August 2020

Country Ranking Trends

  • Magni recently completed a review of Hungary. The review confirmed the existing Magni Country Governance Score. Hungary retains a better than average score among the countries of the emerging markets. Its biggest weakness remains the relatively low Market Integrity in the country. The last change in Magni Country Governance Score for Hungary was May of 2017. Despite this stagnation, in the past year, Hungary fell behind two countries that have implemented reforms. Even modest improvement in Hungary’s Market Integrity would be sufficient to return it to its prior position.

What do Vladimir Putin and Freddie Mercury have in Common?

  • Russian opposition politician Alexey Navalny fell ill following a confirmed poisoning on a flight to Moscow. Initially, he was treated in the Siberian city of Omsk, but now is in Berlin’s renowned Charite hospital where clinical tests indicated poisoning with a substance used in insecticides or nerve agents such as sarin. At this point, his condition is considered serious, but not life threatening, though long-term recovery is unclear. Russia has a long history of dissidents and defectors being poisoned or meeting other untimely deaths, including the 2006 murder of former Russian spy Alexander Litvinenko from tea laced with radioactive isotope polonium-210. As another opponent of Putin may be biting the dust (hence the Freddie Mercury reference), there is a debate about whether Putin would have risked the expected protests arising from such action. Russia is already challenged by the pandemic, the crisis in Belarus, and unrest in its eastern regions.
  • The poisoning overshadowed Putin’s announcement of a vaccine. While Russian authorities have promised trials and publishing of trial results, the only information that has been released involves plans for trials. Even trial results on animals have not been released. The underlying approach is similar to the other major potential vaccines being developed, including China’s CanSino Biologics, Britain’s Oxford University, and AstraZeneca.
  • Implications: Beyond the current crises, Russia faces multiple structural challenges, including depressed prices for its commodities. Reforms, which would increase its Magni Country Governance Score, could take pressure off the structural issues and other challenges. That said, there are so many immediate issues that the time and effort required to complete reforms may well be viewed as a luxury that Russia cannot afford. In addition, the reforms could impact the flow of money that is siphoned from Russia to Putin and his allies. Russia likely will retain its low Magni Country Governance Score.

Hong Kong Arrest Shows China is not “Lai-ing” about Suppressing Demonstrations

  • On August 10th the Hong Kong police arrested pro-democracy media tycoon Jimmy Lai. Other key figures were arrested as well, while arrest warrants were issued for six activists based abroad. Hong Kong also postponed the city’s legislative council elections until next year. Britain, Australia, Canada, New Zealand, and the US issued a joint statement condemning the postponement, as well as condemning the exclusion of pro-democracy candidates from the election. Under the leadership of President Xi Jinping, China has become much more aggressive, both domestically and internationally. In addition to the less favorable view of China in the US and around the world, China is placing the status of Hong Kong as a financial center at risk. Hong Kong is considered the number three financial center of the world, behind only New York and London. The city’s position took decades, if not centuries, to achieve. The market depth and liquidity, which provides many advantages for China, depends on trust and confidence in a fair system. Erosion of trust and confidence can occur quickly, while rebuilding these attributes cannot be mandated from government — particularly one viewed as not trustworthy. With Hong Kong managing more than 70% of the international trade volume occurring in Chinese currency, the city had been considered a cornerstone of China’s plan to make the yuan a rival to the dollar and euro.
  • Implications: President Xi seems to value calm and lack of dissent more than the risk of damage to Hong Kong’s role as a financial center. That may become a remarkably high price for China to pay. Whatever happens, Hong Kong has one of the lowest Magni Country Governance Scores among the countries of the developed market. China’s score is even worse and among the bottom third of the countries of the emerging markets. Previously, there was the promise that China would reform to look more like Hong Kong. Now it appears more likely that Hong Kong’s score will descend in the direction of China.

Is the Agreement Between Israel and UAE a Big Deal?

  • On August 13th the US, Israel, and the UAE issued a joint statement announcing a deal. The deal begins a process that is expected to result in the UAE becoming the first country in the Gulf to normalize ties with Israel. In exchange, Israel agreed to suspend further annexation of the West Bank. However, Israeli Prime Minister Benjamin Netanyahu later clarified that Israel was “delaying” (as opposed to suspending) the annexation plans. Another provision of the deal would allow Muslims to visit and pray at the Al-Aqsa Mosque in Jerusalem. The deal also includes a provision regarding cooperation on a vaccine for the coronavirus. There has been a wide range of reactions to the deal, including protests among Palestinians who reject and condemn the deal on one end of the spectrum to comparisons with the 1977 Camp David Accords at the other end of the spectrum.
  • Implications: Given the long, troubled, and extremely complicated history of the region, people should be cautious in predicting the future. The deal is an agreement to start a process with the objectives as documented above. It is possible that the deal will founder as many prior promising efforts have. It is also possible that the ultimate agreement to be negotiated becomes the breakthrough to transform the Middle East. Time will tell, though the deal has already encountered an obstacle as Israel rejects sales of F-35 fighter planes to UAE . Transformation of the Middle East will require more countries joining the ultimate agreement. A key country is Saudi Arabia, a country reticent on this topic. All countries in the region have relatively low Magni Country Governance Scores. Perhaps this deal will be the catalyst that leads to peace, and then reforms to improve the governance of the respective countries and the lives of the people in those countries.

Déjo Vudéjo Vu is How to Say Déjà vu in Argentina

  • On August 4th the Argentine government struck a deal with some of its major creditors. With more than $323 billion in debt, accumulated over several decades, Argentina defaulted for the ninth time and the third in the last twenty years. The debt holders range from the IMF to major US financial services companies to private bondholders. The announced deal follows the government’s negotiations with some large US investment firms, led by BlackRock. Collectively, the parties negotiating with the government own more than half of the overseas portion of the debt. Under the terms of the deal bondholders, who are part of the deal, will swap defaulted bonds for new bonds with a 45% “haircut” in valuation. The global pandemic has hit Argentina hard, thus providing bondholders an incentive to negotiate more lenient terms and to complete a deal quickly in order to stem further economic damage, thus risking even greater write-downs of the debt. From an Argentinian perspective, the deal avoids further reputational damage, while preventing the country from being locked out of international credit markets. The deal was submitted for approval to the US SEC on August 17th.
  • Implications: While the deal is significant, more work remains. Argentina owes more than $40 billion to the IMF. This debt needs to be restructured as well. The country’s economy was shrinking before the pandemic. For many, Argentina appears to be repeating an ugly cycle. Breaking the cycle will take more than debt restructuring. Argentina retains one of the lowest Magni Country Governance Scores in the investible world. Reform of the country’s monetary policy, along with implementation of financial services regulatory changes designed to foster healthy markets, are required to move Argentina toward the average governance of countries of the emerging markets.