From the CEO – July 2019
Despite being kept busy with the various happenings in the world of political risk, the summer months are always savored as it gives us some time for other pursuits and for reflection. The benefit of our business is that the multi-faceted nature of political risk creates a very suitable jumping off point for related inquiries, whether they be fields of finance, political economy, sociology, or perhaps less-direct avenues of thought or entertainment, such as philosophy, art history, and keeping up with this year’s Tour de France.
I mention these items because, having spent over the past quarter century in this field, much has been seen and, given that our data series includes internal ‘field’ notes, studies, reflections and forecasts, the data’s longevity portrays very well trends in political and country risk. Similar to a kind of Kondratieff wave in economic cycles, patterns in political risk occur in varying lengths, punctuated every so often by milestone events, ranging from coup d’états, debt moratoria, or landmark election victories. Similarly, asset classes often display a kind of “Sorosian” sense of reflexivity, pushing and pulling political and related events, shaping the risk ratings as time passes.
With this said, two items come to mind: First, a timely analogy to the ebbs and flows in political risk cycles are the individual stages of the Tour de France. In each stage riders are faced with different terrain. Some excel in the climbing stages; others pick up time during the descent. Others are sprinters. And at times the natural flow is interrupted by an unexpected (or highly unlikely) event, such as the recent halt to Stage 19 due to hail and a landslide in the mountains near Val-d’Isere.
The second item in mind is a sub-text of sorts; namely, that perfection can never be reached in political risk. Phrased differently, riskless countries do not exist, and the pursuit of it is, from a practical matter and as an end in itself, pointless. As we mentioned during the Astana Economic Forum in the spring, countries can have nearly perfect risk scores but if the economy or investment climate doesn’t support meaningful commercial opportunities nobody will care about the scores.
These two items remind us of a central tenet in the thought of Bertrand de Jouvenel, one of our favorite 20th century thinkers, when he spoke about ‘the myth of the solution’ in the 1963 piece, The Pure Theory of Politics:
Now can we observe anything like this attitude when a ‘solution’ has been given to a political ‘problem’? Do we observe that those who have opposed this solution rally to those who advocated it, feeling a bit ashamed that they had not previously perceived the rightness of this solution, but delighted to now be aware of it? Do we observe that the opponents of the solution at once become its champions? Surely nothing like this happens in politics.’
Turning to the world of political risk, some notable developments were covered by our analysts this month, in Hong Kong, although the ongoing protests have ostensibly been directed towards the controversial extradition bill that Chief Executive Carrie Lam was forced to abandon – stating it was dead, albeit without officially withdrawing it – many have also ascribed the events to much bigger problems for the authorities to address, including housing shortages, unequal distribution of wealth, corruption, and other facets of the uneasy relationship with mainland China including the large influx of mainland workers putting pressure on local services.
Looking ahead, while an end to the protests will remain elusive in the short-term, we remain somewhat bullish on Hong Kong equities, as prices have taken their cue from the renewed bias toward monetary policy easing emanating from the US Federal Reserve influencing local borrowing rates. However, caution is warranted here because Hong Kong’s commercial banks are so far unlikely to willingly match any cut in base rate – noting the fact there was a lack of equivalence when interest rates were raised – and because the economy is slowing more substantially than envisaged, with strong wages growth an added problem eroding profits.
In Israel, it is quite likely that the September elections will produce an outcome very similar to those held in April, in which case, Prime Minister Netanyahu will attempt once again, with unclear prospects for success, to pull together a majority coalition that includes far-right and religious parties. In the event of his failure, or a first-place finish for Blue and White, Benny Gantz, the challenger to Netanyahu, could be given a crack at forming a government.
Finally, in Brazil President Bolsonaro scored a significant political victory as the government’s proposals over pension reform were approved in the lower house by a vote of 379–131, easily achieving the three-fifths threshold required to make the necessary changes to the constitution.
However, the path forward is not terribly risk-free: The lower house must approve the reforms a second time, in a vote that has been delayed until early August, at which point the measures will be sent along to the Senate, whose leaders have indicated that a vote will take place 60 days after receipt of the legislation.
As such, final approval is still nearly three months away, and it’s not clear whether the president will have sufficient political capital – given some of the challenges he’s faced of late with some internal fissures and fickle legislative support – to see the job to completion. Even if he manages to do so, that will provide no guarantees that he will enjoy similar success as the government moves forward on promised reforms of the tax system and labor-market rules.
The forthcoming book on political risk – co-edited and written by Peter Marber and myself – titled Quid Periculum: Measuring and Managing Political Risk in the Age of Technology, is progressing well and should be ready for order in the early fall.
One of the more unique parts of the books is a roundtable discussion by a number of influential thinkers, and risk and asset management professionals. Among those offering their insights into a range of issues affecting the future of political risk are: Price Lowenstein (Sovereign Risk Insurance), Peter Kraus (Aperature Investors and former CEO of AllianceBernstein), Ted Merz (Global Head of News Product, Bloomberg), and others.
Please contact the PRS Office in NY for details on this new book.
Clients should also note that PRS is about to unveil its new Preferred Client Advantage (PCA) in September. Recognizing the large expansion of clients from the institutional investment sector there is a solid case to be made for the data of the International Country Risk Guide (ICRG) come out earlier in the month. There is also a clear need for more intimate contact with me and our analytical group, and more frequent communication from PRS about the changes to the risk ratings as they are being formulated during the time between data releases.
Finally, July was a busy month for the ICRG ratings, with some 70 countries having their political risk profiles adjusted (almost half the entire ICRG index), affecting just under 100 individual political risk metrics.
Thanks for your continued support, and please contact us if we can be of any assistance.
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