March 2018

Country Ranking Trends

  • Magni completed a review of market integrity. Market integrity is important in assuring business transactions can occur in an open and honest environment. In countries with high market integrity, corruption is more difficult and attempted corruption is more easily discovered.
  • The review resulted in no changes to Magni Country Scores, though two countries will be watched for potential future upgrades. Thailand for its stated, but unimplemented intentions, and Mexico for its partial implementation of international standards.
  • Recent news events have reconfirmed a prior downgrade. The poisoning of a former Russian double agent allegedly by Russia has shed indirect light on the previously identified weakness in British market integrity. A portion of the allegations include references to the ease with which suspicious funds transfers can occur through nontraditional financial services in Britain (e.g., lawyers, art dealers, real estate agents).

Yet Another Potential Chinese Inflection Point

  • At China’s annual parliamentary session, in addition to approving constitutional changes removing presidential term limits, the most sweeping overhauls to the bureaucratic structure in fifteen years were adopted. The moves are steps to strengthen the Communist Party and further centralize control. Among other changes, the banking and insurance regulators will be merged into a single agency. The central bank will then set overall rules for the banking and insurance industries, leaving supervision of individual firms to the new super regulator. At the top China is creating a new cabinet level group that will coordinate overall regulatory policy. Following China’s rapid debt build-up in recent years, the Chinese leadership has made curbing financial risks one of its top priorities. The recently announced regulatory takeover of Anbang Insurance Group is an example of this approach.
  • Implications: Magni’s Sustainable Wealth Creation principles do not directly consider autocratic rulers and centralization of power. While these changes can be early indications of governance problems, some autocrats can be good leaders and some centralization of power can lead to beneficial changes in other areas. More important to Magni is the change in regulatory powers. Magni will be watching to see whether the new regulatory regime leads to better oversight of financial services. If so, then the Magni Country Score for China would increase. Conversely, the autocratic leadership and centralized powers could lead to further corruption and cause the Magni Country Score to decrease.

European Union as Italian Opera

  • As expected the recently held Italian elections did not yield a clear majority for any party, which means that following Germany’s own inconclusive elections another major European country faces a period of political uncertainty. As with other recent elections anti-establishment parties gained at the expense of the traditional parties that have long held power. In Italy, more than half of the votes cast went for the populist Five Star Movement and Northern League parties. Also, within the center-right coalition, the Northern League out-polled Forza Italia led by Silvio Berlusconi. This means that any coalition between the center-right grouping and the outgoing Democratic Party would be led by the far-right Northern League rather than the more centrist Forza Italia. An alliance between the Northern League and Five Star would be disconcerting and would place populists in charge of Italy. Italy’s head of state is due to start consultations next month to try to end the stalemate.
  • Implications: The European Union continues to stumble through near-term issues and these issues prevent serious consideration of the underlying structural factors eroding the support of citizens in the countries of the European Union. Somewhat faster economic growth is easing, at least temporarily, some of the intensity of citizen disaffection and some of the most pressing economic issues (e.g., Greek debt). Magni continues to see a “muddle through” scenario playing out. This scenario prevents the reduction of perceived risk involving the European Union and continues to act as a drag on equity valuations.

India Shot Itself in the Foot and Recovered

  • Following the disruptive demonetization and tax reforms last year the economy appears to be rebounding. Recent growth figures show India’s growth has accelerated to outpace China. The national goods and services tax (GST) implemented in July was a positive step because it simplified doing business, but haphazard implementation led to a chaotic start to the new regime. While the GST is an improvement on the dozens of separate levies that were previously collected, it is still complex compared to other similar systems. Hopefully India will revise the GST to reduce the number of rates, limit exemptions and simplify laws and procedures. Achieving sustainable high growth will require reform in other areas and with an estimated million young people joining the job market every month achieving it is also a necessity.
  • Implications: Magni has viewed India as having the best potential of the BRIC countries. The low-quality rollout of the reforms was a short-term drag on the economy. If India pursues deeper economic reforms (and does a better job implementing them), the Magni Country Score would increase, and India would probably move into the top third of countries in the emerging markets.

Will Hungarian Populist Be the Poster Child for Populism’s Negative Impact on Governance?

  • Polls show Prime Minister Viktor Orban is likely to secure a third straight term in upcoming parliamentary elections. The question will be whether he can secure a two-thirds supermajority, which would enable him to amend the constitution and pass laws without opposition support. Orban’s Fidesz party has become one of the more prominent European populist parties. Since being elected he has worked to build what he’s described as an “illiberal state” modeled on Russia, and he has been at the forefront of the anti-immigration movement animating much politics in Europe. He has clashed with the European Union over his roll back of judicial independence and press freedoms. There are also allegations of corruption with politically connected oligarchs receiving disproportionate amounts of public tenders. Disunity among the opposition has prevented them from mounting a credible challenge, so for this election talks are taking place to field a single opposition candidate in certain districts though they have ruled out a formal alliance.
  • Implications: Hungary has benefited from its participation in the European Union. The current trends are not good and could have a material impact on its Magni Country Score, though so far the trends are mostly based on rhetoric. Hungary is at material risk of losing its ranking among the top-third of the countries in the emerging markets.
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