September 2017

Country Ranking Trends

  • Magni completed its review of Pakistan following its recent promotion to the emerging markets by MSCI. Pakistan has numerous governance weaknesses common to frontier countries, though the country does have noticeable strengths in accounting and the rights of shareholders. Magni is still reviewing the suitability of Pakistani ETFs for inclusion in Magni Global Portfolios.

Can Angela and her Diverse Band Sing Reggae?

  • As expected, the conservative Christian Democratic Union (CDU) came in first place in the just-held German federal elections paving the way for Angela Merkel to continue for a fourth term as chancellor. However, both the CDU and its current coalition partner, the center-left Social Democrats (SPD), lost seats, while a far-right party, Alternative for Germany (AfD), will enter parliament for the first time in half a century as the third largest party. Shortly after the election, the SPD announced it would no longer work with the CDU to form a coalition. Given that Merkel has ruled out joining with the AfD, she will have to try to form a coalition with the smaller Free Democrats (FDP) and Green parties to cobble together a majority in parliament. This “Jamaica” coalition (so called because the three parties’ colors match those of the Jamaican flag) has not governed at the national level and given the parties’ differing philosophies, negotiations are sure to be difficult. However, the parties are all seen as strongly pro-Europe and the inclusion of the freemarket oriented FDP is likely to bring about a shift from austerity to more pro-growth reforms.
  • Implications: Germany already has a relatively high Magni Country Score. Despite the diverse philosophies of the Jamaica coalition, the country appears positioned to maintain or perhaps slightly improve its score, though the fragility of the coalition remains a risk.

Russian Internal Interventions

  • Recent large bailouts of several private banks in Russia raise the question whether the central bank has now contained the threat of contagion to other private lenders. Earlier this month the Russian central bank (CBR) rescued the 12th largest lender in the country,
  • B&N Bank. This bailout followed just a few weeks after the CBR’s stepping in to save Otkritie Bank, one of ten banks the CBR had last year designated as “systemically important”. The cumulative effect of Western sanctions and falling oil prices has caused problems for several Russian financial institutions. Since 2013, the central bank has shut down more than 300 insolvent lenders. The CBR has been credited for its efforts to clean up the banking sector, and given that state banks hold most of Russia’s banking assets a systemic crisis is unlikely. However, bad loans brought about by politically directed lending are not isolated to these two banks, so additional central bank interventions may be needed to stabilize other lenders.
  • Implications: While the bailouts do not directly impact the Magni Country Score for Russia, the underlying politicization of lending reflects already-known weaknesses in banking regulations. Overall, Russian regulation of financial services remains weak and is a big reason why the Magni Country Score for Russia remains relatively low, though it is a bit higher than China’s score.

Sometimes “Muddle Through” is Good Enough

  • Portugal has made great progress recovering from the deep recession that accompanied the debt crisis of 2010 to 2014. For the first time since receiving the IMF and EU rescue of €78bn in 2012, Portuguese bonds have moved out of junk status and regained their investment-grade credit rating. S&P was the first credit rating agency to upgrade Portugal; Moody’s and Fitch both still rate the country one level below investment grade. The gains made by Portugal provide some validation for the painful labor market and other reforms demanded by the country’s creditors. Portugal has implemented laws to clean up a troubled banking system and has vowed to stay the course with fiscal consolidation. Portugal is on track to meet its budget deficit target of 1.5 per cent of national output this year, well below the 3 per cent maximum allowed under EU rules. However, it would be too soon to say that Portugal’s problems are behind it. At 130 percent of economic output, its overall debt stock is still one of the largest in Europe behind only Greece and Italy.
  • Implications: The Magni Country Score for Portugal places it in the middle of the developed markets. Its recent successes do not change its position and the country remains at roughly the same level as Belgium.

All of the Pain and None of the Gain for India

  • Following the chaotic roll out of the goods and services tax (GST) in July and a surprise ban on large value currency notes last year, the rate of growth in India is at its slowest pace in three years. Contrary to its intention, faulty implementation of the GST has made doing business far more complicated for many companies. It is still hoped that once the initial hiccups with the GST are ironed out the new tax system will be of benefit to the economy. However, reports on the results of demonetization have called into question whether its impact on corruption will be enough to justify the widespread disruptions it has caused. The government has been talking about a fiscal stimulus to boost short-term growth, but there is limited space to increase the deficit because of concerns about losing India’s investment-grade rating. Pushing forward with structural reforms in areas like labor and land laws will be needed to enable faster growth.
  • Implications: The various challenges in implementing the GST and demonetization need to be addressed. Overcoming challenges and adding a short-term stimulus will not solve the primary impediments. Economic reforms are required to address multiple weaknesses in Indian governance. Such reforms would enable conditions for faster and more inclusive growth as well as better prospects for its equity markets. Even small reforms could improve the Magni Country Score for India enough to move the country ahead of Indonesia.
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