May 2018

Country Ranking Trends

Magni completed another periodic review of Market Integrity. Countries with high market integrity enable routine business transactions to be conducted in an open, transparent, and efficient manner. Those countries are also more conducive to business growth and more attractive for investment. The review confirmed existing scores and hence Magni Country Scores are unchanged for the month of May.

Will Italy Follow a Populist Path?

The alarming possibility of Italy’s anti-establishment Five Star Movement and the far-right Northern League forming a government moved closer to reality. The populist parties were the top two vote getters in March’s inconclusive election, and they had recently come to a governing agreement. However, the president has vetoed the coalition’s proposed selection of a euro-skeptic economist to be finance minister. In addition, and probably more importantly, he called for new elections, though there are indications that some compromise may occur.
Implications: Yet another country feels the impact of populism. As previously discussed, populist governments tend to be harmful to governance as populism includes an “ends justify the means” approach. Even if the ‘ends’ are good and noble, the use of possibly corrupt ‘means’ increases the risk of bad actions and causes a general weakening of governance. Magni will be watching to see if this coalition eventually forms a government, and if so, how it rules. Not all populist governments damage the quality of governance, though improvements are rare. There are also broader implications for Europe. Should a second round of elections occur, the populist parties may use the recent actions of the president as justification for an even more populist and anti-euro message. Such a scenario has the potential to restart the unwinding of the euro, though at a faster pace than described in previous commentaries.

Can Malaysia Convert Election Enthusiasm into Positive Results?

The opposition won recent elections for the first time since Malaysia became independent from Britain in 1957. The Alliance of Hope, led by the 92-year-old former Prime Minister Mahathir Mohamad, won a majority in national parliamentary elections. The years-long scandal over billions of dollars that disappeared from government investment fund 1MDB, which the outgoing prime minister once headed, played a large role in motivating voters to turn against his party. In a sign of the dramatic shift in political fortunes, Anwar Ibrahim, the jailed former deputy prime minister, was granted a royal pardon for what has been considered politically motivated charges. He is strongly rumored to be a near-term successor to the country’s elderly new leader. As a first order of business Mahathir has focused on reinvigorating the 1MDB investigation and recovering assets lost due to wrongdoing. However, as welcome as the anti-corruption push is, some of the other promised policies such as scrapping the recently implemented goods and service tax (GST) could be problematic for the highly indebted country.
Implications: Currently Malaysia receives a Magni Country Score placing it 31^st among the investible countries of the world. Improving the integrity of Malaysian markets, while strengthening key aspects of financial services regulation, could have a material positive impact on the attractiveness of Malaysia and could increase corporate investment. In addition to increasing the Magni Country Score, Malaysia would likely experience faster and more inclusive growth, along with an opportunity for rapidly rising equity prices.

Will Mexico Go Down the Path of Becoming Venezuela?

Negotiators for Canada, Mexico, and the United States had hoped to conclude an agreement for an updated NAFTA by the end of 2017, but deadlines have repeatedly slipped. Speaker Paul Ryan has said that there could still be a couple of weeks left to pass a deal if the International Trade Commission were to expedite its mandated review of a proposed deal. There is little reason for optimism. U.S. Trade Representative Robert Lighthizer said recently they are “nowhere near close to a deal.” The same contentious issues remain that have so far been blocking a deal, including rules of origin standards and U.S. demands for a 5-year sunset provision. One proposal to salvage the situation is a so-called “skinny NAFTA” that would not make any changes requiring a vote in the U.S. Congress. Until a deal is reached, the lack of certainty will weigh on businesses in all three countries.
Implications: Whatever happens with trade negotiations, NAFTA will not directly change governance scores for any of the three countries. The communications by Trump and his administration about Mexico have strengthened the electoral prospects for Maduro and his AMLO party. AMLO is a left-wing populist party that could take Mexico down the path that Chavez took Venezuela. Beyond precipitating likely downgrades of Mexico by Magni, having a situation similar to Venezuela on the border of the U.S. would be a major complication for Trump.

Strengthening Dollar Punishes Already Weak Countries: Argentina Front & Center

The International Monetary Fund has begun bailout negotiations for Argentina. Argentina’s president, Mauricio Macri, has requested the financing in order to give his administration time to stabilize a growing financial crisis. In agreeing to enter negotiations, the IMF acknowledged Macri’s progress in correcting policies of his predecessor that led to a recession, high inflation, and unsustainable deficits. Details of the arrangement are still being negotiated, but it will likely be conditional on cutting subsidies and other spending to reduce deficits to specific levels. Given the history between the IMF and Argentina, the fact that Macri has taken this step speaks to the difficulty of its current situation. Many Argentines blame the IMF for the country’s 2001 financial collapse that led to a sovereign bond default and plunged the country into a depression. Argentinian dependence on foreign borrowing at a time of a strengthening dollar and rising interest rates is a cautionary story for emerging markets. The hope is that by helping Argentina make the necessary fiscal adjustments the IMF can contain potentially damaging spillovers.
Implications: First, across the countries of the emerging markets, sovereign debt denominated in US dollars will continue to be an issue. Countries requiring additional debt are likely to face headwinds (at best). Second, despite being on the MSCI watchlist, Argentina is unlikely to be promoted from the frontier markets back into the emerging markets until this issue is resolved.