Download Credendo Group Risk Monthly

Asia
Europe
Latin America
MENA
Africa
ASIA
Hong Kong: ‘Umbrella
Movement’ loses momentum but
instability factors remain
Event
Student-led street protests began end September in Hong Kong’s financial district under the impetus of the
pro-democracy ‘Occupy central’ movement. Recently, disruptions have abated and the occupation of major
locations by the so-called ‘Umbrella Movement’ has been much reduced. The key demand of tens of
thousands of demonstrators is to adopt a real universal suffrage at the next elections in 2017, thereby
rejecting Beijing’s plan to continue controlling the election process and if necessary vet CEO candidates.
Another demand is the resignation of current and pro-Chinese CEO Leung whose popularity has
considerably declined during the latest crisis. Except in some circumstances where violence has sometimes
been hard against protesters, notably pro-democracy leaders, police has generally operated with restrain as
to prevent the situation from degenerating.
Impact on country risk
Beijing will not bow under popular pressure and adjust its position on political reform. Therefore, it will
definitely stick to its own version of universal suffrage, hoping not being compelled to use force which would
damage Hong Kong’s image as a haven of political and financial stability. Protests do not seem to have
harmed the economy so far. The longer the crisis, the more uncomfortable the Chinese communist party will
feel, especially in terms of credibility and, potentially, stability in mainland China. However, given broadbased support among young people, teachers or the growing poor population, political instability is likely to
persist until the 2017 deadline, at a varying degree. The reason is that protests go beyond simply contesting
the voting system. Latest rallies are also a reaction to the perceived Chinese invasion and interference, to
progressively eroding democratic rights which could threaten the ‘one country, two systems’ model.
Besides, income inequalities have also reached alarming levels in a more difficult economic context for
many citizens. In the coming weeks, CEO Leung might be sacrificed and be urged to step down but this
would not meet the protesters’ key demand. Therefore, instability factors are to remain and should trigger
further protests in future.
Country risk analyst
Raphaël Cecchi | T +32 2 788 87 45 | E [email protected]
EUROPE
Ukraine: Pro-European won the
parliamentary elections and gas
deal with Russia
Event
The parties of President Petro Poroshenko (Poroshenko’s Bloc) and Prime Minister Arseniy Yatsenyuk
(People’s Front) won the majority of the votes. They are likely to form a coalition with one or two other
parties being the Lviv Mayor’s party ‘Self-Help’ and Yulia Tymoshenko’s Fatherland party. The Opposition
Bloc, a vestige of Former President Yanukovych’s Regions party, is also represented in parliament while, for
the first time since Ukraine’s independence in 1991, the communist party has no representation in
parliament. No vote took place in Crimea and the part of the Donbass region occupied by the separatists. As
a result, 27 seats will be left empty. Turnover was particularly low, partly given the limited voting in the East
of the country. On 31 October, Russia and Ukraine announced that a gas agreement was found. As a result,
Russia has resumed gas supplies to Ukraine which had been cut since June 2014. Despite the gas deal,
geopolitical tensions remain high and hence sanctions on Russia are unlikely to soften soon. On Sunday 2
November pro-Russian separatists organised elections in eastern Ukraine that were not recognised by the
European Union.
Impact on country risk
The recent elections give a strong mandate to the pro-European and pro-reforms parties that are expected
to rapidly form a new government. This should in principle enable the new government to adopt badly
needed (sometimes unpopular) reforms. However, despite the willingness of the government to implement
reforms, adoption and implementation of reforms is likely to be slow and difficult given the political and
economic difficulties that the new government is facing. Indeed, the economy is in recession, the banking
sector very weak, foreign exchange reserves and the hryvnia are under pressure, external debt and debt
services are very high. In this context, the country remains highly dependent on financial support from the
IMF and the European Union. On the political side, geopolitical tensions remain elevated; ceasefire agreed
on 5 September in Minsk is still broadly in place but fragile. Expectations for change are very high but
structural reforms are unlikely to be adopted soon given the vested interests, weak institutions and a
possible return to continued political confrontations that characterised the government formed after the 2004
Orange revolution.
Country risk analyst
Pascaline della Faille | T +32 2 788 87 45 | E [email protected]
LATIN AMERICA
Bolivia: Evo Morales cruises to
third consecutive presidential
term
Event
In a general election held on 12 October, incumbent President Evo Morales and his leftist ‘movement
towards socialism’ (MAS) secured a landslide victory. The charismatic Bolivian leader, who has been in
office since 2006 received the support of 61.4% of the electorate, thus crushing runner-up Samuel Doria
Medina of the centre-right ‘national unity front’ (UN), who won 24.2% of the votes. In Congress, the MAS
managed to retain its two-third ‘supermajority’. Key ingredients to the new electoral success include a track
record of high economic growth and poverty reduction (GDP growth has averaged 5% since 2006 and this
has in turn allowed for a substantial increase in pro-poor public spending), Evo’s personal appeal (his
farmer background and indigenous origins are well-perceived in Bolivia, a largely agricultural society with a
55% Amerindian population) and opposition weakness (as evidenced by Evo’s first-ever election win in the
department of Santa Cruz, a traditional opposition stronghold).
Impact on country risk
Earlier this year, Credendo Group upgraded its medium-to-long-term political risk classification for Bolivia
from category 6 to category 5. This was done to reflect that in recent years, both political stability and
macroeconomic fundamentals have greatly improved. Prudent policy-making has crucially contributed to this
achievement, and in light of the election outcome, is unlikely to be reversed in the years to come.
Challenges do prevail, however. Primarily, with falling commodity prices, the need to diversify Bolivia’s
commodity-dependent economy will become more pressing. To this end, the government has proposed an
ambitious industrialisation program. To attract the necessary foreign investments, it has improved legislation
and vowed to refrain from making new expropriations. Yet given past experience as well as pressure
groups’ continued advocacy for state interventionism, investor confidence along with capital inflows are
expected to remain subdued in the near future.
Country risk analyst
Sebastian Vanderlinden | T +32 2 788 85 13 | E [email protected]
Brazil: Four more years for
Dilma Rousseff, but with a weaker
mandate
Event
On 26 October, Brazilian President Dilma Rousseff of the centre-left Workers’ Party (PT) won re-election by
the narrowest of margins. She secured 51.6% of the second-round votes, merely 3% more than her
opponent, Aécio Neves of the centre-right Brazilian Social Democracy Party (PSDB). Neves had trailed
Rousseff by 8% in the first round of the election, and thus clearly benefited much – though not enough –
from the endorsement of Marina Silva, the candidate for the Brazilian Socialist Party (PSB), who was
eliminated in the first round with 21.3% support.
Impact on country risk
Investors negatively received the prospect of a fourth consecutive PT term, as they had hoped for the PSDB
to bring about more pro-business policies (in particular a reduced tax burden and less state intervention in
the economy) and renewed adherence to macroeconomic orthodoxy (the ‘tripod’ of credible inflation
targeting, fiscal restraint and a flexible exchange rate). The day after the presidential poll, the benchmark
index of the São Paolo stock exchange fell by 2.8% and the real depreciated to its lowest US dollar value
since May 2005. Obviously, financial market sentiment alone does not explain the tight election outcome.
The desire for change is just as strong among the urban middle class, as evidenced by the 2013 mass
protests against the rising cost of living, widespread corruption, and subpar quality of public services and
infrastructure. Here too, investor confidence will be key, however. Indeed, without more investment (now
significantly below the 20%-of-GDP threshold) it will prove difficult to boost growth (expected to dwindle to
0.3% in 2014 and 1.4% in 2015) in a sustainable way, that is, without fiscal and monetary expansion that
would fuel public debt (already on an upward trend) and inflation (currently above the 6.5% ceiling of the
central bank target range). Moreover, higher growth will be necessary not only to meet middle-class
demands, but also to safeguard pro-poor public spending and low unemployment, the things on which the
election-winning high level of PT support among lower classes depends. In a polarised Brazil, Dilma
Rousseff has four years to prove her critics wrong and get the economy going again.
Country risk analyst
Sebastian Vanderlinden | T +32 2 788 85 13 | E [email protected]
MENA
Egypt: Likelihood of IMF
agreement increases
Event
During last month’s IMF-World Bank annual meetings, it was stated that the Egyptian authorities have
requested an Article IV consultation mission from the IMF, which expects the mission to take place in the
course of November. Moreover, the IMF recognised that some economic stabilisation has been achieved
and that fiscal consolidation has started, which could support investor confidence, but also that ‘more needs
to be done to create an economic environment for growth and jobs going forward’.
Impact on country risk
The recent statements indicate that the likelihood of the conclusion of an IMF loan in the coming year is
increasing. Such a loan – and the economic policy program it entails – would free IMF and bilateral financial
support. Moreover (and perhaps more importantly) it could provide some comfort for foreign investors with
regard to Egypt’s longer term financial-economic stability. Indeed, Egypt remains very dependent on
financial support from friendly GCC countries, which amounted to an estimated USD 20 billion during fiscal
year (FY) 2013/14. This support was vital to stabilise the country’s ailing foreign exchange reserves
(currently covering around 2.5 months of imports) and to mitigate its very large public deficit, from 14% of
GDP in FY 2012/13 to 12.2% in FY 2013/14 (after grants, which amounted to more than 4% of GDP) but it
is not a long-term solution. Reforms of energy subsidies and taxation have already started in order to
address Egypt’s fiscal and external imbalances, but more measures will be required. This could still incite
resistance in different segments of the population, but for the time being, President Sisi’s rule looks
sufficiently solid to overcome such opposition.
Country risk analyst
Daan Rowies | T +32 2 788 87 85 | E [email protected]
Kuwait: MENA oil exporting
countries: resilience to oil price
shock
Event
Over the past months, global oil prices have been hit by a significant downward shock. Mid-October, Brent
crude oil prices had fallen by more than USD 30 since their peak of USD 115 mid-June, hitting a near fouryear low. In the past months, the upward price effects of the escalation of severe security issues in Libya
and Iraq and the conflict between Russia and Ukraine were outweighed by (so far) resilient oil production in
Libya and Iraq, a strengthening dollar and weaker-than-expected worldwide economic performance.
Meanwhile, US production of hydrocarbon products continues to grow, largely thanks to a boom in nonconventional oil and gas production.
Impact on country risk
Lower international oil prices reduce the import bill of energy importing countries. However, energy exporting
countries in the Middle East and North Africa (MENA), which houses the world’s largest conventional oil and
gas reserves, see their incomes shrink as energy revenues represent up to 95% of total exports and public
revenues. Kuwait and Saudi Arabia are in the best position to deal with a fall in oil prices. In this additional
assessment, an in-depth analysis is provided of the ability of MENA’s net oil and gas exporting countries to
deal with negative oil price shocks.
Country risk analyst
Daan Rowies | T +32 2 788 87 85 | E [email protected]
AFRICA
Mozambique: Real tests lie
ahead for new President
Event
On 15 October, the ruling party (FRELIMO), in power since independence, won the presidential and
legislative elections, clouded by allegations by international observers of vote rigging and manipulation.
FRELIMO’s traditional opponent since civil war, RENAMO, nevertheless managed to increase its number of
seats in parliament and called for dialogue instead of violence as a reaction to the disputed result. The
newly elected President Nyusi gained 56.8% of the vote despite growing dissatisfaction with the ruling party
in society at large, and RENAMO’s presidential candidate won 36.8%. The result for RENAMO is quite
rewarding notwithstanding their two-year retreat from the political scene and their campaign of small-scale
armed attacks in central Mozambique that ended with the September peace agreement. The MDM
(Democratic Movement of Mozambique) fared rather poorly except in urban areas.
Impact on country risk
Should FRELIMO refuse talks with RENAMO in the cabinet formation, violent attacks will become more
likely. However, RENAMO does not have the capacity to launch a large-scale rebellion. The threat of
maintaining violence could deter tourist and investor confidence, thereby obstructing developments in the
nascent natural gas industry and associated government revenues. The stakes for holding power are high
with natural resource wealth seeping in and huge offshore gas fields coming on stream in the next five
years. Henceforth, rifts inside FRELIMO are arising between ‘reformers’ and ‘enrichers’, while RENAMO will
push for a greater share of wealth. Mozambique could become a textbook case of the ‘natural resource
curse’ if the upcoming economic developments do not take place in a transparent manner and moreover
result in improved livelihoods of the population. Indeed, real tests lie ahead for the new president.
Country risk analyst
Louise Van Cauwenbergh | T +32 2 788 86 62 | E [email protected]
Zambia: After months of health
speculations, populist President
Sata dies
Event
President Sata died on 29 October at age 77, after receiving treatments for an undisclosed illness in the UK.
Sata won the presidential elections in 2011 with the promise of tackling corruption and creating jobs and
prosperity. However, his term was tarnished by crackdowns on the opposition and deteriorating external and
fiscal imbalances with large public and private investment costs and a lower copper price. He pushed
through some controversial laws including capital controls, tax increases and a 45% surge in public wages.
As of 2012, the local currency came under pressure and hit record lows in 2014. The central bank’s efforts
to keep the kwacha stable led to foreign exchange reserves dropping below the 3-month import cover level.
Impact on country risk
It is still not clear who will succeed the President. After Sata left for treatment, Defence Minister Edgar Lungu
was named acting president. Nevertheless, Vice-President Guy Scott is constitutionally most likely to
become acting president in the interim period of (maximum) 90 days before presidential by-elections.
However, Scott is of Scottish descent and is therefore unable to succeed Sata as president with full
executive authority. Furthermore, the Patriotic Front (PF, President Sata’s party) is plagued with
factionalism, making it unclear who will be selected as Presidential candidate. During the campaign period
for the presidential by-election, there will be an increased risk of violence between opposition and security
forces and an opposition win would moreover increase the risk for government contract cancellations.
Should the PF win the by-election, the risk for contract renegotiation or cancellation will be moderate and the
introduction of pro-business policies will become more likely after Sata’s legacy of interventionist policies.
What’s more, the IMF support requested by the government in June to help control the imbalances and
stabilise the kwacha, might be postponed until after the election. Undoubtedly, a period of uncertainty is
coming up, but in the longer run Zambia might retrieve its investor-friendly reputation and fast-growing
dynamics.
Country risk analyst
Louise Van Cauwenbergh | T +32 2 788 86 62
Disclaimer: Credendo Group has used its best endeavours to ensure that all the information, data, documentation and other material (copy and images) in
this report are accurate and complete. Credendo Group accepts no liability for errors or omissions. The views expressed herein are the author's personal views
and are not intended to reflect the views of Credendo Group. Credendo Group will not be liable for claims or losses of any nature arising directly or indirectly
from use of the information, data, documentation or other material from this report. The texts and illustrations can be printed for private use; distribution is
permitted only after authorisation by Credendo Group. Quotations are permitted provided that reference is made to the valid source. Reproductions are
permitted provided that reference is made to the valid source, unless for commercial aims, in which case reproduction, even with source indication, is not
permitted.