January 2019

Country Ranking Trends

  • Following a review of Market Integrity, Colombia and Israel were upgraded for progress in implementing reforms. Market Integrity measures the ability of businesses to conduct routine activities in an efficient and easy manner without corruption. Despite the upgrades, the Magni Country Score for Colombia remains below the average of the countries in the emerging markets, and the Magni Country Score for Israel remains one of the lowest among the countries in the developed markets.

No Sane Person Wants a Brexit with “No Deal”, However…

  • Prime Minister Theresa May’s plan to withdraw Britain from the European Union suffered a humiliating defeat. The 432-to-202 vote to reject her proposal was the biggest defeat in the House of Commons for a prime minister in recent British history. The loss adds to the risk of no deal being in place when the UK is scheduled to exit the EU at the end of March. Leaving the EU without a deal could tip Britain into recession and trigger shortages of food, medicine and electricity due to disruption of trade. The EU says it is now up to May and British MPs to agree on a counter-proposal to the Brexit deal they rejected. Towards that end parliament held a series of votes to try and find a consensus that lawmakers in May’s own party could support. The results of the votes were inconclusive. The EU has shown great reluctance to alter the exit deal they negotiated, so a question will be whether the EU can offer enough to get a variant of May’s defeated deal through parliament.
  • Implications: A Brexit with “no deal” remains the most likely path, though few want a “no deal” Brexit. 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.

Perhaps Brazil Can Show Populism as a Force for Improved Governance

  • Jair Bolsonaro was sworn in as the 38th president of Brazil. After years of corruption scandals and a deep recession, Bolsonaro’s focus on law and order as well as his promise of a clean government resonated with a population deeply disillusioned with conventional politicians. Critics have expressed concerns about his praise of the country’s former dictatorship and by his comments concerning women, race and human rights. In filling his government, unlike former presidents, who gave cabinet positions to members of political parties in exchange for support in the legislature, he has appointed a number of military leaders and technocrats, some with little or no political experience. In a nod to his anti-corruption pledge, Bolsonaro named as justice minister Sergio Moro, who helped lead Brazil’s vast Car Wash corruption probe. The new president has also announced plans to sell many state-owned companies, and he has promised a proposal to be sent to Congress that will bring cuts to pension outlays and establish a minimum retirement age. Pension reform is especially important because of its potential to help narrow a widening budget deficit. While Bolsonaro’s party made gains in the congress, the legislature will be highly fragmented meaning he will likely require significant support from other parties in order to pass legislation. If he is successful with much-needed reforms, many investors seem likely to overlook his more controversial past positions.
  • Implications: Magni ranks Brazil as about average for the countries in the emerging markets. To improve, Brazil needs to do more than root out specific corruption; the country needs to make the reforms required to reduce the risk of future corruption. Such reforms include strengthening Market Integrity and strengthening regulation of financial markets. Such changes could move Brazil into one of the leaders in the emerging markets. If Bolsonaro is able to make such changes, then he would become an unusual example of a populist who strengthened governance.

Is Modi’s Populism Temporary?

  • On February 1, Prime Minister Narendra Modi’s government will present its last federal budget before general elections, which are to be held by May 2019. Modi’s government is seen as likely to include more populist measures within the proposed budget in an effort to boost their electoral prospects. The budget gives the government an opportunity to present its vision for the next five years, if it returns to power. New spending is expected to focus on the rural and farm sectors after recent regional election losses suffered by the ruling BJP. Major economic reforms, such as tax cuts for bigger companies and plans to bring down the budget deficit, could also be put on hold at least until after the election.
  • Implications: In the past year only Indonesia has improved more than India in Magni’s ranking of countries. If Modi’s populist measures are merely efforts to secure another term, then India may well continue its rapid improvement. Even small further improvements would place India as one of the leaders of the countries in the emerging markets. Conversely, a switch to sustained populism would likely arrest further improvement, and perhaps cause one or more downgrades.

Will Pakistan Use Recent Help or Will the Help Only Defer the Pain?

  • Talks between the IMF and Pakistan for a bailout loan hit an impasse in November. In order to move the negotiations forward the government has announced a number of measures to narrow their fiscal and trade deficits. The IMF is also demanding Pakistan reform its state-owned companies, but Pakistan has backtracked on plans to lay off thousands of public sector employees. An IMF team had been expected to return to Pakistan for final negotiations, however the short-term pressure on Pakistan has subsided as the country has secured loans from Saudi Arabia, the United Arab Emirates and China to meet short-term cash requirements. Pakistan may be able avoid the IMF’s stringent conditions, but at the expense of needed longer-term reforms. An IMF loan will likely be needed at some point as Pakistan will need more funding to cover the nation’s widening external account gap.
  • Implications: Pakistan retains one of the lowest Magni Country Scores with a quality of governance a bit behind Russia. Reform is necessary. The IMF requirements focus more on austerity than much-needed infrastructure reforms. Some amount of austerity is required, but austerity doesn’t fix the country’s core issues and austerity is almost always very unpopular with the public. Legislation to strengthen governance provides more impact and is more sustainable, while also producing a less negative public reaction. How will Pakistan use the window of opportunity provided by the short-term financing?