific Coast that is currently controlled by Honduras. El Salvador recently asked the International Court of Justice to review a previous decision that awarded this land to Honduras, re-starting old animosities. • Outlook: The potential for disputes in the region has edged higher recently, thus the possibility of a conflict cannot be ruled out. Guatemala and Belize • Key Issues: Guatemala claims that much of Belize’s territory rightfully belongs to it. Moreover, a number of border incidents have occurred in recent years, inflaming tensions. • Outlook: Despite Guatemala’s aggressive stance on this issue, Belize is relatively secure due to foreign protection. Honduras and Nicaragua • Key Issues: Both countries claim the mineral rich Caribbean island known as Cayo Sur. The eastern portion of the border between the two countries is also disputed. • Outlook: The International Court of Justice will make a ruling on the maritime dispute between the two countries, but this will do little to reduce the tensions between these two neighbors.

14. Regional Military Outlook Balance of Power in the Region The United States military dominates the world like no other military in history. • Through its air and sea power, it is able to project large forces anywhere in the world. • Moreover, it holds a massive superiority in all forms of warfare. Other North American militaries are small and used primarily for defense or peacekeeping. • Canada spends relatively little on its military, despite its large economy. Outlook Source: SIPRI The United States’ huge military advantage over the rest of the world will continue to widen in the coming years. • The single greatest threat will come from China, but it will be decades before China can hope to approach US spending and technological levels. • Meanwhile, the US will maintain its policy of establishing military bases at strategic locations throughout the world in order to be able to project power in any place at any time.

15. Despite the threat from international terrorism, political risk levels in North America are the lowest in the world. The US and Canada have very stable democracies, while Mexico too is becoming a more politically stable country. Central America and the Caribbean continue to experience higher levels of political instability. North America: Political Risk Outlook Current Political Risk Ratings: Political Risk Outlook: Low Risk………………High Risk • ISA Risk Ratings • 0.0 to 1.9 = Low Risk • 2.0 to 3.9 = Low to Moderate Risk • 4.0 to 5.9 = Moderate Risk • 6.0 to 7.9 = Moderate to High Risk • 8.0 to 10 = High Risk

16. Regional Economic Outlook

17. North American Economic Overview The United States economy dominates North America like no other economy in the world dominates its home region. • The US economy accounts for more than 80% of the region’s total economic output. • The United States is the world’s largest recipient of foreign labor resources, much of which comes from Mexico and Central America. • Mexico’s and Canada’s economies are based largely on exports to the United States, although both countries are now diversifying their export markets. Central American economies struggle from political instability, crime and the overall lack of a large manufacturing sector. • Meanwhile, Caribbean economies remain dependent upon tourism and agricultural exports. Source: ISA Economic Forecasts Avg. Annual GDP Growth 2008-2012 Size of the circle indicates the size of the economy Per Capita GDP at PPP No developed country in the world has brighter long-term prospects than the United States and this provides the rest of North America with an opportunity for significant growth. However, this will only occur if the countries of Central America and the Caribbean can diversify through the development of export-oriented industries.

18. NAFTA Economic Growth Outlook Source: ISA Economic Forecasts, national statistics Economic growth in the United States will accelerate in the coming years as the world’s largest economy begins to record growth rates along the lines of those from before the crisis. This will present strong export opportunities for Mexico and Canada and will enable each of these two countries to record healthy growth rates in the years ahead.

19. Central American Economic Growth Outlook Source: ISA Economic Forecasts, national statistics Central American economic growth has rebounded in recent years, led by Panama, which has one of the world’s fastest growing economies. Looking ahead, exports will remain the key to the region’s growth and the recent free trade agreement with the US will lead to higher export revenues and foreign investment inflows over the long-term.

20. Caribbean Economic Growth Outlook Source: ISA Economic Forecasts, national statistics Economic growth in the Caribbean region slowed sharply in recent years as export revenues fell sharply in the wake of the recession in the United States. Growth will return in much of the region, but is likely to remain below pre-crisis levels in the coming years.

21. North American Economic Growth Summary Key Factors US business and consumer spending is the key to the region’s economic performance. The US economic recovery will be the key factor throughout the region, while local instability will continue to plague some countries. US economic growth also will fuel growth in the tourism sector, benefiting many areas of the region. Mexico’s economic growth has been halted by a decline in exports and increasing foreign competition. Central America will suffer from the potential for further political unrest that will hamper foreign investment. The ability of the US economy to fully recover from the recent economic crisis will determine whether or not all of the countries in the region are able to return to pre-crisis levels of economic growth over the course of the next few years.

22. NAFTA Inflation Outlook Source: ISA Economic Forecasts, national statistics Inflation pressures have fluctuated greatly in the United States and Canada in recent years, with slight deflationary pressures emerging in 2013. In Mexico, inflationary pressures have eased in recent years.

23. Central American Inflation Outlook Source: ISA Economic Forecasts, national statistics Inflationary pressures eased in recent years after peaking in 2008. Looking ahead, inflationary pressures are forecast to remain under control for most of Central America over the course of the forecast period.

24. Caribbean Inflation Outlook Source: ISA Economic Forecasts, national statistics Inflation rates had trended downwards across the Caribbean before 2008 and 2012, but high food and energy prices mean that a renewed spike in inflationary pressures in the near-future cannot be ruled out.

25. North American Key Exchange Rates Against the US Dollar(1 US$ = Local Currency) Source: ISA Economic Forecasts, OANDA

26. North American Labor Force Overview Source: ISA Economic Forecasts, national statistics The unemployment rate in the United States fell sharply in 2013 as job creation levels improved after a long slump. Unemployment rates in Canada and Mexico have also begun to come down from their recent highs.

27. Foreign Investment in NAFTA Source: UNCTAD The United States has been the largest recipient of foreign investment over the past decade, with FDI inflows rebounding from to the economic dowturn. Canada and Mexico have also experienced a similar pattern of FDI inflows. Looking ahead, the region will continue to attract significant foreign investment due to its growing market.

28. Foreign Investment in Central America Source: UNCTAD Foreign investment levels in Central America remain low compared to many other developing regions. Panama has been the region’s leading FDI recipient, thanks to the Panama Canal. Costa Rica will be a leading recipient in the future, due to its political stability and economic diversity.

29. Foreign Investment in the Caribbean Source: UNCTAD Foreign investment in the Caribbean is focused largely on the tourism industry, with a few countries and territories focusing on banking and financial services.

30. The Automotive Industry in North America The North American automotive industry is undergoing a period of rapid change. • US manufacturers and suppliers are facing severe competition from Asian companies. • Japanese and Korean automakers continue to expand their manufacturing presence in the region as their sales grow. • Meanwhile, Detroit’s “Big Three” all face difficult financial situations. • Meanwhile, high fuel prices are forcing consumers to look at more fuel-efficient vehicles. Mexico and Canada also have sizeable automotive industries. • Mexico is poised for further foreign investment in its automotive sector, much of it from overseas companies seeking to expand their presence in the region. Source: PwC Autofacts The North American automotive industry will benefit from the fact that it is the only developed region that will realize significant growth in the long-term. However, regional automotive companies must find a way to turn around their declining market shares in the face of growing competition from other regions.

31. Economic risk levels had risen in previous years due to the housing crisis and financial meltdown in the United States. Over the long-term, North America’s diversified and growing economy faces relatively-low economic risk levels. Continuous market growth, the result of entrepreneurship and population growth, helps to ease economic risk levels. Furthermore, the flexible US economy is able to absorb exports and excess labor from Central America and the Caribbean, helping to ease risk levels in those countries as well. North America: Economic Risk Outlook Current Economic Risk Ratings: Economic Risk Outlook: Low Risk………………High Risk • ISA Risk Ratings • 0.0 to 1.9 = Low Risk • 2.0 to 3.9 = Low to Moderate Risk • 4.0 to 5.9 = Moderate Risk • 6.0 to 7.9 = Moderate to High Risk • 8.0 to 10 = High Risk

32. Demographic and Environmental Outlook

33. North America Population Trends All areas of North America are growing. Source: US Census Bureau Source: US Census Bureau The working-age populations of the United States and Canada will continue to grow, though at a slower rate in the years ahead. This will partially be offset by the continued rapid growth of the working-age population in Central America and parts of the Caribbean that will provide the US and Canada with a reliable source of labor.

34. North America Population Trends by Country Source: US Census Bureau Source: US Census Bureau The United States will account for more than half of the region’s population growth before the middle of this century as emigration from other North American countries contributes to this expansion. Mexico and Guatemala will also see significant population growth, even with high rates of emigration.

35. North America Ethnic Composition European descendants comprise over half of North America’s population. The US, Canada and Costa Rica have the largest percentage of European descendants. Most African descendants in North America live in the US or the Caribbean. Amerindians make up large portions of the population in Mexico and most Central American countries. Source: CIA Mixed-race people are a large segment of the population and are growing in numbers. The most significant ethnic issue in North America is the rapidly changing ethnic composition of the United States, that will see Asians and other ethnic groups continue to grow rapidly.

36. North America Religious Composition The Roman Catholic Church holds a dominant position in Mexico and Central America. The United States has the world’s largest Protestant population, with over 150 million Protestants. Protestant churches are growing rapidly through the region, often based in the US. North America has the world’s largest Jewish population. Source: CIA Other world religions have a foothold in the US and Canada, but have few other followers. Together with South America, the Roman Catholic Church of North America is growing rapidly in its global influence. However, numerous Protestant churches are actually growing much faster in the region and will continue to see increasing numbers of followers in the future.

37. North America Language Composition English has achieved its status as the world language thanks primarily to the influence of the US. English is the leading language in both the US and Canada, as well as a number of Caribbean states. Both the US (Spanish) and Canada (French) have large minority languages. Spanish is the dominant language in Mexico, Central America and many areas of the Caribbean. Source: CIA Mexico is the world’s most populous Spanish-speaking country by a wide margin. With the world’s most influential English and Spanish speaking countries both located in North America, no region is having a greater impact upon modern global linguistics than North America.

38. Largest Cities in North America Source: World Gazetteer Three of the world’s ten largest metropolitan areas are found in North America. New York is generally considered the world’s most important economic and cultural center and is the heart of the heavily populated Northeast region of the US. Mexico City is the largest city in the developing world.

39. North American Immigration and Emigration North America continues to be a center of immigration. • Historically, most immigration came from Europe, but today Asia is the leading source of new immigrants. North America easily receives the largest number of highly-skilled and educated immigrants of any region in the world. • These people are attracted to the opportunities found in the United States and Canada. Internal migration continues to be a major issue in North America. • Mexico, Central America and the Caribbean continue to see large-scale emigration to the US. Source: US Census Bureau Immigration has allowed the US and Canada to maintain relatively young populations in comparison to the developed countries of Europe or Asia, giving them a tremendous advantage over these other regions. On the other hand, the continuing loss of skilled people in the region’s poorer countries will lead to further economic difficulties.

40. Top Environmental Issues in North America SUVs, pick-up trucks and large-engined cars continue to dominate the automotive market in North America. • As a result, overall fuel consumption levels continue to rise significantly. • SUVs continue to grow in popularity, accounting for an ever-larger share of new vehicle sales in the US. The Preference for Large Motor Vehicles The US and Canada have some of the world’s most advanced wildlife protection legislation. • Unlike most developed countries, the US and Canada have retained large wildlife populations. • Elsewhere in the region, population pressure is a growing threat. Protecting North America’s Wildlife Many of the region’s larger cities suffer from severe air pollution. • Mexico City is one of the world’s most polluted cities. • Los Angeles and Houston suffer from the worst air pollution among the US’ larger cities. Urban Pollution The US and Canada benefit from very low population densities that disperse some of the effects of these countries’ large industries and cities. However, other areas are suffering from a severe increase in urban pollution as many of the region’s larger cities grow rapidly.

41. Key Geographic Issue in North AmericaThe Constant Threat of Hurricanes Most countries in North America are subject to hurricanes and other severe storms. • Every country in the region has been hit by at least one hurricane in recent years. The number of powerful hurricanes has increased in recent years. • The two most devastating hurricanes of the past decade were Hurricane Andrew which struck Florida and Hurricane Mitch which hit Central America. • Some scientists believe that global warming will lead to even more severe storms in the coming years. Hurricanes are a force of nature that have always effected the region and they will continue to do so. Thus far, none of the region’s larger cities have been destroyed by a hurricane, but if a Category Five hurricane were to directly hit a city such as Miami or Havana, the damage would be tremendous.

42. North America has a relatively risk-free demographic balance at present given the high birth rate in the US and that country’s openness to immigration. North America: Demographic and Environmental Risk Outlook Current Risk Ratings: Demographic Risk Outlook: Environmental Risk Outlook: Low Risk………………High Risk • North America suffers from a multitude of natural disasters, including earthquakes, hurricanes, tornadoes and volcanoes. • ISA Risk Ratings • 0.0 to 1.9 = Low Risk • 2.0 to 3.9 = Low to Moderate Risk • 4.0 to 5.9 = Moderate Risk • 6.0 to 7.9 = Moderate to High Risk • 8.0 to 10 = High Risk

43. Summary

44. Future Outlook Summary Demographic and Environmental Outlook • The US and Canada will continue to realize most of the developed world’s population growth as immigration from Asia and Latin America continues. While the US’ birth rate has fallen in recent years, it is expected to rise again as the US economy accelerates. • Population growth will also continue in many poorer areas of the region, with Guatemala and southern Mexico realizing high growth rates. • Urban pollution and urban sprawl will be the major environmental issues in North America in the near-term. Political Outlook • The growing political divide in the United States could threatened to unity of both of that country’s leading political parties, particularly the Republicans who face deepening internal divisions. • The Conservatives grip on power in Canada will be maintained over the near-term as the political opposition remains weak. • Political instability in Central America will grow as crime spirals out of control. • Future terrorist attacks against the US remain high distinct possibility in the coming years. Economic Outlook • Economic growth will return to North America in the coming years as the impact of the global economic crisis lessens. Nevertheless, consumer and business spending levels in the region will remain below pre-crisis levels in the years ahead. • Mexico’s economy will continue to under-perform its potential due to a lack of reform and growing competition from other emerging markets.

45. ISA Region Report North America January 2014 Edition