April 2019

Country Ranking Trends

  • Magni completed a review of property rights. Several countries with relatively lower overall Magni Country Scores were upgraded, including the Czech Republic, Egypt, Portugal, and Turkey. These improvements are good news as more secure property rights should reduce investment risk. Lower risk leads to more attractive investment opportunities.

Shakespeare on Brexit: “Full of Sound and Fury, Signifying Nothing” (continued)

  • The Brexit deadline had been March 29, but the EU has extended the deadline to October 31st. However, Prime Minister Theresa May would like the U.K. to formalize its departure from the European Union by May 22, so it doesn’t have to take part in elections for the European Parliament scheduled for the next day. If the vote goes ahead, pollsters expect the Conservative Party could have its poorest ever showing in a nationwide poll as voters register their displeasure with the government’s handling of Brexit. After three previous rejections there is little optimism that Therese May’s exit agreement will ever be ratified, much less in time to avoid the upcoming EU parliamentary vote. The ongoing negotiations with Labour officials over a compromise deal do not show any apparent progress. The government is aiming for an agreement with Labour that would make a “customs arrangement” with the EU, though May has ruled out a full customs union as she contends it hamper the U.K.’s ability to conclude independent trade deals. Any compromise with Labour could not be reflected in the legally-binding withdrawal agreement, only in the aspirational political declaration. The nonbinding nature of such a declaration is problematic for Labour.
  • Implications: Much like a Shakespearean play, this drama unfolds in multiple acts. Unlike the Bard’s many plays, there is little character development and the plot is rather repetitive. If you want to skip to the likely conclusion, Britain will be OK after a period of disruption, while the EU remains distracted from addressing the many issues across the rest of the union.

Do Recent Elections Position Indonesia for Continued Improvement?

  • Indonesia recently held the country’s first simultaneous presidential and legislative elections. The election was the world’s largest one day vote with 245,000 candidates vying for almost 20,000 posts. Preliminary results indicate that incumbent president Joko “Jokowi” Widodo will widen his margin of victory over former army general Prabowo Subianto, whom he narrowly beat in the 2014 presidential election. This will be Jokowi’s final election as the Indonesian constitution only allows a president to serve two five-year terms. Jokowi’s win was seen as a victory for moderation and centrist politics over Prabowo Subianto’s more nationalistic rhetoric. For example, Jokowi had faced accusations throughout the campaign of being insufficiently Islamic, a potent charge in the world’s largest Muslim-majority nation. Jokowi’s government has been given credit for progress on poverty reduction and improving Indonesia’s inadequate infrastructure. However, his reform ambitions will face challenges in a divided parliament where the party of his defeated rival is projected to hold the second-largest number of seats. Official vote count results will not be announced until May 22.
  • Implications: Indonesia has made significant progress in strengthening its governance. The country moved past six countries in the last twelve months and achieved a ranking close to the top of the emerging markets. The recent election demonstrated that Indonesia, unlike so many other countries in the world, can contain populist forces. Despite some potential parliamentary challenges, Indonesia may continue to improve, and such improvements would be an important step in a path toward the developed market.

Israel Likely to Stagnate

  • Following recent parliamentary elections, Benjamin Netanyahu is set to win a record fifth term as prime minister. His Likud Party won 36 of the 120 seats, which should allow him to form a slim majority coalition with several right-wing and religious parties. During the campaign the economy played a smaller role as national security was the primary topic. To the extent economic issues were a factor the strong Israeli economy boosted Likud with voters wanting to maintain the status quo. However, Israel’s budget deficit is rising and is forecast to reach almost four percent of GDP this year, well above the government’s stated target of 2.9 percent. Current debt levels are not an immediate concern, but eventual spending cuts and/or tax increases appear unavoidable. Fiscal consolidation will be made more difficult by the demands of Likud’s potential coalition partners. Ultra-orthodox religious parties will be looking to protect their generous subsidies. Roughly half of Ultra-orthodox men are employed, instead pursuing religious studies – a situation restraining Israel’s growth potential. The next government is expected to be in place by late May.
  • Implications: Israel has one of the lowest Magni Country Scores among all the countries of the developed market. The nature of the recent election is likely to mean that economic reform will not be a priority. The country remains at risk of declining in the relative rankings as some of the hard-charging countries of the emerging markets could potentially achieve higher Magni Country Scores.

Will the Ukrainian Tragedy Become a Comedy?

  • The comedian Volodymyr Zelensky, who plays a president on a popular sitcom, won a landslide victory to become the actual president in Ukraine’s second round election. He will enter office with no previous political experience after having run an unconventional campaign with few policy specifics. He won a decisive mandate with over 70% of the vote, winning in every region of the country, except for the area around the western city of Lviv. His win was rebuke to a political and business establishment and part of a trend that has seen political outsiders win recent elections in many countries. Both candidates agreed on Ukraine’s Western direction, but voters were dissatisfied with the incumbent, Petro Poroshenko, for doing too little to combat corruption. Zelensky has promised to break the power of oligarchs in Ukraine. However, his own relationship with the oligarch Ihor Kolomoisky, who owns the channel that Zelensky’s productions are broadcast on, has come under scrutiny. Given the lack of specific proposals during the campaign, observers will be watching the composition of the incoming administration for clues about policy direction.
  • Implications: Ukraine is not considered part of the emerging markets and hence is not investible. The country has a size and global importance to be part of the emerging markets. Historically, rampant corruption has held back the country’s progress. While much is unknown about the new president, perhaps he can address the corruption and place the country on a better path.