November 2018

Country Ranking Trends

  • Following Magni’s review of Market Integrity, Indonesia’s implementation of previously-announced reforms has progressed to the point where an upgrade is warranted. Governments that assure high market integrity provide environments conducive to open and honest business transactions.

UK and EU Need the Optimism of Little Orphan Annie’s “Tomorrow”

  • The United Kingdom’s proposed agreement to exit the European Union was approved. It must then be ratified by the UK and European parliaments. The current agreement covers a transition period where the UK and the EU would negotiate the second phase of the Brexit process, which would include future trade links. If the parties struggle to find a deal, the proposed exit agreement provides Britain with the ability to request a one-off extension. Prime Minister Theresa May’s Conservative Party doesn’t hold a majority in the House of Commons and many of her own lawmakers openly oppose the proposed deal. In order to tamp down opposition to her exit deal, May is expected to lay out a route to a future free trade agreement in as much detail as possible. Discussions continue on a parallel political statement setting out the EU’s relations with post-Brexit Britain. Supporters of May’s agreement are hoping this understanding will also mollify her opposition. Realistically there is no time to negotiate a different deal before the UK’s departure in March.
  • Implications: Within Britain there is no clear majority on the major Brexit issues. The forces that led the Brexit effort want to cut ties with Europe, and therefore find this agreement unacceptable. There are other forces that want a new Brexit vote as they see the likelihood that the vote would fail, thus leaving Britain in the EU. The situation is opaque and unpredictable, though Britain is fairly strong and likely to be all right regardless of events. The implications for the EU are more complicated. The EU needs to worry about precedents set for other countries seeking to leave the EU. The EU also needs to worry about actions that encourage more anti-EU politicians to be elected in member countries. These “clouds” are likely to remain over the continent, thus preventing equities from achieving valuations consistent with traditional earnings multiples. Whenever these clouds disappear, there could be a nice rebound in valuations.

Is the Polish Anti-Corruption Push Real or Just About Attacking Enemies?

  • Marek Chrzanowski, chairman of the Polish Financial Supervision Authority (KNF) resigned after the CEO of Getin Noble Bank accused him of soliciting a bribe of over $10 million in return for lenient treatment of his bank. Getin Noble has been in a restructuring program with the regulator for the past two years. The KNF has denied the bribe allegation. Chrzanowski is a member of the ruling Law and Justice party (PiS). The scandal poses a significant risk to the government because it has made fighting corruption one of its main selling points. Poland’s prime minister has ordered an investigation. Failure to deal forthrightly with the charges would undermine the current government and would have a negative impact on Poland’s business reputation.
  • Implications: Despite its relatively high Magni Country Score for a country in the emerging markets, Poland receives a relatively low score for Banking Regulation. With some modest improvements, Poland could increase that score to one comparable to the best scores among the countries of the emerging markets. Further, this change would move Poland to an overall Magni Country Ranking ahead of some countries in the developed world. Along the way, the alleged corruption becomes more difficult to conduct, while the anti-corruption program becomes more effective and less likely to be seen as an effort to weaken political enemies.

Will this Bollywood Movie have a Happy Ending?

  • Prime Minister Narendra Modi’s government has been pressuring the Reserve Bank of India (RBI) to pursue greater monetary expansion before upcoming national elections in May, thus threatening the independence of the RBI. At a much-watched recent RBI board meeting, India’s central bank signaled a compromise with the government by agreeing to small steps designed to ease tensions with the government, but the more fundamental issue of central bank independence has not been resolved. The RBI has no statutory independence so the government’s actions, and the perception of interference, risks damaging RBI’s long-term credibility.
  • Implications: After some early missteps by the Modi administration, the Indian government appeared to be moving forward with meaningful reforms. The issues with the RBI both undermine reform efforts and risk creating new problems for Modi. India has a comparable size to China and some significant advantages, including elite universities rivalling world-class institutions. So far, China has been noticeably more successful in achieving economic success, though recently China’s challenges have become much more obvious. Modi’s planned reform efforts are most likely needed to spur Indian economic activity and to place India on a path of commercial success more similar to China’s achievement in recent decades. Time will tell whether the RBI interventions have lasting negative impact and whether Modi can still achieve the planned reforms.

Will the Real US-China Trade Negotiations Actually Start?

  • American and Chinese negotiators will meet on the sidelines of the upcoming G20 summit in Buenos Aires before an official meeting between Xi and Trump. The objective is to establish a practical framework for talks. China has put forth an opening offer, but the proposal doesn’t meet many of the trade reforms that the U.S. is seeking. The written response to U.S. demands included 142 items divided into three categories: issues the Chinese are willing to negotiate for further action, issues they are already working on and issues they consider off limits. Chinese Premier Xi has said he was committed to giving more market access to foreign companies, but prior Chinese pledges on economic and trade reforms have not been fulfilled. President Trump has threatened to impose additional tariffs on close to $300 billion worth of Chinese products if the two countries don’t reach a deal. It’s unlikely that all issues will be resolved at the upcoming meetings, and the best-case scenario is that the two leaders agree to keep talking and hold off on raising tariffs while the negotiations continue.
  • Implications: So far, the US has avoided providing an indication of what is acceptable as Trump tries to extract what he believes to be maximum concessions. The hardliners in the Trump administration (e.g., Navarro, Ross, Lighthizer) want a trade deal where the U.S. clearly wins and China clearly losses. Such an outcome would embarrass Xi and China, and thus is almost impossible to achieve. Actual progress will require negotiations over specifics. One way to gauge the likely rate of progress is to identify which members of the Trump administration are controlling the process. The hardliners are opposed by Mnuchin and Kudlow. Both Treasury Secretary Mnuchin and Larry Kudlow, Director of the National Economic Council, have a deeper understanding of the issues and a strong desire for a practical solution. A solution palatable to Xi and China will probably require the hardliners to take a backseat.
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