March 2017

Country Ranking Trends

  • Magni completed a review of shareholder rights. Protection of shareholder rights is important in reducing an investor’s risk when purchasing securities. Countries with strong protections on shareholder rights tend to support higher valuations in their equity markets. The review resulted in upgrades for Ireland and Thailand, while Australia, South Africa, and Qatar were downgraded.

Is Mexico a Canary in the Proverbial Coal Mine?

  • During his campaign, Donald Trump regularly expressed his antipathy toward past trade agreements and was broadly skeptical of the former consensus on the overall benefits of free trade. While there is still uncertainty about how much of the campaign’s rhetoric will be implemented, there will be negative implications for the United States if countries begin pursuing trade deals without US participation. Mexico is a country that is particularly challenged by the new ambiguity surrounding US trade policy. Last year foreign investment fell by 6 percent, and some analysts have predicted a much bigger drop this year.
  • Mexico, the world’s biggest buyer of US corn, is considering offering the same duty-free access to Brazilian and Argentine growers as US farmers. This offer would be a hedge against any downgrading of trade ties with the US. Without NAFTA, US farmers could face expensive tariffs. Protracted doubt about the future of US-Mexico relations could also bleed into Mexico’s 2018 presidential election. The current leading candidate is Andrés Manuel López Obrador, a populist who has promised to end what he describes as a relationship of “subordination” to the United States.
  • Implications: Mexico is one example of countries moving forward with trade deals that exclude the US. Trade deals do have issues, though the issues need to be placed in context. If others create trading blocs without the United States, we may have meaningful declines in export volumes, along with experiencing the associated issues of economic softness and weak wage growth. In recent days, the Trump administration has noticeably softened its rhetoric on NAFTA and this softening may reflect a better understanding of the situation.

Silver Linings Kimchi Style

  • On March 10, Park Geun-hye became the first president of South Korea to be impeached and removed from office. The court’s decision means that an election for a replacement must be held soon. Moon Jae-in, a former head of the opposition Minju party, is the favorite to win. He is said to favor a more conciliatory approach towards North Korea. On the economic front, Moon has vowed to boost corporate governance by improving transparency and tackling the opaque ownership structure of many of the country’s top companies. In addition, the leading candidates have all pledged to end the common practice of presidential pardons for convicted top executives.
  • Implications: Magni will be watching to see if there is a silver lining to the recent scandal as the election may give impetus to real reform of the cozy relationship between the government and large companies. Such reforms would improve Korea’s already good Magni Country Score.

Bridging the Mainland Gap

  • Despite having less popularity with the citizens than her main rival, Carrie Lam has been elected by a 1,200-person committee, made up mostly of loyalists to the Chinese government. Lam is viewed with suspicion by Hong Kong’s pro-democracy movement because of her ties to the failed effort to overhaul the city’s election process according to Beijing’s wishes. Beijing is said to have lobbied heavily behind the scenes to ensure her election. Many fear that Beijing is tightening control and undermining the “one country, two systems” framework that guarantees Hong Kong a high degree of autonomy. Lam will face a challenge to balance the demands of China’s Communist Party leaders, with the wish of many residents to preserve the global financial hub’s liberal values and rule of law that have long underpinned its economic success. She has pledged to focus on mending social rifts and to maintain Hong Kong’s status as an international financial center. She has also called for tax reform to boost small business and improve Hong Kong’s regional competitiveness.
  • Implications: The more Lam moves Hong Kong toward the desired model of the mainland, the greater the risk of weaker governance, and hence a Magni downgrade. Perhaps the best outcome in the short term would be minimal changes.

Is it Finally Time for Russia to Attack Corruption?

  • Russia recently witnessed anti-corruption protests in over 90 cities across the country. The demonstrations marked the most substantial opposition turnout since the crackdown on protesters in May 2012. The protests were fomented by Alexey Navalny, a lawyer and blogger known for his crusade against corruption, who recently released a video expose accusing Prime Minister Dmitry Medvedev of having amassed a real estate empire. The size of the protests was a tremendous show of power by Navalny, who has declared that he is running for president of Russia in 2018. He is a long shot at best, and the Kremlin may not even allow him on the ballot. Navalny, who is largely ignored by state media, has bypassed traditional outlets by using social networks to organize his followers and spread his message. Navalny’s popularity creates a dilemma for Russia’s leaders; they will be tempted to stamp out dissent but risk creating a martyr out of Navalny which could in turn lead to unrest.
  • Implications: A major reason for the low Magni Country Score in Russia is that the economic infrastructure, rule of law, and related systems are operated in a manner that encourages and protects corruption. Reducing corruption could increase their score in meaningful ways, but the changes will be heavily resisted by the people benefiting from the current corruption.