April 2018

Country Ranking Trends

  • Magni completed a review of insurance regulation in India. Regulations that produce an open, transparent, and efficient market for insurance products enable better management of risk, thus allowing business leaders to undertake more initiatives to create value for shareholders.
  • The review resulted in an upgrade of India’s Country Score. India has successfully begun implementing a prior declaration of intent to strengthen insurance supervision. The size of the upgrade was too small to change the relative rank of India among the countries of the emerging markets. Magni will continue to watch for additional progress in implementing these important reforms, thus justifying further upgrades.

Ongoing Scandals Undermining Much-Needed Brazilian Reforms

  • The outcome of elections to be held in October 2018 became even more unpredictable when the Supreme Court rejected the former President Luiz Inácio Lula da Silva’s request to remain free while he appeals against his 12-year sentence for corruption. He had been the front-runner in all recent polls, and even after his arrest he would still lead the race according to the most recent survey. Whatever the outcome of any subsequent appeals Lula is unlikely to be a candidate because Brazilian laws bar anyone convicted of a crime from being eligible for elected office for eight years. Ongoing corruption scandals and the associated anger against the establishment will likely be the main ingredients in this year’s election. The unpopular incumbent President Michel Temer has low single-digit approval ratings after introducing austerity measures and trying to reform the country’s costly pension system. However, these reforms are important for Brazil’s long-term growth potential, and election uncertainly undermines the likelihood of structural reforms after this year’s presidential elections.
  • Implications: Widespread resentment of elites based on perceived corruption and perceived isolation from the issues of the everyday citizen is more acute in Brazil given the pervasive and ongoing corruption scandals. The additional uncertainty introduced by Lula’s likely ineligibility for elected office makes predictions more difficult. A decade ago Brazil was considered by many to be a rising star within the emerging markets. The systemic weaknesses in Brazilian governance have prevented the rosy forecasts from being realized. Further, the multiple corruption scandals, enabled by the governance weaknesses, undermine support and seem likely to derail the very reforms required to prevent future scandals.

Hungary Is Losing Its Advantages

  • As expected Prime Minister Viktor Orban won a third straight term in recent parliamentary elections. His Fidesz party and their Christian Democratic allies secured more than 49% of the vote. Electoral rule changes gave Orban’s party a supermajority in parliament despite winning less than a majority of the vote. The victory will allow them to pass major overhauls and constitutional changes unilaterally. The Organization for Security and Cooperation in Europe, which monitored the election, said the campaign did not offer opposition parties a level playing field. Orban campaigned largely on his hardline stance against immigration, and he has promised to move quickly to implement that agenda. His party has said they would soon move to pass a 25% tax on aid groups that assist migrants. The measure is seen as aimed at philanthropist George Soros who was a frequent target during the campaign for his assistance to nongovernmental organizations.
  • Implications: The concentration of power by Orban is a source of concern. So far, government action has not warranted a decrease in Magni Country Score, however Hungary’s rank as one of the better governed countries in the emerging markets is at risk. Magni will be watching for changes, driven by a populist agenda, that undermine good governance.

The United States Increasingly Isolated

  • The European Union and Mexico have reached an agreement to update their 18-year-old trade deal. The original trade pact was relatively narrow and mainly eliminated tariffs on cars and machinery. The new deal when fully implemented will virtually eliminate tariffs between the country and the union. The deal will also make Mexican government procurement from EU companies easier. The Mexican government has also agreed to recognize certain “geographical indications” to offer protection for European food and drink products in Mexico. The agreement also promises to streamline customs procedures that EU exporters have complained hurt their efforts to sell in the Mexican market. The trade deal is expected to be finalized by the end of the year. In contrast with the more protectionist posture of the United States, the EU has also recently concluded trade agreements with Canada, Japan and Singapore. As Mexico expands its access to other advanced markets it increases the pressure on the U.S. to come to a deal for a renegotiated NAFTA.
  • Implications: Trade deals in and of themselves are not factors determining the quality of governance, though trade deals are important for other reasons. The implications of the shifting international trade landscape mainly involve political considerations. The US has an increasingly weak position in renegotiating trade deals, thus making the likely outcomes less attractive while also appearing to undermine the Trump administration’s ability to deliver on promises. For Mexico, the deal with the European Union will likely decrease the probability of Obrador, the populist left-wing candidate, winning the upcoming Mexican presidential election.

The Signs in Turkey Remain Bad, Though Nothing is Definitive

  • President Erdogan has announced that presidential and parliamentary elections will be brought forward to this June. Turkey has been one of the fastest-growing economies among the G20 countries, but there are signs of overheating with high inflation and a rapidly depreciating national currency. Early elections would likely be completed before an economic downturn, thus helping Erdogan’s prospects. There are concerns whether the upcoming elections will be demonstrably free and fair. Parliament voted to again extend the state of emergency in place since the failed coup, meaning the vote will take place under emergency rule. The state of emergency authorizes, among other things, the government to limit the right to assembly and further restricts media freedoms and openness around criticizing the government. A vote perceived as illegitimate would hurt Turkey’s political stability and economic prosperity.
  • Implications: Prior to the attempted coup, Turkey improved its governance under Erdogan’s leadership. The country improved faster than any of the majority-Muslim countries in the emerging markets. Despite prior improvements, Turkey remains below average when compared to the other countries in the emerging markets. Since the attempted coup, Turkey’s governance has stagnated, and the country remains on our watch list for downgrade.