As 2017 draws to a close, the Speyside team would like to wish all our partners and friends the very best for the holiday season, and of course a prosperous and peaceful 2018. Thank you for your continued support and parternship and we look forward to working together for many years to come.
As has become tradition at this time of year, our teams around the globe have summarised some of their closing and forward-looking thoughts on a range of pivotal emerging markets. We hope you find this an enjoyable and useful read.
The consensus view among leading economists is that 2018 will be a strong year for global emerging markets, with some obvious exceptions (Venezuela) and concerning trends (Turkey) driven largely by political risk. However, in terms of the ‘real world’ trade and foreign direct investment climate, the picture is far more mixed.
On the plus side, we expect a TPP 11 agreement to be reached, which in time will deliver significant dividends for both Asia and the Americas. However, the outlook for NAFTA and other agreements is bleak, and we expect a significant rise in non-tariff barriers and investment disputes (increasingly masked in the language of consumer protection, privacy and security), causing market access issues.
In terms of FDI, we believe 2018 will continue to see net inflows from leading global economies, but the path will become more problematic as populist governments initiate more investment screening, and local communities (with support from the global NGO community and social media) make winning and maintaining a ‘social license’ to operate ever more complex.
We expect emerging markets will most tangibly feel the rise of China and the retrenchment of the US, especially in low income countries. Transformative US development programs such as PEPFAR will need to appear before the US Congress to secure funding reauthorizations, with China waiting in the wings to prove itself as the new model global citizen.
Reform on the agenda for Macri's Argentina
President Macri’s surpassingly strong showing in October’s mid-term elections - increasing the ruling administration’s presence in Congress and the Senate - has provided the much-needed platform and public backing for furthering the direction forged after 2015's Presidential victory.
However, despite the international plaudits and positive coverage, the path forward is not entirely clear after October’s results. Both monetary and fiscal policy will remain appropriately restrictive to deal with stubbornly high inflation and a bulging fiscal deficit – key priorities for the government next year. Energy, mining and infrastructure remain the brightest opportunities, but the broad inward flood of investment promised and expected by the government remains weak until wide-ranging structural reform is pushed through. It is here that notable progression will be made in 2018. The government still operates a minority in both Congress and Senate and will continue to rely on agreements and negotiations with a fractured opposition. The ugly and chaotic scenes that took place place both inside and outside Congress during the vote on the polemic pension reform towards the end of December shows just how adverse both the opposition and parts of society are to further reform.
Crucially for the government, one of its most controversial bills on pension reform was passed, and an additional pro-market reform agenda (tax, labor, and fiscal reforms are already at varying stages of the legislative process) is now confidently in place for 2018. The more ambitious of reforms - judiciary and electoral - will likely be pushed back to the next electoral cycle commencing in 2019, when Macri will be hoping that success with 2018’s legislative agenda will pave a way for re-election.
The G20 presidency and hosting its accompanying summit adds gloss to Macri’s message of the country’s global reemergence, but the true undercurrent of change and reform will begin in 2018, setting a path of sustainable and robust long-term growth.
Brazil works to regain footing
Brazil will hold presidential elections in October 2018, along with elections for Governors, Congress and State Legislatures. In the aftermath of the impeachment of former president Dilma Russeff, a record breaking unpopular mandate by Vice President Michel Temer, and successive tsunamis of corruption scandals, the country is yearning for political renewal. Yet, old powerhouses remain in place, with few viable names among the many presidential hopefuls, which thus far have included the São Paulo Mayor and prior Brazil Apprentice presenter João Dória, and TV entertainer Luciano Huck.
The strongest polling name is former President Lula, who in spite of having a first instance conviction for corruption and being defendant in several other ongoing corruption proceedings, is still intent on running for office. He would be barred from taking office if the conviction is upheld by the Appellate Court, a judgment set to start on January 24, but legal maneuvers could delay any such practical effect. As a result, his potential candidacy is likely to be surrounded by uncertainty and judicial injunctions up to election and/or inauguration day.
Opposition candidates are likely to be fragmented, in a vote as volatile as the one that elected the eventually impeached President Collor in 1989. The centrist party of incumbent President Temer, PMDB, has yet to launch a candidate and is unlikely to do so in view of single digit approval ratings. The Social Democrat party, PSDB, is facing internal battles for nomination (with São Paulo Governor Geraldo Alckmin ahead in the game); leftist parties are scattered; politicians across the spectrum are tarnished by corruption allegations, all while right wing Congressman and former military officer Jair Bolsonaro profits off this vacuum by playing chameleon and reaching second in polls. In this scenario, it seems like election results will be as predictable as the winner of the upcoming World Cup in June, which is certain to distract Brazilians from any political campaign scandals.
Nonetheless, the Brazilian economy is showing signs of modest recovery, two years after its worst recession in history. Only last week, the Ministry of Finance reviewed the GDP growth rate expected for 2018 from 2% to 3%, but delays in voting on pension reform could lead this estimate to be reduced to 1.7%. Other indicators remain critical though: unemployment hit a historic high of 13.7% in March 2017, and is expected to linger around 12% until late 2018. The stock exchange index has been slowly recovering, but this seems to be fueled by unwarranted confidence over the impact of a set of structural reforms proposed by President Temer to address the expected BRL 157 billion primary deficit in 2017, of which only part was approved, and with texts not as wide-ranging as needed.
A sign of this overconfidence came in the context of the upcoming vote on a controversial Pension reform, which will affect not only parties’ positioning in the electoral debate, but also serve as a thermometer for investor confidence in 2018. A statement by the government leader in the Senate, Romero Jucá, indicating that the vote would be delayed to February resulted in Fitch Ratings threatening to downgrade Brazil’s credit rating, as it is believed that any such delay would effectively end any chances of approval before 2019. The vote has since been delayed until mid-February, with Minister of Finance Henrique Meirelles trying hard to convince rating agencies to delay their assessments.
2018 promises to be a political rollercoaster, with a polarized debate, society alternating between street outrage and soccer-induced apathy, resulting in fidgety markets and international puzzlement. However, Brazilian institutions are as resilient as its population, and the country remains the powerhouse of the region. We see no reason for alarm in 2018, this being only a long overdue period of adjustment and renewal.
Mexico faces presidential elections and NAFTA
Mexico will elect a new president to a six-year term in July 2018. Despite the many unknowns, there are predictions we feel confident making. Whoever wins the election will probably win with less than 30% of the vote, which means that after a transition of nearly six months, the new government will start on December 1st with the majority of the population feeling dissatisfied. This will also be reflected in the absence of a majority in Congress, significantly limiting the power of the next government to drive legislative changes in the short run.
The campaign will certainly be fierce, marked by attacks against the current government of Enrique Peña Nieto and the Institutional Revolutionary Party (PRI). The issue of corruption and a lack of rule of law will be front and center, with little discussion of substantial public policy matters, in keeping with the tendency of Mexican political campaigns to be almost utterly devoid of content.
The PRI candidate, José Antonio Meade, and others will likely sound the alarm bells regarding the populist tendencies of Andrés Manuel López Obrador, the candidate of National Regeneration Movement (MORENA) and link him to other populist leaders in Latin America, such as Evo Morales and Nicolas Maduro.
A PRI repeat or a victory by Ricardo Anaya, running as the candidate for For Mexico to the Front (an alliance between the National Action Party (PAN) and the Party of the Democratic Revolution (PRD)), would mean business as usual. In this event, we would expect policy continuity and further implementation of the structural reforms. A victory of Andrés Manuel López Obrador, would mean a substantial change in policy, though even then he would need to tap members of other parties in order to effectively govern.
The renegotiation of the North-American Free Trade Agreement (NAFTA) has been extended into 2018, a scenario that the Mexican administration had wanted to avoid in order to keep it as far from the electoral process as possible.
We expect Mexican negotiators to maintain a firm, free trade position and to stay at the negotiating table, unless President Trump decides to announce a U.S. departure under Article 2205 of the agreement, which remains a possibility. Mexico may consider ceding some ground in order to ensure that NAFTA remains in place, given that a break up of the agreement would inevitably cause short and medium term economic uncertainty. The US seems squarely focused on the auto and manufacturing sector, and continues to view the trade deficit through a mercantilist lens.
Regardless of the outcome, Mexico will continue to move on various fronts in order to pursue economic diversification and we may even see the updated trade agreement with the European Union finalized before the year’s end. One thing is for certain: 2018 will not be a dull year for Mexico.
Kenya looks to focus on the economy after a turbulent election
After a volatile 2017, Kenya is expected to veer back onto the path towards recovery. An election period that should have only lasted for one month ballooned into a four-month period of political tensions and uncertainty. The prolonged election saga began with unprecedented call to nullify incumbent President Uhuru Kenyatta’s victory in the original August election, only to have Raila Odinga, the opposition candidate, drop out of the race in the final hour and call on his supporters to boycott the new vote. Kenyatta walked away with the victory for the second time in October, and has since been officially sworn in for his second and final term.
The prolonged election turmoil has dampened trade and investment in the country, negatively impacting the performance of companies in East Africa’s most important economic hub. Political temperatures are expected to calm down come 2018 and this in turn is expected to spur economic growth. Most companies are geared up and ready to go come January so that they can try as much as possible to recover from the losses of 2017.
Politics will take more of a back seat as the government focuses on economic policies, which for President Kenyatta will be the opportunity to cement his legacy, while Deputy President William Ruto will be looking to position himself as his successor. Odinga and his supporters had planned a mock inauguration for December 12, the country’s independence day – a move that the government said would amount to treason and was condemned by the international community. That protest was postponed, but Odinga still refuses to acknowledge Kenyatta’s legitimacy. While the opposition might plan for a few demonstrations here and there, it should not affect business, as most Kenyans are fatigued of the protracted uncertainty, and want the political side shows gone. In a nutshell, 2018 for Kenya is the year to recover from the elections and people will be hungry for business. We expect increased investment by foreign firms currently in the market, as well as new entry into the market.
South Africa at a crossroads
Just this week, Cyril Ramaphosa was named the president of South Africa’s ruling party, the African National Congress (ANC). He is now well positioned to become president in 2019, given the party’s electoral dominance. In the meantime, he will be tasked with steering the party back on course, regaining the trust of voters, and rebuilding the economy at a time when investment has slowed.
Under current president Jacob Zuma, the ANC had become tarnished by corruption charges, losing municipal elections and key urban areas for the first time since Nelson Mandela brought the party to power in 1994. Ramaphosa’s victory over Nkosazana Dlamini-Zuma – President Zuma’s ex-wife and preferred candidate – marked a pivotal moment for the party. Observers feared that corruption and bought votes would give her the top position, and that she in turn would protect her former husband from corruption charges and keep the rent-seeking arrangements he had created in place. Ramaphosa ran explicitly on a platform of anti-corruption, and is the darling of investors. His victory is already being met with business confidence, with the Rand rebounding to its strongest level in months and Moody’s indicating a hold-off on a credit downgrade.
Ramaphosa still faces an uphill battle, however. Three of the six senior positions within the ANC - the Deputy President, Secretary General and Deputy-Secretary General - went to politicians who were aligned with Dlamini-Zuma, and are unlikely to back Ramaphosa’s expected reforms. The National Executive Committee (NEC), announced just last night, was also split squarely down the middle between Ramaphosa and Zuma loyalists. This indicates that the deep divisions that have developed within the party will remain for some time, and it will be harder for Ramaphosa to pass sweeping anti-corruption reforms.
The composition of the party, however, will effectively prevent the ANC from splitting, and diminishes the risk of losing out to opposition parties or being forced into a coalition government in 2019. We also shouldn't underestimate Ramaphosa's ability to negotiate with the opposition. He has served as Deputy President for the past four years, and now has the advantage of being able to appoint the Public Protector, members of the Constitutional Court, and the head of the National Prosecuting Authority. It would have been better, of course, if Ramaphosa had won an outright majority, but at least he avoided having to govern over an NEC sympathetic to Zuma. That would have tied his hands further than they already are, restricting his ability to focus on economic growth and tackle corruption. He now has the chance to further his agenda, giving the country an opportunity to breathe new life into business and industry and regain its footing on the global stage.
Central and Eastern Europe
Russian retrenchment and provocation continues
Russia’s Presidential elections in March and the cabinet reappointments that follow will provide three to four months of distraction for both citizens and businesses operating in the country. In the absence of any real political contest, the election will serve more or less as a vote of public confidence in Putin’s agenda. With his 4th term all but certain, this will extend Putin’s reign to 2024, making him the longest ruling leader of the country since Leonid Brezhnev. Putin’s recent announcement that he will run this time as an independent candidate, as opposed to within the United Russia party, surprised some, but was seen by others merely as an attempt to rise above the day-to-day political intrigue and allegations of corruption.
Meanwhile, US-RU-EU relations are at a historical low, with Russia continually accused of interference in elections around the globe. While Russia has more or less legitimized its place as a global political disruptor, it remains unclear how the world will respond to cyber-security, political advertisement and media trolling as weapons of choice in a new era of confrontation. Most eyes will be on the recently passed CAATSA (Countering America’s Adversaries Through Sanctions Act), which introduced the option for the US to penalize anyone dealing with Russian oligarchs and elite circles deemed particularly close to President Putin. Compared to previous sanctions, CAATSA gives the ability to apply pressure more subjectively. This will give the US better leverage to steer anyone away from Russian business.
Despite a slow but steady economic recovery, Russia’s economy will still face an uphill battle in 2018. With any economic policy decisions on hold until after the March elections, GDP growth is expected to hover around 1.5%. The Government has planned tax reform for after the election to support an increase in spending on education and healthcare, but this would require an estimated $25 billion, and it is difficult to imagine such an amount being diverted from the military and high tech sector budgets. That said, Putin did recently announce a major withdrawal of Russian troops from Syria – conveniently at a time when public interest in the conflict has started to wane.
While it may be attractive to try and predict social discontent in Russia bubbling up and into grand liberalization, it is important to remember that an entire generation has now been raised under Putin’s regime, and he continues to enjoy unparalleled popularity. Clearly, they and the older generations are not expecting any political surprises or reforms for the sake of liberalization, and on this front we would agree with them firmly. No major direction or policy changes, then, are expected during 2018, with foreign relations expected both to dominate the landscape and, of course, impact domestic rhetoric and (metaphorical) sabre-rattling.
A critical year ahead for Poland
Away from the political headlines and some straining relations with the EU, the CEE region generally is set to continue its impressive, almost under-the-radar recovery. Benefitting from a relatively stable Eurozone, CEE is now into its 5th year of recovery following its struggles post-2008 and pound-for-pound is one of the best performing regions globally.
At the heart of this recovery has been Poland, which has continued its strong recovery, all the while receiving strong domestic and international criticism for a succession of authoritarian and foreign investor-unfriendly policies. Poland now rivals Russia as the biggest market in the region, and certainly the more stable. There are signs, however, that the cracks in Poland’s growth trajectory are starting to widen and that 2018 will be a pivotal year not just for relations with the EU, but for the country's domestic performance and future direction.
Criticism from Brussels has been ramping up for some time and the EU this week moved to recommend a formal warning to Poland that it risks undermining fundamental democratic values at the core of the EU. This unprecedented move was triggered by Poland’s plans to overhaul its judiciary, which has looked increasingly inevitable for some time. We expect the war of words to continue well into 2018, but the support of Hungary (among others) means the Commission’s hands remain tied in terms of the mooted drastic suspension of Poland's EU voting rights. That said, increasing criticism at home and abroad of the Government’s policies may finally be beginning to bite in terms of its impact on levels of foreign investment (and therefore further growth).
With elections due in 2019 and some early signs that a weak and fragmented opposition is beginning to gather momentum, we expect a year of steady but unspectacular growth, with the ongoing tussle between popular but expensive social policies twinned with an authoritarian stance on the one hand, and more investor-friendly rhetoric from the opposition on the other. And all this against the backdrop of constant clashes with Brussels and an increasingly worrying demographic challenge posed by an ageing population and ongoing ‘brain drain’ to foreign markets. Either way, this critical market is at an important crossroads on multiple levels.
2018 FIFA World Cup
Four years on from Brazil’s heartbreak, who will be celebrating at Russia 2018?
Having successfully predicted Brazil’s demise (but not by that scoreline!) nearly 4 years ago, thoughts turn to the World Cup in Russia next June where the traditional mainstays of European football look set go furthest and compete for the title. Argentina — although trying their hardest not to qualify — and Brazil can never be discounted, but their overreliance on individual talent will come up short against the collective strength of Spain, Germany and France, who will all take exceptionally deep squads. Never ones to shirk putting our necks on the line, we predict the Les Tricolores will show exactly why they remain one of the favourites and reclaim the trophy in Moscow.
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