A review of Poland led to a combination of a small upgrade in Market Integrity and a small downgrade for Securities Regulation. Other areas, including Insurance Regulation and Banking regulation, were unchanged. Market Integrity was upgraded due to passage of legislation to address money laundering. Securities Regulation was downgraded for a lack of progress in implementing prior initiatives. The overall impact was a slight increase in the Magni Country Score for Poland. Given the recent Polish conflicts with the EU and the populist tendencies of the governing political party, the increase in score was a pleasant surprise. Poland now has a score comparable with the lowest-scoring of the countries in the developed markets.
With Brexit Deadline Looming, Don’t Be Distracted by Desperate Actions
The March 29 exit date is fast approaching and there is still no end in sight to the uncertainty that has gripped the United Kingdom and Europe. There are far too many news items regarding Brexit to document all of them in this summary format. Further, the number of possible Brexit scenarios has increased.
Implications: Don’t read too much into specific actions. Much of what is happening will likely not impact the ultimate outcome. Magni has been very consistent in its assessment of the situation and the next paragraph is a restatement of the implications from last month.
A Brexit with “no deal” remains the likely path, though few seem to want this. There is no clear majority in the Parliament for any specific path. Further, any compromises that might generate majority support in the Parliament are unacceptable to the EU. Increasing desperation among Tories may change the dynamics, though that is unlikely and the deadline for exiting the EU approaches rapidly. The “no deal” scenario will be disruptive for both Britain and the EU, especially given the lack of planning by all parties for such a scenario. After Britain’s period of disruption, it is likely to be fine as the inherent strengths of British governance provide a solid foundation. For the EU, Brexit has been more of a distraction, and the serious challenges facing the EU still need to be addressed, including the impact on the EU budget from the loss of British revenue.
Rightfully Concerned About Russia Risks
The investment climate in Russia deteriorated further with the arrest of Michael Calvey, one of Russia’s longest-standing foreign investors. Calvey started the private equity firm Baring Vostok in 1994 and the firm has invested close to $3 billion in Russia and across the former Soviet Union. He and three other partners have been charged with fraud in connection with a dispute over Vostochny Bank, in which Baring Vostok holds a majority stake. Prosecutors allege that he and his associates embezzled $38 million from the bank. Vostochny shareholders have been litigating recapitalization plans for the bank in an arbitration court in London. Calvey has said he believes the charges are meant to put pressure on Baring Vostok to drop these arbitration proceedings. The shareholder whose accusations started the case against Calvey is a Russian investor with reported ties to the security services. Calvey has received notable statements of support from the Russian business community. However, this case follows a common practice where Russian courts lacking independence are often used by the well connected to get the upper hand in disputes.
Implications: Russia remains a country with weak governance, currently ranking number 40 among the 47 investible countries of the world. Weak governance is a risk for foreign investment as investors correctly fear corruption may impair the performance of investments. Increased risk means less in capital investment, thus reducing economic development and wealth creation.
Thailand Appears Stuck in Neutral
Thailand, which has been under military rule since a coup in 2014, will soon hold its first general election since the military takeover. A military-drafted constitution, however, ensures that the armed forces will retain significant control over politics. The junta is in the process of choosing all 250 members of the Senate, which will elect a prime minister along with the 500-seat House of Representatives, putting pro-military forces at a significant advantage even before the election. Prayuth Chan-ocha, the army chief who seized power and made himself prime minister, is running as a candidate for a pro-military party. Given that the military will appoint the members of the Senate, Prayuth will only need 126 seats to control the majority of seats in both chambers, and controlling the chambers means controlling the process required to become prime minister. The main opposition to the military is from parties associated with Thaksin Shinawatra, the country’s long dominant political figure. One of these parties faces a ban by the Constitutional Court for nominating the king’s older sister as their prime ministerial candidate, which runs afoul of the country’s strict lese majeste laws.
Implications: Thailand ranks in the middle of the countries in the emerging markets. This election is likely to maintain the status quo with few changes in country governance. Thailand and Brazil have very similar Magni Country Scores. Perhaps Brazil’s newly-elected leader, Bolsonaro, will be successful in reducing corruption. If so, Brazil would join India, Indonesia, and perhaps Malaysia in improving and “breaking away” from the middle of the countries in the emerging markets, while Thailand may well stagnate and possibly get passed by countries such as Colombia.
South Africa Misses Mandela
President Cyril Ramaphosa has appointed a new tribunal to fast-track legal proceedings from corruption investigations. Investigations have implicated government officials and business people in wide-scale graft, but prosecutors have yet to bring charges against the majority of perpetrators. The new tribunal is expected to streamline the litigation process for both public and private sector entities. One particular area of concern is South Africa’s state-owned power utility Eskom, where corruption is alleged involving senior management. South Africa has suffered its worst blackouts in years due to neglected maintenance and crumbling infrastructure. Eskom is asking for billions in capital injections from the government as well as rate increases. The utility is deemed to be too big to fail, given the government’s exposure to its debt and the fact that it is the economy’s major supplier of power. Ramaphosa will have a difficult task coming in to the May elections. The large-scale layoffs needed to bring Eskom and other state-owned enterprises back to health are anathema to the unions who are a key constituency of his African National Congress party. He will also be trying to distance himself from the ANC’s legacy of corruption, while not alienating the ANC’s core supporters.
Implications: South Africa has many governance strengths that are attributable to its legacy from the British Commonwealth and the leadership of Nelson Mandela. The euphoria during Mandela’s presidency is long gone. Successfully addressing the corruption is required to keep South Africa in a leadership position among the countries of the emerging markets. If Ramaphosa can both get reelected and make the required changes, there could be significant upside to South African equities.