May 2020

Country Ranking Trends

  • Magni completed a review of fiscal transparency. A consistently implemented and transparent fiscal policy creates a more conducive business environment. Company leaders can build plans more confidently and risks are perceived to be lower, so more projects are attractive and, hence, funded. Brazil, Japan, Mexico, and Thailand received small upgrades, while the Czech Republic, Norway, and Pakistan were subject to small downgrades.

Germany Accepts the Slippery EU Slope It Feared

  • France and Germany have put forward a proposal for a €750bn EU recovery fund to help the European economy overcome the effects of the coronavirus pandemic. Under the plan the European Commission would borrow money to support the budgets of stricken member states. Crucially the proposal calls for the fund to provide grants rather than loans, so as not to increase the debt of economies that were weak prior to the pandemic.
  • The plan represents a significant shift in Germany’s position. Germany has long insisted that there should be no common borrowing. Germany’s change of heart came following a ruling by the country’s constitutional court challenging the ECB’s monetary authority, a challenge which raised questions over how far the ECB can push its monetary stimulus, underscoring the need for a fiscal response as well. Not all EU members are on board with this plan; Austria, Denmark, the Netherlands and Sweden, the so-called frugal four, would like assistance to countries to be in the form of loans and have said they will present a counter-proposal. No date has yet been set to consider the Franco-German plan and any one country could veto it.
  • Implications: The economic fallout from the pandemic appears to be presenting the EU with a fork in the road. Historically, Germany has led the resistance against common debt. If Germany retained its position, the consequence could be an accelerated unravelling of the union. Conversely, the removal of the German barrier could be the first step in integrating finances more deeply. Germans have long been wary of becoming the financier for much of Europe; however, the fears of EU unraveling appear to have caused Germany to accept common debt. Perhaps it will seek compromises in other areas in exchange for this concession.

Abe is not Able to Shake Economic Malaise

  • Japan became the first economy following the onset of the global pandemic to officially enter a recession with a decline in GDP during the previous two quarters. Japan’s economic stagnation over multiple decades left the country in a weak position at the beginning of the pandemic. In mid-April, Prime Minister Shinzo Abe declared a national state of emergency, which severely affected supply chains and businesses in the trade-dependent nation. The pandemic has decimated Japan’s exports and forced it to postpone the Olympics. The economic slump is likely to deepen further with forecasts for as much as a 21.5% contraction in the three months through June, which would be a record for official data going back to 1955. The Japanese government has announced a $1 trillion stimulus package and the Bank of Japan has expanded its own stimulus measures. Abe has pledged a second budget to provide more aid to businesses and households. He has also announced that he is lifting the state of emergency in the majority of the country earlier than initially expected, which should lead to a rebound in economic activity, though reopening efforts around the world so far point to numerous challenges ahead.
  • Implications: Abe came to power promising reform, though only minor improvements have been accomplished, such as this month’s small upgrade. Japan retains a below average Magni Country Governance Score among the developed countries of the world. The current economic challenges will make meaningful reform more difficult.

Скороварку is Russian for Pressure Cooker

  • Russia now has the third most coronavirus infections after the United States and Brazil, though Russian infection statistics may under report the severity of the outbreak. The Kremlin took some early actions having closed most of its border with China in late January, before most other countries took similar steps. However, state-controlled media continued to insist that Russia had nothing to worry about and much of the country ignored the lockdown measures that began in Moscow at the end of March. Despite having more than 300,000 COVID-19 cases there have been relatively few reported deaths, leading to suspicions of potentially manipulated numbers. One indication of a possible undercount is that Moscow mortality figures showed nearly 20% more fatalities this April than in the same month in the previous 10 years. The pandemic forced the cancellation of an April referendum on constitutional changes that would allow Mr. Putin to stay in power until 2036. Russia has begun to reopen its economy and Putin has said the referendum could be rescheduled as soon as June. Russia’s economic activity has declined by a third during the lockdown and polling indicates Putin’s approval at its lowest in two decades. Nonetheless, there is little expectation that this crisis will derail his plans to extend his rule.
  • Implications: While Putin may appear calm, he is under tremendous pressure. The decline in oil prices hurt Russia’s access to foreign currency. Russia’s military adventures (e.g., Syria, Ukraine, “harassing” U.S. ships and planes) require money. Russian citizens see the military adventures as proof that Russia was returned to its rightful place as a world power and, thus, are distracted from the many problems inside Russia. Putin needs to keep each of these pieces in place to maintain the status quo. Each piece is not working the way Putin would like, so the pressure grows. While the likelihood that Putin leaves power (voluntarily or involuntarily) is low, no path to relieve the pressure is visible now.

This Hungarian Goulash is not Appetizing

  • Hungarian Prime Minister Viktor Orban and his ruling Fidesz party have pledged to end special emergency powers approved in March to deal with the coronavirus crisis. Hungary’s justice minister has said the state of emergency would be lifted on June 20. Parliament, where Fidesz holds a two-thirds supermajority, is preparing legislation ending the power to rule by decree. The emergency powers caused a great deal of concern when they were passed because they did not include a sunset clause. Freedom House, in its annual survey of countries, declared Hungary no longer a democracy, citing the emergency powers as the latest example of the Orban government’s steps against the rule of law. Even with the rescission of the emergency powers, many of the initiatives that the prime minister passed via decree are likely to remain in effect. Furthermore, with his party’s control of parliament, it is likely he can pass any legislation he wants. Beyond rhetorical condemnation, Hungary so far has faced no repercussions from the EU for actions many say have undermined the rule of law.
  • Implications: Several years ago, Hungary had the potential to be one of the stars of the emerging market. Now, we question whether it still is a democracy. The business environment has deteriorated more slowly than the political environment, though Magni will be looking for signs that the political decline has infected the business environment.