As part of our Asia coverage this month we assess the dangers lying in store for investors in Malaysia, as the government’s austerity policies designed to reduce the country’s fiscal deficit and high debt levels (considered a plus for sovereign creditworthiness) risk pumping up popular discontent as consumer prices react to the dissolution of state subsidies and corruption is brought into focus. We analyse whether the dominant party in the ruling coalition, Prime Minister Najib Razak’s traditionally secular and business-minded United Malays National Organization, risks further splintering the political divide and whipping up religious animosities by advancing a more forceful Islamic agenda – also favoured by the opposition Pan Malaysian Islamic Party of former prime minister Anwar Ibrahim – as a platform for its austerity agenda. Our report, furthermore, looks at the implications of tightened credit availability across the region in the wake of the US Fed’s tapering and what that might mean in terms of consumption and trade patterns for Malaysia’s hitherto strong macro-economy.
Turning to the Americas, PRS will issue a revised report on Chile, where Michele Bachelet easily won a run-off election to secure a second term as president. Although the president-elect’s expanded center-left coalition, the New Majority, claimed 68 of the 120 seats in the lower house and 21 of the 38 seats in the Senate, fulfilling many of her key campaign pledges, including education reforms and changes to the constitution, will require congressional super-majorities that can only be achieved with some support from opposition parties.
Bachelet has proposed hiking the corporate tax rate from 20% to 25% to finance a program to provide a free university education to all students, but she has assured that she otherwise has no plans to meddle in the private sector. Our report will assess Bachelet’s prospects for implementing her agenda, and what the changes will mean for foreign businesses operating in Chile. Just as significant, our report will analyze the risks for investors that could arise in the event that she fails to meet the expectations raised by her campaign promises, an outcome that would increase the danger of disruptive political instability.
This month’s coverage of the Middle East and North Africa includes a report on Egypt that will assess the prospects for political and economic stability as the country attempts to establish a viable system of elected government under the close supervision of the military brass and without the participation of the (once again) outlawed Muslim Brotherhood. Analysis will focus on what the military’s hands-on political role will mean in terms of the prospects for improvement in the business climate, and the dangers, particularly with regard to security, inherent in the effort to sideline a political force that won both the legislative and presidential elections held in 2011–2012.
Our in-depth report on Zambia this month assesses the challenges that lie in store for the Patriotic Front government led by President Michael Chilufya Sata as it nears the mid-point of an electoral cycle still promising much, but with financing constraints and political challenges frustrating its ambitions. We assess the prospects for government stability following the resignation of Geoffrey Bwalya Mwamba, the defense minister, in a dispute over loyalties to the Bemba-speaking peoples (the country’s largest ethnic group), and for corporations doing business, as pressure mounts for wages to keep pace with the cost of living and other tensions escalate with the government struggling to manage expectations. We investigate the economic situation now that populist spending and depressed copper export prices have left the government with a gaping hole in its budget finances, which in combination with a current account deficit and rising debt burden raises capital financing and currency stability questions. Foreign investors, already concerned by trends in commodity prices and wage costs, may also be perturbed by the government’s officious stance in promoting worker welfare and environmental safeguards which, with little room for diplomatic contract resolution, runs the risk of disrupting production, investment and ultimately Zambia’s longer-term development prospects.
Our coverage of Western Europe this month leads with Greece as we investigate what lies in store in 2014 for the coalition government led by Prime Minister Antonis Samaras as it grapples with a legacy of debt to survive as a euro zone member state. The government faces the added distraction of holding the six-month rotating presidency of the European Union in the first half of the year, in which role it will oversee the elections for the European Parliament in May. Our report analyses how Athens will utilize this opportunity to shape its own agenda in Europe, as we delve into the political challenges still involved in weaning the country off its life support, in maintaining a primary budget surplus, privatizing key assets and grappling with the austerity-fatigue and unemployment problems eroding social stability and political legitimacy. We analyse how Greece will hope to finance itself if it exits its troika bailout programme this year should the economy stumble, and as debts continue to rise and the tenuous political consensus risks fracturing. Our report also challenges the positive spin put on recent macro-indicators and a rebounding stock market to distinguish what is real and what is illusory, ultimately highlighting tail-risks that investors need to be wary of before plunging back into Greek assets.
Political risk is rising in Turkey, where a corruption scandal has triggered upheaval within Prime Minister Tayyip Recep Erdogan’s government, prompting one departing Cabinet member to publicly call upon the prime minister to step down. Our report will discuss what the political damage from the scandal means for Erdogan’s hopes of winning the presidency in 2014, and, by extension, his chances of completing the current term. Erdogan claims that the scandal has been manufactured by his enemies within the judiciary, and there are signs that he may attempt to bolster his position by pursuing a rapprochement with leaders of the military, whose political influence the prime minister has managed to reduce significantly in recent years. Our report will assess what such a strategy portends for the level of political risk, and explore the implications of the increasing uncertainty for macroeconomic stability.
Coverage of East Europe includes an update to our report on Slovakia, where Prime Minister Robert Fico commands a solid parliamentary majority and remains popular, despite a weak economic performance in 2013. Not surprisingly, given the governing Smer’s leftist orientation, some of the government’s policies have not been warmly received by the local business community, but the 2014 budget includes some tax relief, while also widening the tax net. The update will examine possible sources of increased risk for investors, largely stemming from the potential for fiscal slippage if the economy fails to recover as rapidly as government officials are forecasting.
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