July 2019

Country Ranking Trends

  • Magni completed reviews of Canadian financial services regulation and Chinese market integrity. The Canadian review focused on banking and insurance regulation; in both cases, the review confirmed prior determinations. The China review produced a small downgrade as important legislation to make transactions more transparent has not been implemented as previously believed. Beyond hurting the governance of the country, the lack of progress is an impediment to establishing its currency as a global alternative to the U.S. dollar.

Britain Shifts from “Hail Mary” to “Hail Boris”

  • Boris Johnson is the new Prime Minister in Britain. He has promised to complete Brexit and to do it on time. The various “Hail Mary” passes by former PM May to revote her deal and by others to get a second referendum did not work. As with all such passes, the odds of success were low.
  • Implications: The “no deal” exit is increasingly likely. On the one hand, such an exit is likely to be disruptive. On the other hand, at least there is an increasingly clear path forward so that some of the disruption can be mitigated.

Will Mexico Lose Its Leadership Position?

  • Mexican finance minister, Carlos Urzua, has resigned issuing an angry letter via twitter challenging the economic decision-making of president Andres Manuel Lopez Obrador, commonly known as AMLO. Urzua was known for his commitment to fiscal discipline and had reassured the business community by pledging a balanced budget, despite AMLO’s ambitious policy proposals. In a country with weak institutions, the Finance Ministry has been seen as an exception with a strong tradition of independence. In his letter Urzua said that economic policy had to be based on evidence and be free of extremism, and he criticized government policy making as ideological and not economically prudent. AMLO’s nomination of the undersecretary, Arturo Herrera, a career technocrat, as his choice of replacement has calmed the uproar somewhat. The test will be whether Herrera will have the wherewithal to push back against impractical economic ideas.
  • Implications: Mexico has been one of the leaders within the emerging markets. AMLO is a populist and generally populists hurt more than help governance. The resignation of Urzua may be the first step in a Mexican deterioration. Other countries in the emerging markets appear to have a window to overtake Mexico.

Will India Achieve a Leadership Position?

  • India has released its first budget since Prime Minister Narendra Modi’s victory in the general election earlier this year. The budget outlined a goal of 8 per cent annual growth in order to achieve a $5 trillion economy by 2025 – almost double its current size. Boosting the country’s infrastructure is the government’s top priority. Corporate tax rates for smaller domestic companies will be reduced from 30% to 25%. There are also tax incentives and exemptions for larger companies, as well as proposals to increase taxes on the highest earners. More foreign direct investment opportunities will be available. At the same time, the government cut its fiscal deficit target for the year to 3.3 per cent of GDP from the previous goal of 3.4 per cent. Growth has been slowing and unemployment is at a 45-year high, so there is a clear need to reinvigorate growth to absorb the millions of young people entering the workforce each year.
  • Implications: It is good to see Modi continuing to enact reforms. That said, important reforms still need to be addressed. For example, India has yet to implement its commitment to strengthen market integrity. Over recent years, India improved to the point that the country is in the top third of the emerging markets. Material progress in strengthening market integrity could position the country to be one of the leaders across all of the countries in the emerging markets.

A Brazilian Populist Increases Financial Stability

  • The pension reform plan presented by Brazilian president Bolsonaro in February was recently approved by the lower house in a first round of voting. It is widely expected to be approved in a second-round vote next month and prospects for final approval in the senate later this year are also good. Pensions consume around 45% of the federal government budget, while less than 3% is dedicated to public schools and other infrastructure, according to the economy ministry. Under the reform plan, the minimum age for retirement will be increased to 65 for men and 62 for women, and workers will require 40 years of contributions before collecting full pension payments. Currently, many Brazilians retire in their mid-50s or younger. The reform bill also removes some of the special benefits that public servants have enjoyed. Savings from the reform are expected to reach $235 billion over the next 10 years. A more sustainable debt level should create conditions for lower interest rates and attract private investors.
  • Implications: The pension reforms will enable greater financial stability. Magni will be watching to see if Bolsonaro can shift his focus to reforms that address rampant corruption across most levels of government. Reducing corruption is key to preventing Brazil from falling behind more countries.

Is Greece Starting a Trend Away from Populism?

  • Greece held its first parliamentary election since emerging from the last of three international bailouts. The conservative New Democracy party, led by Kyriakos Mitsotakis, won almost 40% of the vote – a significant improvement over the 28% they had achieved in the last election. New Democracy’s landslide win gives them the first single party majority in over a decade and ends more than four years of government by the radical-left Syriza party of Prime Minister Alexis Tsipras. Syriza came in second place and will be the main opposition party. Syriza rose to power with a promise of confronting the EU and ending austerity, but they were still forced to implement controversial spending cuts and tax hikes during the third bailout program. After a decade that has seen the Greek economy shrink by over a quarter, there is hope that Mitsotakis will follow through with his promise to implement pro-growth structural reforms.
  • Implications: The victory of New Democracy reverses the recent trend of citizens rejecting the political mainstream and turning to populist parties. Magni will be watching to see if reforms are implemented and whether the Greek vote is the start of a global trend away from populism. Even modest reforms could move Greece in front of Brazil.