February 2020

Country Ranking Trends

  • Magni completed a review of accounting systems. Peru was the only country with material changes. Magni found weaknesses in both Peruvian reporting and controls, resulting in a downgrade. This dropped the country below Argentina in the Magni ranking of country governance.

Coronavirus Epidemic Made Worse by Chinese Opaqueness

  • The coronavirus outbreak that began in Wuhan, China has continued to spread; notably, Italy and South Korea now have significant numbers of confirmed cases. In the United States, officials are cautioning that it’s a question of when, not if, the virus will show up here. The current disruptions to supply chains and industries, such as tourism, as well as the uncertainty about the future trajectory has led to the largest global market selloff seen in years. Initial hopes were that this would be a temporary phenomenon that would quickly be brought under control. However, the longer the Chinese production shutdown continues, and the more widely other countries are forced to take similar measures, the greater the chance of lasting economic damage. Despite the ongoing global spread of the virus there are some reasons for optimism. So far it appears that the overall mortality rate from the new virus is around 2% which, while much higher than traditional viruses, is low enough to keep the demand for intensive resources more manageable. The virus is very infectious and that is the primary concern. The next few weeks will determine how manageable this outbreak really is.
  • Implications: The world has had a tough time calibrating the true severity of the epidemic as Chinese opaqueness prevented an understanding of what was happening, while also causing people to distrust the information that China reported. To be the global leader it aspires to be, the country needs to reform. Such reforms would strengthen China and lead to a higher Magni Country Governance Score.

Déjà vu Argentinian Style

  • Argentina finds itself on the precipice of a ninth default on its international debt obligations, continuing a long history of troubled relations with creditors. Since taking office in December president Alberto Fernández from the populist Peronist party has argued that Argentina is unable to pay back all the debt taken on during the previous administration. Public debt has risen to about 90% of gross domestic product, and Argentina would like to restructure some $100 billion of debt – including $44 billion owed to the International Monetary Fund (IMF). During recent talks the IMF agreed that Argentina’s debt load was unsustainable and that meaningful contributions from private creditors would be required to restore debt sustainability. While the IMF has endorsed the idea of private creditors taking losses, the IMF has expressed its unwillingness to take a haircut on its biggest-ever bailout package. Argentina has agreed to allow the IMF to inspect its accounts, and these consultations could lead to a new financing program. Argentina is hoping to complete debt negotiations with creditors by the end of March, but this will likely prove to be too optimistic of a timeframe.
  • Implications: MSCI upgraded Argentina from frontier markets to the emerging markets less than one year ago. At the time, Magni was surprised given the country’s troubled financial history. Argentina has one of the lowest Magni Country Governance Scores in the investible world, though it is ahead of a few countries, such as Egypt.

Will Ireland Follow in the Footsteps of Israel and Spain?

  • The nationalist Sinn Féin party earlier this month won the popular vote in Ireland’s parliamentary election. The results were a rebuke to the political establishment which has been dominated by two center-right parties since independence almost a century ago. Sinn Féin began as the political arm of the Irish Republican Army, but these ties have faded for many voters who were eager for change after years of austerity following the 2008 financial crisis. Recognizing austerity fatigue, Sinn Féin focused its campaign on economic issues. Sinn Féin for its part would like to lead a leftwing coalition, but even with the support of Ireland’s other left-wing parties, they would still be short of a majority. Political parties previously have pledged not to join a coalition with Sinn Féin because of its links to the country’s violent past and commitment to reunification. If party leaders are unable to form a ruling coalition, a second election is a possibility. Sinn Féin would likely make further gains in any revote, so the traditional political parties may have an incentive to compromise.
  • Implications: Rejection of traditional political parties and increased power for populist parties is happening around the world. This trend increasingly produces election results that are too fragmented to enable a new government to be formed. In addition to the risk of repeated gridlock from multiple elections, any platform of reform tends to get deemphasized. Ireland ranks in the middle of the countries of the developed market, though it risks a slow decline in rank.

More Than Meets the Eye in Malaysia

  • The ruling Pakatan Harapan (PH) (Alliance of Hope) coalition collapsed after Prime Minister Mahathir Mohamad announced his surprise resignation. This coalition was the first government since independence not to be led by the United Malays National Organization (UNMO) party. It ruled for less than two years after coming to power following the 1MDB financial scandal and subsequent unpopularity of Prime Minister Najib Razak, who was deeply implicated in the multi-billion-dollar fraud. The king accepted Mahathir’s resignation but asked for him to stay on as interim leader. Mahathir has not explained why he resigned, but the issue of succession was likely a central issue. Mahathir had become prime minister following the last election under an agreement that he would eventually hand over power to fellow PH leader Anwar Ibrahim. He had, however, refused to commit to a clear timeline on when to cede power. The various political factions in Malaysia will now begin discussions to try and form a governing coalition. If no government is formed the king may call a snap election.
  • Implications: Lurking under the actual events is a lot of intrigue. We will get only occasional glimpses of it. Regardless of the winner of the power struggle, the loser will be the Malaysian people. The country stood on the cusp of reforms designed to make Malaysia part of the developed markets. Instead, Malaysia appears unlikely to reform, and its score likely will stagnate or even decline.