Looking at the Americas, PRS will issue a new report on Cuba, where the Communist Party government is pushing ahead with a program of structural economic reforms that has greatly increased the island nation’s investment potential. In late March, the legislature approved a new foreign investment law that reportedly will ease (or eliminate) equity restrictions on foreign investment in a broad array of sectors and will significantly reduce the tax burden of companies investing in targeted industries, notably agriculture. Our analysis will focus on the political factors that could affect the implementation of the reform program. The regime gives no indication of any plans to loosen political restrictions, suggesting that officials will proceed cautiously, and the possibility of unexpected policy shifts in response to signs of social discontent cannot be ruled out.
In Eastern Europe, the spotlight this month will be on Russia, with particular focus on the risk implications of the recent flaring of east-west tensions that is developing against the backdrop of a political crisis in Ukraine. The hasty annexation of Crimea and Moscow’s assertive stand in defense of Ukraine’s ethnic-Russian population has scored political points for President Vladimir Putin at home, even as the country’s adoption of a quasi-war footing has provided a pretext for the tightening of restrictions on civil liberties.
However, there is a high risk that Putin’s aggressive diplomacy could produce negative fallout for the economy, which slowed markedly in 2013, as investors retreated from emerging markets in anticipation of monetary tightening in the US. Punitive measures imposed by the EU, the US, and other western countries, although relatively mild to date, figures to reinforce negative sentiment in the near term. We will assess what it will take to defuse the current situation and, failing that, the risks associated with the perpetuation (or further escalation) of international tensions, particularly with regard to domestic political stability and the climate for investment and trade.
Our coverage of Western Europe this month leads with analysis of the implications of the latest political drama in Italy, which has catapulted Matteo Renzi, the youthful, ambitious, and energetic former mayor of Florence, to the top government post. Our in-depth report assesses the prospects for reform in a country where unstable coalitions, a bloated state sector, and a labyrinthine civil service pose obstacles to redressing a sovereign debt burden that is on course to reach 134% of GDP this year and a sclerotic economy struggling to emerge from a recession that has led to high unemployment and weakened tax revenues. We will evaluate the new government’s plans to rectify these ills, including a discussion of the prospects for clearing up accumulated debt arrears to private creditors and the implications of a landmark political reform bill. In addition, PRS will assess whether Italy is finally on the road to a sustainable recovery that offers a more measured risk-return trade-off.
Turning to Sweden, we examine the implications of the anticipated election of a center-left government at a general election scheduled for September 2014, highlighting both the challenges posed by a deteriorating fiscal position, the result of a weakened economy and fiscal stimulus measures. Our report will evaluate the latest spring budget bill from the center-right Alliance for Sweden government, and discuss what changes investors might expect beyond the fall elections. We will round up our analysis with a review of Sweden’s macro-indicators and bank credit risks to ascertain if one of Europe’s safer investor domains merits its triple-A credit ratings.
Germany is also encountering problems of its own at present as the left-right coalition government stands accused of doing very little during its first months in office, following a three-month delay in forming a new government. The pairing of Chancellor Angela Merkel’s Christian Democratic Union and its Bavarian sister party, the Christian Social Union, with the center-left Social Democrats has made for an uneasy alliance, and the challenges it confronts have increased in the wake of a recent high-profile ministerial resignation, the eruption of the Russia/Ukraine crisis, and signs that Germany’s strong economy may be losing momentum. PRS analyzes whether the euro zone’s leading member is still a rock-solid investment prospect or fading stock. Our report hones in on the government’s strong fiscal record, its budget and the difficulties involved in agreeing on policies in the light of the divergent opinions among the coalition partners. We also focus in on Germany’s energy policy outlook, complicated at present by internal politics with the ministry run by Sigmar Gabriel, the Social Democrat, and by the events in Crimea, with prospects more generally for Germany’s export-centric economy reliant on global growth prospects brightening.
Our coverage of Asia this month includes a candid look at Tony Abbott’s first six months as prime minister of Australia and assesses the policy priorities of the Liberal-National coalition government for the rest of 2014. With the mandate they received from voters in September 2013, the governing parties can be expected to continue to try to chart a new policy course for the government after the Labor Party’s reign. Our report will examine Abbott’s prospects for making good on pledges to repeal controversial carbon and mining taxes, while also assessing the strength of Australia’s economic recovery in the near term.
Turning to Sub-Saharan Africa, PRS will examine the political scene in Botswana ahead of the legislative and local elections scheduled for October 2014. The baseline scenario foresees the incumbent Botswana Democratic Party (BDP) remaining in power, but with a reduced majority, a reflection of public dissatisfaction with the pace of improvement in living standards and the alleged nepotism and corruption that have characterized the BDP’s decades-long rule.
The recent BDP primaries for legislative candidates were marked by a backlash of rank-and-file members against incumbent lawmakers, and reports of voting irregularities that produced bitter disputes over the outcome in numerous constituencies. The scandal led to the resignation of the party chairman, but PRS sees little evidence that the opposition parties are in a position to capitalize on the BDP’s troubles.
President Ian Khama’s administration is expected to maintain its pro-market, investor-friendly posture, and the risk of widespread political violence that might destabilize the government is low. The main risk for involves the antagonistic relationship between the government and trade unions. The election period could see further industrial action, and instances of union leaders openly siding with opposition candidates.
Our coverage of the Middle East and North Africa includes a new report on Tunisia, where the threat of a crisis triggered by building tensions between Islamist and secular political forces has been averted by Prime Minister Ali Larayedh’s agreement to hand control of the government to a caretaker regime, which will remain in power until presidential and legislative elections are held later this year. The troubled tenure of the now-departed government led by the Islamist Ennahda party has left many wondering if the country’s religious and secular parties are capable of forming an effective governing partnership. Given the fact that opinion polls continue to show Ennahda favored by about 30% of voters, that is not a trivial concern.
The report will outline the remaining hurdles that must be cleared in order to complete the democratic transition begun by the overthrow of the Ben Ali regime in early 2011, which include the approval of a new election law, and will also discuss the outlook for establishing a stable government following the presidential and legislative elections. Tunisia has won pledges of support from multilateral organizations, but international financial assistance will be conditioned on the implementation of fiscal reforms and the elimination of both legal and de facto deterrents to foreign investment. Our analysis will include an assessment of the likelihood of success on the policy front under alternative government configurations, along with a discussion of the implications of success or failure in implementing reforms for economic performance over the next five years.
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