December 2017

Country Ranking Trends

  • Magni upgraded China for enacting regulatory reforms regarding securities and insurance. For all of 2017, China had the largest increase in Magni Country Score and the best improvement in relative ranking. If trends continue, China will soon be considered average among the countries of the emerging markets.
  • Despite the many negative headlines, the investible countries of the world once again improved overall governance, though the increase was smaller than the historical trend. Fourteen countries received higher Magni Country Scores, while six countries received lower Magni Country Scores. China, Ireland, and Indonesia had the largest increases in score, while Qatar, South Africa, and Australia had the largest decreases in score. Early next month, Magni will distribute an updated “Country Research Stoplight Chart” showing country trends.

United Kingdom is Through the Easy Part

  • The difficult negotiations between the United Kingdom and the European Union over Britain’s exit from the EU advanced with the outlines of an agreement on separation terms, which by treaty is scheduled to take place in March of 2019. European leaders say “sufficient progress” has been made on the initial divorce issues. The main items the EU wants resolved first included Britain’s exit bill for past commitments, the rights of EU citizens living in Britain, and the prevention of a hard border between Northern Ireland and Ireland. The transitional program will cover the period immediately after March 2019 and is expected to last about two years. According to negotiation guidelines released by the European Council, Britain must accept all EU rules during the transitional period, including the remit of the European Court of Justice. This will be difficult for Britain to accept because it will complicate its ability to negotiate trade deals with the rest of the world. However, the remaining 27 members of the EU have so far stuck together with a hardline on future arrangements based on the shared goal of dissuading future exits. This unity will likely be challenged during subsequent negotiations.
  • Implications: The recent progress is mostly agreement on process issues. Many difficult issues are not yet resolved. The UK currently has one of the highest Magni Country Scores. As discussed in prior commentaries, the UK score is unlikely to change significantly following completion of Brexit. Magni will be watching to see how the negotiations impact additional countries considering the exit process.

Austria – The Softer Side of the Far Right and Blocking the Exits

  • Sebastian Kurz, Austria’s new chancellor, won the plurality with over 31% of the vote in the October elections, becoming Europe’s youngest leader. His center-right People’s Party (OVP) has agreed to form a coalition with the far-right Freedom Party (FPO) which came in third in the vote. There remains concern about the FPO which was founded by neo-Nazis after World War II. Austria’s president elicited several promises from the new government before he would administer the oath of office. Among the steps taken by the new coalition was an acknowledgment of Austria’s commitment to the European Union and its responsibility to a Nazi past. The two parties have agreed to govern on a platform of tax cuts, social welfare and a tougher stance against illegal immigration. The FPO has backed away from calling for Austria to follow Britain by holding a referendum on leaving the European Union, however it remains critical of the bloc and wants to prevent further political integration. The EU has given its blessing to Austria’s new government on grounds it is “pro-European”, despite its far-right element. European Commission President Jean-Claude Juncker said he would judge Kurz’s government by its deeds. Austria’s pro-European position is important for the EU as Austria will take over the rotating presidency of the EU Council in July of 2018.
  • Implications: Austria has one of the lowest Magni Country Scores among the countries in the developed world. The score is stagnant, and three countries improved enough to move ahead of Austria during 2017. The stated priorities for the new government do not indicate any upgrades are likely to occur. So far, the EU has been able to keep the “exit” forces in Austria at bay and curb a “Brexit contagion”.

Will Erdogan Overcook Turkey?

  • Turkey had the fastest growth among G20 countries with a nominal growth rate of 11.1 percent in the third quarter of 2017. In response to the downturn caused by last year’s coup attempt the government enacted economic stimulus measures – including expanding a credit guarantee fund to provide what has so far been $57 billion of easy credit to companies. However, now with inflation at its highest level in 14 years, there is concern as to whether the central bank will have the requisite independence to tighten policy to prevent the economy from overheating. Turkish president Erdogan has been a proponent of the unorthodox theory that high interest rates cause inflation, and has said the central bank was on the “wrong path” to tackle soaring inflation. The central bank’s most recent hike in Turkey’s key interest rate was less than half market expectations. Central bank officials have given assurances of their independence and full authority to act, but there is a perception they may be bowing to political pressure. With presidential and parliamentary elections set for 2019, it will be important for the bank’s credibility to not pursue short-term growth at the expense of longer-term stability.
  • Implications: Prior to the attempted coup, the initiatives undertaken by Erdogan enabled Magni to upgrade Turkey significantly faster than other countries in the emerging markets. Since the coup, Turkey has continued to improve, though more slowly. Magni will be watching to see if Erdogan’s administration continues to make improvements after the election.

Chile – Marching in Place

  • Former President Sebastian Pinera has won Chile’s presidential runoff election, winning 54.6 percent of the vote representing a coalition of conservative parties. He ran on a platform of cutting taxes on businesses to revive growth and vowed to pursue new investments in infrastructure. Pinera will succeed incumbent president Michelle Bachelet, a socialist whose popularity sank toward the end of her current term due to slow economic growth and a rising public debt. This follows other recent victories for right-wing parties in Argentina and Peru where leftist governments were also seen as fiscally irresponsible. Pinera’s victory is unlikely to produce any major shifts in public policy. His coalition controls only 73 of the 155 seats in the lower house, so the president will need support from the opposition to pass legislation.
  • Implications: In the prior decade, Chile was one of the most improved countries in the world. Under both left and right leaders, Chile has mostly stagnated for an extended period. The country maintains a Magni Country Score that is above average within the countries of the emerging markets. More than cutting taxes is required to improve governance, and Magni will be watching to see if a broader agenda of economic reforms is enacted.