November 2020

Country Ranking Trends

  • Magni recently completed a review of Banking Supervision in the Philippines. Our purpose was to evaluate the weaknesses in the country’s banking system, the weakness that enabled the North Koreans to pull off the 2016 bank heist using Philippine banks. They got $81 million from a Bangladesh bank. Unfortunately, the review demonstrated even weaker banking supervision than had been in place previously. The Philippines’ bank supervision was downgraded to the second lowest possible score. With the downgrade, the country governance score for the Philippines is now worse than the score for Russia.

Hong Kong Losing its Special Status

  • Governance in Hong Kong has moved further from the promise to maintain “one country, two systems” until at least 2047, which was supposed to protect the city’s limited self-government and legal framework. Starting with China’s imposition on Hong Kong this summer of a sweeping national security law, the government in Beijing has taken a series of steps to squelch dissent. Most recently, the Chinese parliament passed a resolution allowing the city’s government to dismiss politicians deemed a threat to national security from the Legislative Council, or Legco. This led to the swift ouster of four pro-democracy lawmakers; they already had been barred from seeking new terms. In protest, the remaining 15 members of their bloc also resigned. For the first time since the 1997 handover by the UK, Beijing-friendly lawmakers are in complete control of Legco.
  • Implications: Until now, Hong Kong had one of the worst governance scores among the developed markets. With China absorbing Hong Kong into the mainland, the score likely will head even lower. In addition, several countries of the developed world may take away the special status Hong Kong has enjoyed since 1997, thus harming the historically vibrant financial services sector.

China IPO that “Ant” Happening

  • The IPO of Ant Group, the financial unit of the Chinese e-commerce giant Alibaba, was cancelled by regulators days before its scheduled listing. The expected $35 billion offering on the Shanghai and Hong Kong exchanges would have been the world’s largest. There are reports that President Xi Jinping personally sought to shut down the listing. He was reportedly upset by a recent speech in which Jack Ma, Alibaba’s founder and China’s wealthiest individual, criticized financial regulation in China. The authorities have been wary of the growing influence of Ma and his business operations. Regulators recently put forward proposed regulations that would force fintech companies like Ant Group to revamp their business models. These proposals would impose new capital requirements and lower valuations whether or not regulators allow a future Ant IPO to go forward.
  • Implications: With one of the few remaining political rivals to Xi involved in Ant Group, the story has intrigue. Is Xi cancelling the IPO to weaken a rival or rivals? Opaque countries with weak governance, such as China, become places where the powerful can change the rules in self-serving ways. It is one of the many reasons why good governance is important to healthy markets. At the same time, there may be legitimate regulatory concerns regarding a relatively new type of company. Reality probably is some combination of both. At the same time, such actions likely will make China less attractive for successful entrepreneurs.

Chinese Success on Trade Deal Which Excludes the US

  • China and 14 other nations have signed one of the largest free-trade deals in history. The Regional Comprehensive Economic Partnership (RCEP) is the culmination of eight years of negotiation. While the agreement appears to be less comprehensive than other trade deals, it is a major diplomatic success for China and a notable trade opening at a time when most moves have been in a more protectionist direction. Absent from the agreement is the United States. Previously, the US withdrew from the Trans-Pacific Partnership (TPP), which did not include China, and had been intended by previous administrations as a way to facilitate a US-led rules-based system and to act as counterweight to Chinese trade dominance. The other countries in TPP have since moved forward without US participation.
  • Implications: Nature abhors a vacuum. The US departure from TPP left a big vacuum in the Pacific. China filled the vacuum. In so doing, it created a trade framework based on its approach. If anything, RCEP creates a protective buffer for the country should the US attempt either to negotiate a bilateral deal or to revive some multi-country coalition along the lines of the TPP. Progress on the trade relationship between China and the US likely will be more difficult and prolonged, regardless of the incoming US administration.

South Africa Remains at a Crossroads

  • The African National Congress Secretary-General, Ace Magashule, has been charged with 21 counts of fraud and corruption. He is the second-highest ranking official in South Africa’s ruling party so charged since President Cyril Ramaphosa was elected in 2018. Ramaphosa campaigned on a promise to clean up the rampant corruption of his predecessor, Jacob Zuma. The arrest highlights divisions within the ANC between those pushing for reforms and allies of the ousted former president. Zuma himself has also been charged with corruption related to the widespread looting of state resources during his decade in power. Magashule had been one of Jacob Zuma’s most influential allies. The charges against him relate to kickbacks on a $14 million contract awarded in Free State while he was the leader of the province. The ANC has said that all members who face legal charges should step aside, but Magashule so far has said he will refuse to leave his position. His trial is to begin in February.
  • Implications: As this commentary has documented, South Africa continues to perform below expectations. The near miraculous job done by Nelson Mandela, navigating the country during the post-apartheid period, generated those expectations. The governance of South Africa was one of the best in the emerging markets. The entrenched corruption that bedevils so many countries of the emerging markets and inhibits the evolution into developed countries was not eradicated. Instead it festered. South Africans will need to decide what type of country they want. It could have been the bright spot to lead Africa, while being compared to some of the best Asian countries in the emerging markets. Instead, it may be more comparable to Brazil.

Is the Fourth Time the Charm for Turkey’s Erdogan?

  • Turkey’s President Recep Tayyip Erdogan has fired the central bank governor, Murat Uysal. Uysal was appointed about a year ago after his predecessor had resisted Erdogan’s entreaties to cut interest rates as a boost to the economy. Erdogan is well known for disputing the connection between interest rates and inflation. Uysal succumbed to pressure and cut rates from 24% to 8.25%. Since that cut, the Turkish lira is down more than 30% against the U.S. dollar and inflation is now running at more than twice the official target of 5%. Naci Agbal, a former finance minister, has been named the fourth central bank governor in five years. He has no prior experience in monetary policy but is known as a market-friendly technocrat. In his first meeting as governor, he signaled a change in direction by raising the bank’s benchmark interest rate by 4.75 percentage points, the largest such increase in more than two years. Erdogan indicated his support for the move, saying it was bitter but necessary. The hope is that he will continue to allow the governor to operate without undue political interference.
  • Implications: Erdogan is under immense pressure. Turkey is in the middle of multiple complicated international situations. The economy is weak and under pressure. The quality of governance is low, ranking just behind Colombia. The dysfunction resulting from political meddling in monetary policy has made Erdogan’s job more difficult. Perhaps the new central banker will have the freedom to follow sound monetary policy. If so, Erdogan should have more time to focus on other issues. Unfortunately, reforms to improve governance do not appear high on the list of his priorities.