November 2019

Country Ranking Trends

  • Magni completed a review of Thailand’s regulatory environment. The country has made meaningful progress in implementing previously enacted reforms to improve supervision of banks and insurance companies. Collectively, these upgrades improve Thailand’s score enough to move above five countries. With implementation of a few more reforms, Thailand has the potential to receive a score close to the best countries in the emerging markets.

What do the Hong Kong Protests Mean for China?

  • Protests that started in February over a now-withdrawn extradition bill have shown no signs of abating and at times have grown increasingly violent. The just-held vote for district councils across Hong Kong was widely seen as a referendum on popular support for the protestors and their calls for greater democracy. District councils have little power, but their members make up part of the election committee that is responsible for selecting Hong Kong’s chief executive. The district council election is the only actual democratic vote afforded in Hong Kong. The result was an overwhelming victory for the pro-democracy parties. Voter turnout almost doubled 2015 participation levels. Pro-democracy parties won a majority of the 452 district council seats at stake, while allies of Beijing fell from a majority of 300 to just 60 seats.
  • In another sign of support for the protests, the U.S. Congress passed the Hong Kong Human Rights and Democracy Act. The bill would require annual reviews of Hong Kong’s special status under U.S. law, during which officials would assess how much China has encroached on the city’s autonomy. President Trump signed the legislation, despite concerns about its impact on the on-going trade talks with China.
  • Implications: Hong Kong is treated as a separate country for investing purposes. It has been the lowest-ranking country across the developed market for quite a while. Magni will be watching for downgrades based on recent events. The broader question is what this means for China. An optimist may believe that the ultimate resolution would be positive reforms in mainland China. As such, the Magni Country Score for China would increase. Conversely, a harsh crackdown combined with actions in the mainland to prevent spillover effects could cause a downgrade of China. Along the way, especially given Hong Kong’s central role in the economy of the mainland, the current events may tip China into an economic downturn. If so, the debt bubble and other economic challenges could cause the economic downturn to be protracted.

Still “Groundhog Day” in Israel

  • A third election within a year is more likely after the leader of the centrist Blue and White party, Benny Gantz, also failed to form a government following Netanyahu’s earlier unsuccessful effort. There is the small possibility of a surprise coalition given some unique statutes in Israel; however, a third election is far more likely. Adding to the uncertainty, the Attorney General announced charges against Netanyahu, the first Prime Minister to be indicted while in office. Netanyahu was charged with bribery, fraud and breach of trust in three criminal cases as part of a long-running corruption investigation. Netanyahu has no legal obligation to resign now that he has been indicted; he would be forced to step down only if convicted. Gantz called on Likud members to speak out against Netanyahu and said he is ready to try to form a unity government with other Likud leaders, but without Netanyahu. It is possible that Netanyahu could be challenged as party leader, though so far the party remains behind him.
  • Implications: Given the relatively small differences in vote totals between the first and second election, a third election appears unlikely to produce a stable government. Perhaps a sidelined Netanyahu could pave the way for some yet-to-be-defined coalition.

The Peronists are Back; is it Time to Cry for Argentina?

  • In late October Argentina returned the populist Peronist party to power, electing Alberto Fernández president. Fernández defeated conservative incumbent Mauricio Macri. Macri’s term started with optimism that he would represent a break from past populist policies, but he leaves office with Argentina bedeviled by familiar problems of high inflation, dwindling foreign reserves and risks of default on large foreign debts. Controversial former president Cristina Fernández de Kirchner will become vice-president. She recruited Fernández to run in the top spot, strategically recognizing her divisive persona could be an impediment to their electoral chances. In her last term as president she was accused of being corrupt and economically irresponsible. Fernández is seen as more pragmatic than Kirchner, but expectations are that he will adopt more interventionist policies than Macri, who advocated a free market approach. However, the new president’s promise of no more austerity will be difficult to square with the demands of foreign creditors including the IMF who agreed to a $57 billion bailout in 2018, the largest ever by the fund.
  • Implications: Since being returned last May to the countries of the emerging markets, actions in Argentina have brought into question that decision. The Magni Country Score for Argentina places it among the lowest-scoring countries in the investible world. We will be watching to see if it sinks lower.

Groundhog Day Makes Another Appearance…This Time in Spain

  • Spain earlier this month held its fourth general election in the past four years. A previous vote in April ended with no clear majority, and the Socialists failed to form a government by the September deadline. The Socialist party has again received the most votes; however, they won a smaller share than the previous vote and were still well short of a majority. The far-right Vox party had the biggest success doubling its previous result, making it the third-largest party in parliament. Recognizing his eroding position and growing frustration with political deadlock, Spain’s interim Prime Minister and Socialist party leader Pedro Sánchez, reached a coalition agreement with the anti-austerity party Unidas Podemos soon after the results were announced. However, the two parties together are still short of a majority and negotiations are ongoing with several smaller parties in order to form a narrow majority. If they are successful, it will be the first left-wing coalition since the 1930s; however, failure would lead to yet another election and likely further gains for the far-right.
  • Implications: As with many countries, populist parties draw votes from the center, thus creating a tougher environment for major parties to form governing majorities. Spain ranks just outside the group of developed countries with the best governance. This ongoing voting churn is likely to cause stagnation. Even if the country doesn’t receive a downgrade in some topic, the country’s opportunity to join the group of best-governed countries is fading.