May 2017

Country Ranking Trends

  • During May Magni reviewed the Economic Standard on Accounting. Four countries, including Korea, US, India and China were upgraded. Conversely, Japan, Hungary, and Switzerland were downgraded. This latest upgrade of China moves it from 43rd up to 41st among the 46 countries in the investible world.

The EU Center is Holding – For Now

  • Political forces advocating for the break-up of the European Union have suffered setbacks in recent elections. Most recently, Emmanuel Macron’s victory over National Front far-right candidate Marine Le Pen in the French presidential election, put to rest for now the threat of an exit by France from the EU. In Germany, Merkel’s center-right Christian Democrats also pulled off a strong showing in regional elections. These elections are a positive harbinger for her chances in German federal elections to be held in September. At the same time, there will be fraught negotiations ahead to decide the relationship between the UK and EU post-Brexit, though a near-term rupture of the union seems less likely. Future potential flashpoints testing the stability of the European project include snap elections in October in Austria, an Italian general election in 2018, and any worsening of the Greek debt crisis.
  • Implications: France and Germany remain the heart of the European project. These recent votes are small, but important, steps. The steps reinforce the “slow fraying” scenario discussed last month. Further, Magni’s overall view of Europe is unchanged. Over the long term, there appears to be significant upside opportunities in the European countries with the best governance, though the opportunities will probably not be realized until the fraying stops and the issues are resolved; either by dissolution of the project or by a major structural change.

A Brazilian Mr. Smith is Needed in Brasilia Now More Than Washington

  • As mentioned last month, the ongoing corruption scandal has now engulfed President Temer, who himself came to power after the impeachment of the previous president. A secretly taped conversation showed the president allegedly encouraging bribes. The Supreme Court has now authorized a probe into Temer on allegations of corruption and obstruction of justice, only days before Congress had planned to vote on a pension bill considered central to the administration’s economic reforms. The biggest potential casualty of the scandal is the ambitious reform program that his government has authored and is attempting to pass through congress. Temer now faces an uphill battle to ensure his political survival, much less rebuilding a coalition that could approve controversial measures such as a bill curbing pension outlays. He has argued that the incriminating recording was doctored and has said he would not resign even if he were to be indicted. But if Mr. Temer was forced to resign or was impeached, congress would choose a stopgap president to serve out the rest of the current term, which ends in 2018.
  • Implications: To reduce the risks of a populist trap (discussed last month), Brazil needs to find a leader who is not tarnished by the ever-larger corruption scandal. Until such a person comes to power, Brazil’s governance may well stagnate or even deteriorate. For now, it retains its relatively low Magni Country Score.

Is Erdoğan Confusing a Zenith for Mount Olympus?

  • Last month the commentary discussed the successful passage of Turkey’s constitutional amendments and the resulting concentration of executive power. During May, President Erdoğan further consolidated power by extending the previously-declared temporary state of emergency. The state of emergency gives Erdoğan and his cabinet nearly unlimited power as it allows them to make policy decisions without parliamentary oversight or review by the constitutional court. In addition, many of the capable technocrats in the cabinet that were credited with steering the economy through a sustained period of high growth and low inflation have left and were replaced with untested economic policy advisers. With the referendum behind him, Erdoğan is expected to streamline his economic team to try to speed up decisions and reassure markets.
  • Implications: Magni is even more concerned about the further concentration of power. As previously communicated, concentration of government power is typically, but not always, a precursor for increased corruption and other government issues. The change in economic advisors will also be watched closely. Until recently, Turkey has improved its governance more than most Western media sources acknowledge. A reinvigorated set of economic reforms would help assuage concerns about perceived abuse of power.

When Tax Legislation is not Really About Taxes

  • India is set to implement its biggest tax reform since independence in 1947. The Goods and Services Tax (GST) is a national sales tax that unifies more than a dozen separate levies. The reform has the potential to reshape India’s business landscape, and is likely to raise government revenues by increasing tax collection from the country’s largely informal economy. The federal government hopes there will be a jump in revenue growth under the new levy as more taxpayers come into the formal economy. It is expected to bring unprecedented transparency and create data for almost every monetary transaction in the economy. However, it could also mean chaos in a nation where about one-fourth the population can’t read or write and many offices do not have the technology needed to file digital returns. Some are pushing for a delay in the July 1st implementation deadline based on fears of economic disruption.
  • Implications: The new tax system reduces incentives to use the informal economy, creates greater transparency, and over the longer-term helps enable small businesses to grow into large enterprises. These changes are part of good governance. Success by the government and adherence to the new system by businesses across the country would improve India’s prospects and justify upgrades to the Magni Country Score for India.