Our coverage of Asia this month leads with a detailed report on Thailand that examines what investors should be prepared for in the coming weeks and months in the wake of the debilitating political crisis stemming from street protests and legal challenges that are creating chaos as the country heads for an early election. Urban, upwardly mobile middle-class Thais are rallying behind the opposition Democratic Party in an effort to oust the incumbent Pheu Thai Party, which is accused of corruption, cronyism, and vote-buying to solidify support among its mostly rural base. We look at what might transpire in the coming months on a procedural level with the government still in limbo, discuss what the upheaval portends for tourism and investment, and assess the risks to financial stability posed by the political upheaval.
In the Americas, the spotlight will be on Brazil, where President Dilma Rousseff’s popular support is rebounding strongly as she begins to prepare for her re-election campaign later this year. Current polls show Rousseff in position to win a second term, but with the economy unlikely to boost her chances, she may be tempted to resort to populist policies in the run-up to the vote. PRS will assess what that means for fiscal stability and the broader business climate in the near term, and provide a preview of the medium-term policy agenda in the event that Rousseff wins re-election.
Turning to Africa, President Alassane Ouattara has announced that Côte d’Ivoire will hold presidential elections in October 2015, and that he will seek a second term. PRS is sticking with its forecast that executive stability will be maintained over the next 18 months and that Ouattara will win re-election next year. However, political situation will remain tense due to uneasy relations between Ouattara and Henri Konan Bédié, whose Democratic Party of Côte d’Ivoire has yet to clarify whether it will support Ouattara’s presidential bid or field its own candidate. At the same time, progress on reconciliation between the warring sides from the country’s prolonged civil conflict will proceed slowly, at best, despite the holding of the first formal talks between the government and allies of former President Laurent Gbagbo.
At a recent government-hosted investment forum, Prime Minister Daniel Kablan Duncan spoke of a “second economic miracle” powered by large infrastructure projects, public spending, and donor support. Economic growth has the potential to remain above 8% in 2014, and the authorities plan to issue about $1.68 billion in debt on the regional market this year. Still, diversification away from the key cocoa sector will require substantial inflows of foreign capital, and corruption and security will remain a challenge for foreign investors. The lawlessness that remains a problem in many parts of the country has prompted the UN to call on Ouattara’s administration to rein in former rebel militias accused of looting and human rights abuses.
Poor security conditions remain a major threat to political stability and economic development in the Democratic Republic of Congo. A joint offensive by UN troops and the national army has decimated the M23 rebel group in parts of eastern Congo, but resentment of the central government and competition for resources will generate new security threats elsewhere. The UN has warned of a humanitarian catastrophe in the copper-producing province of Katanga, where shadowy secessionist groups have launched attacks on both government targets and civilians. Armed men linked to a religious leader in Katanga attempted to seize key points in the capital, Kinshasa, in December, attracting more negative headlines.
It is PRS’ assessment that these challenges will not undermine President Joseph Kabila’s ability to serve out his full term, but the outlook for reconciliation between rival political camps remains bleak. The main opposition groups have snubbed Kabila’s initiative for national dialogue, suspecting the president has not given up on plans to change the constitution and run for a third term in office. Talk of a possible Cabinet reshuffle to form a government of national unity only adds to the uncertainty, but any meaningful political change coming from the presidential office appears unlikely in 2014.
The start of production from mining projects that had been scheduled to come online last year will contribute to rapid economic expansion in 2014. Benign inflation will create conditions conducive to a loose monetary policy, but the disruptions caused by ongoing violence and poor execution of public investment projects casts doubt on officials forecasts of double-digit real GDP growth this year.
Our coverage of the Middle East and North Africa includes a new report on Morocco, where Prime Minister Abdelilah Benkirane has managed to restore a measure of stability within his embattled government by reaching a coalition agreement with the National Rally of Independents that restores the government’s legislative majority, which was threatened by the defection of the Istiqlal Party last year. The net result is a strengthened hand for King Mohamed, who helped to broker the deal with the pro-monarchy RNI, and a government that presumably is more committed to implementing the unpopular structural reforms that were at the heart of the troubles between Benkirane’s Justice and Development Party and Istiqlal.
Political risk analysis will focus on an assessment of the viability of a government whose survival depends on the cooperation of the PJD and the RNI, whose past relationship has been decidedly antagonistic, and, beyond that, the prospects for implementation of a reform program being pushed by the IMF as essential to strengthening Morocco’s fiscal foundation. The IMF has called on Benkirane’s government to move ahead on tightening tax enforcement and overhauling the pension system, and having already retreated from plans to significantly reduce spending on subsidies, the government’s credibility is at stake.
Elsewhere in the region, an update on Algeria will include a preview of the April presidential election, and the risk implications of the likely re-election of Abdelaziz Bouteflika, who appears to be committed to seeking another term, despite serious questions surrounding the state of his health. Bouteflika’s candidacy and his front-runner status are indicative of the failure of the military establishment to agree on an alternate candidate, suggesting the presence of divisions within the upper reaches of the armed forces that has negative connotations for both government stability and possibly for domestic security.
In West Europe, voters in Belgium go to the polls in May for parliamentary and regional elections, to be staged concurrently with the elections for the European Parliament. Belgium’s linguistic divide and plethora of parties all but ensure the process of forming a federal government will be complicated, and the risk of policy inaction and investor unease will be high in the event of a prolonged delay in pulling together a viable majority government. Currently the secessionist New Flemish Alliance is leading in the polls by a significant margin, while Prime Minister Elio di Rupo’s Francophone Socialist Party and one of its coalition partners, the Christian Democratic and Flemish, are running neck-and-neck for second place.
Di Rupo’s multiparty alliance has proven to be fairly adept at introducing reforms and steering the economy back to positive growth, which is essential to fiscal sustainability, but it is not certain that a similar configuration of parties will still claim a parliamentary majority after the May elections. PRS will assess the chances of avoiding a repeat of the governance crisis that followed the June 2010 elections, examine the impact of political reforms aimed at quelling the secessionist threat, and forecast whether Belgium’s growth rate will prove sufficiently strong this year to meet its EU fiscal targets and reduce unemployment.
Looking at East Europe, PRS will issue an update on Romania, where the viability of the governing Social Liberal Union, an alliance of center-left and center-right parties, is being tested amid signs of tension between Prime Minister Victor Ponta, the leader of the Social Democratic Party, and Deputy Prime Minister Crin Antonescu, the leader of the National Liberal Party. Ponta is hoping that the USL’s backing of Antonescu as the governing coalition’s joint candidate in this year’s presidential election will help to solidify the partnership. However, even assuming Antonescu wins the election, as seems likely, his continued cooperation with Ponta’s government is far from assured, as the tumultuous relationship between the incumbent president, Traian Basescu, and his erstwhile allies in the PNL attests.
More immediately, Basescu gives every indication that he intends to be a thorn in Ponta’s side for as long as he remains in office, as is evident from a budget standoff between the president and the prime minister that forced the government to delay implementation of an increase in the excise tax on fuel demanded by the IMF. The government will need to offset the revenue shortfall implied by the delay in the tax hike if fiscal targets are to be achieved, and our assessment will include a discussion of possible steps the government might take, and the implications of each for the stability of Ponta’s ideologically diverse coalition.
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