February 2018

Country Ranking Trends

  • Magni completed a review of fiscal policies. Transparency of fiscal policy is important in creating a supportive environment for businesses and in helping to reduce the risk associated with business projects within that country. Lower project risk enables greater investment and the opportunity for greater wealth creation.
  • The review resulted in a series of small upgrades and downgrades. Egypt and Indonesia were upgraded, while Canada, Japan, South Korea, and Poland were downgraded. The small downgrade of Canada did not impact its relative rank and the country retains the highest Magni Country Score. Conversely, the upgrade of Egypt was meaningful, yet not enough to change Egypt’s current rank as it remains better than Qatar, but worse than UAE.

Making Mexico Populist Again

  • Three presidential candidates accepted the nominations of Mexico’s main political parties: Ricardo Anaya from the conservative National Action Party; Antonio Meade from the governing Institutional Revolutionary Party; and Lopez Obrador of the leftist Morena party. The election to succeed President Nieto will be held on July 1st, and recent polls show Obrador with a significant lead. It’s Obrador’s third run for president, and this time he’s running as the anticorruption candidate. His platform promises fiscal and economic stability while redirecting government spending to foster economic growth. However, many voters are skeptical of his radical past, including following his narrow loss in the 2006 election when he declared himself president-elect and his supporters blocked a major road in the capital for six weeks. Whoever wins there likely will be a more confrontational relationship between Mexico and the United States over issues such as NAFTA and migration.
  • Implications: Among countries of the emerging markets, Mexico currently has a relatively high Magni Country Score. The election is likely to result in stagnation, at best, for the quality of Mexican governance. If Obrador wins, Mexico will have a populist and populists across the political spectrum tend to harm governance through an “end justifies the means” approach.
  • There are large potential implications for the US as the relationship between the two countries is likely to deteriorate further. Instead of looking to move the relationship in an “America First” direction, the Trump administration will likely need to spend resources to avoid moving in the opposite direction.

How Long will the Current Calm in Europe Last?

  • Polls suggest the anti-establishment Five Star Movement is likely to receive a plurality in upcoming Italian elections but still falling short of a parliamentary majority. If no one party or coalition has a majority to form a government, it is the president’s task to pick a prime minister who must then win the support of the new parliament. The president has said he won’t ask the populist Five Star Movement to form a government unless it secures an unexpected majority. The most likely outcome is a grand coalition based on Silvio Berlusconi’s Forza Italia and the ruling Democratic Party led by ex-premier Matteo Renzi, though Berlusconi is personally banned from returning to public office due to a fraud conviction. Despite a softening of euroskeptic stances, chances are low for long-term structural reforms to improve Italy’s economic performance or for tackling the country’s debt pile (2nd worst debt ratio in the EU behind only Greece).
  • Implications: While the populist party is unlikely to lead the new government, populist tendencies are impacting platforms and likely legislative agendas. Populism rarely leads to stronger governance, and Italy is unlikely to be an exception. At the same time, many pressures on the European Union remain. The Greek debt situation is not resolved. The Italian debt situation also needs a resolution. This new status quo appears to have generated temporary stability across the union. The next disruption (e.g., recession, bubble bursting) could cause another round of traumatic events and restructuring discussions.

Rounding the Cape Could Turn Headwinds into Tailwinds

  • Scandal-plagued Jacob Zuma has finally resigned, and South Africa’s parliament has elected Cyril Ramaphosa the country’s new president. Ramaphosa is expected to serve out the remainder of Zuma’s term, which ends in mid-2019, and he will be eligible to run for two subsequent full terms. He gave his first State of the Nation address one day after taking office, pledging an economic and political turnaround. He has also introduced a fiscally responsible budget that seeks to repair the economic damage wrought during the previous administration. Investors are hoping he will implement long-stalled government reforms and provide greater regulatory certainty. If there are no signs of an economic turn-around before national elections next year, the ANC risks losing its majority for the first time since the end of white-minority rule.
  • Implications: Like Mexico, South Africa has a relatively high Magni Country Score. Zuma, for all his flaws, did not materially hurt the actual governance of the country. South African equity markets have endured the headwind from Zuma’s issues. Though it is early, Ramaphosa appears to represent leadership much more clearly consistent with good governance. For South Africa, the headwinds appear to be abating and the markets may have clear sailing ahead.

Improving Rights in Saudi Arabia

  • Following a recent crackdown on corruption, Saudi Arabia’s rulers are trying to reassure investors that the kingdom is open for business by moving forward with reforms. Modern bankruptcy legislation does not currently exist in Saudi Arabia, so in a welcome development Saudi Arabia’s cabinet has approved the country’s first bankruptcy law. The new law will give Saudi Arabia a legal infrastructure to deal efficiently with companies that get into financial difficulties. At the moment, there is little alternative to the liquidation of corporate assets. This follows other recent efforts to make the kingdom more welcoming to investors under its Vision 2030 strategy. Modernizing legislation is an important step in Saudi Arabia diversifying the economy away from its dependence on oil.
  • Implications: Saudi Arabia continues to seek an upgrade of its equity market to be included in the MSCI Emerging Markets. One of the weakest aspects of Saudi governance has been opaqueness regarding shareholder rights. Moves such as this legislation are important steps in upgrading Saudi governance. With implementation of this change, Saudi Arabia is positioned to have a Magni Country Score above the majority Muslim countries of Egypt, UAE, and Qatar.