From the CEO – March 2019
With overall levels of political risk expected to rise in the US as the presidential cycle kicks into gear this fall, PRS’ eyes are fixed firmly on parts of Europe. Despite some blips of higher consumer confidence showing up in our models in February, the outlook for the mainstay of the continent is not terribly bright. Notably, what we see on the streets of Paris and other cities has direct ties to what we perceive as the dominant political risk for 2019.
France’s President Marcon is having a devil of a time taming the yellow-vest movement and protests. While nowhere near the numbers and intensity of the demonstrations witnessed last December (this weekend passed very peacefully, despite being the 19th such weekend of protests), some ire was raised as the French army was called in to guard various landmarks. The protestors were banned from gathering on the Champs Elysees and in parts of other French cities. The call for added security was the result of acts of vandalism the week before.
As we mentioned earlier, the yellow vests won’t be leaving anytime soon although the intensity of the protests will vary. The national dialogue that Macro assembled in the wake of the early stages of the protests has produced very little agreement, despite some interesting suggestions, including a referendum on reducing the number of members of the National Assembly.
Part of the problem is that Macron is simply unable, politically, to backtrack on some of the more contentious policies that have flavored his tenure, such as reinstating a wealth tax or reducing the VAT.
The other problem is that the protestors lack the coherence that normally would be conducive to constructive political dialogue and are thus incapable of being channeled into the formal policy process. As one French commentator recently put it: how can the government respond to the grievances when the movement refuses, on principle, to select leaders or become an organized political party? The opposition in the streets of Paris is geared both to policies as well as to the institutions of power themselves. And unlike past confrontations, this time around there are no interlocutors, such as the student leaders in 1968 or various labor union representatives at other, more recent times.
It seems, however, that time may be on Macron’s side. Opinion polls appear to be moving in the president’s favor as the protests continue and as he appears to be willing to extend the dialogue– in the National Assembly and elsewhere – for the next month or so given the European elections on May 26.
What’s happening in France is not new to the world of political risk. It has an element of historical recurrence to it, despite what the most recent slate of ‘talking heads’ will tell us.
But what appears to be remarkable this time is that governing institutions do not seem to be capable of managing the discontent through normal (democratic) channels in an effective way. In one sense, the rules of the game of interest articulation have changed. Trust in traditional institutions has eroded.
How modern states respond will be key. There are perfectly acceptable means of addressing the grievances, but they just take some time. The problem is most governments and elected officials do not have sufficiently distant political horizons.
Turning to the ICRG ratings for March, we see some notable risks on the horizon. In China, despite some mixed improvements of late in the country’s political risk profile, the economy remains an issue: credit terms are tightening, and corporate bond defaults are rising. Some China-based groups are arguing that the economy is expanding at a much smaller clip than the authorities suggest. Our report on China explains the nuances involved.
In Germany, while the present governing coalition appears to be hanging in, there is no guarantee of fresh elections should it unravel. The Christian Democratic Union could form an alternative one with the Greens, and the pro-business, and liberal, Free Democratic Party (FDP). However, the Greens may reject such a move in the hope of securing more seats in parliament commensurate with their recent surge in popularity.
On the German economy, a technical recession was narrowly avoided in 2018, but there is considerable concern given the threats posed by US tariffs on car imports and a looming no-deal Brexit, which could have bigger implications for both German and European assets.
And over in Greece, although parliamentary elections do not need to be held until 2020, it seems unlikely the government will limp on for much longer. In view of the cost involved for a country still struggling with huge debts, the most sensible outcome would be to stage them alongside voting for the European Parliament and municipal elections on May 26. New Democracy is promising a comprehensive business and investor-friendly tax reform which is sure to act as a platform for further gains in Greek assets, although clearly the country is vulnerable to global economic downturn and debt repayment risk as the latest data show a weakening economy at the end of 2018 as the tourism season concluded.
Just as we were finishing the month’s ratings and forecasts, the Mueller report in the US – the investigation into possible collusion between President Trump’s 2016 election campaign and Russia to influence the vote – was released. We all know the results, which effectively removed very large political risk to the presidency. Indeed, the major indices rose on the news and, as Mark Mobius later commented, an adverse finding could have allowed China to take a more aggressive stance in its trade talks with the US.
One part of the client letter we like to occasionally discuss is what we are reading at the moment: it provides some context to the debates of the day and some direction for our readers in the event they are looking for narrative and thought. Two books stand out on our shelves at the moment.
First up is Raghuram Rajan’s The Third Pillar: How Markets and the State Leave the Community Behind. Rajan, a former IMF chief economist and head of India’s central bank (and University of Chicago professor) looks at how the three pillars interact, why they have broken down, how populism is often a consequence, and how we must re-think these relationships. Refreshingly, Rajan offers up some suggestions for doing so (think devolution) but the question of time remains problematic.
Much less problematic is our reading of Andrew Curran’s Diderot and the Art of Thinking Freely. Curran, the William Armstrong Professor of the Humanities and a member of Wesleyan University’s Romance Languages and Literatures department, offers an accessible look at the well-known 18th-century French philosopher, famous atheist, and editor of the “Encyclopédie, for which he wrote some 7,000 pieces. Diderot was also an art critic, political writer, and opposed to the dangers of income inequality, warning that France was on the verge of a revolution almost a decade before it occurred.
This book is especially satisfying since it documents one of our favorite figures at that time (along with Voltaire and Rousseau), reminding us (again) of both the endurance of historical recurrence and human desire. As Diderot put it succinctly, ‘there is only one passion: the passion for happiness.’
As is the case often, we’ve been featured in the press and in the academic and research community’s work. Lately, we commented on investing in the graphite sector in Mozambique (https://www.theafricareport.com/412/mining-mozambique-glittering-graphite/), and several of the risk metrics of the ICRG were used as an ‘institutional proxy’ by IMF researchers looking at the role of structural factors in explaining countries’ external imbalances (https://www.imf.org/en/Publications/WP/Issues/2019/03/19/The-External-Balance-Assessment-Methodology-2018-Update-46643).
PRS were also delegates to a very informative conference in NYC on Artificial Intelligence and Trading, which showcased the most up-to-date developments affecting machine learning and the asset management and trading industry (https://www.aidatatrading.com).
We’ll be in Astana in early May to participate in a panel discussion on the work of rating agencies and their ranking of countries with government and private sector executives from various parts of Asia. The session will be held within the framework of the XII Astana Economic Forum.
Finally, clients should note that some 60 countries had their political risk profiles adjusted in March, affecting just over 75 individual political risk metrics.
Thanks for your continued support, and please contact us if we can be of any assistance.
Back to Insights