Peru’s new president faces hard reality. MSCI announces possible market redesignations. Spain readies for new elections. Kenyan opposition marches against government order. Economic Forum shows potential political shifts in Latin America. All in the Weekly Risk Outlook.
Peru’s new president will face hard political reality with Fujimori congress
The victory of Pablo Pedro Kuczynski over Keiko Fujimori, the leader of Fuerza Popular (FP) – the strongest political party in the country – in the presidential election came mainly thanks to the anti-vote against Fujimori. The newly elected President, who won by a slim margin of less than 0.5%, will be much less lucky in his first weeks as he will have to face the FP-controlled Congress.
However, the parties of the two presidential contenders have very similar market-friendly economic agendas that could lead to some form of cooperation. Moreover, an internal split in the FP between Keiko Fujimori and her brother Kenji, who did not vote for her and plans to run for the presidency in 2021, could play into the cards of Kuczynski. He would still have to garner the support of the remaining leftist and centrist parties to pass anything through the legislature.
While his pro-market initiatives could impulse the stagnating Peruvian economy, it will be extremely difficult, yet not impossible, for the new government to gain support across Congress. In the long term, his plans for tax reductions and tax breaks for SMEs could find backing within the FP and proposals for minimum wage increases and development in rural areas might be supported by the leftist parties. Yet, what might break any fragile political deals are planned new mining projects that have generated deadly unrest across rural areas in the past. The risk of political paralysis and of postponing of necessary reforms will continue to threaten any economic improvements.
MSCI to announce possible redesignation of 3 major markets
On Tuesday, the equity portfolio and stock market index firm MSCI will announce whether it will change its designation of the market status of China, Pakistan, and Peru as part of its 2016 Annual Market Classification Review. In the case of China, a specific subgrouping of shares may be designated as emerging market rather than its current standalone status. In the case of Pakistan the MSCI may upgrade its country ranking from a frontier to an emerging market, and in Peru, the firm may downgrade the country from emerging to frontier.
Although the definition of what constitutes a “frontier” market distinct from an emerging market can often be hazy, they are typically understood to be developing economies that are “on the way up,” and may have limited liquidity in their markets. Subsequently, a reclassification of Peru as a frontier from its previous position as an emerging economy could discourage investment or encourage more risky investments. It would also join Argentina as one of the two countries in the Americas designated by the MSCI as frontier (Brazil, Chile, Colombia, and Mexico are classified as emerging markets, while the United States and Canada are developed economies). In contrast, the upgrade of Pakistan from a frontier to emerging market would allow it to join the ranks of wealthier Middle Eastern/North African economies like Qatar, the UAE, Egypt, and Saudi Arabia and could encourage investors that a country that has historically struggled with poverty and political instability could become, at least from a market perspective, a safer bet.
MSCI is not, however, the only source market watchers turn to on this issue and there are some divisions regarding classification. Within the FTSE index, which differentiates emerging markets between advanced and secondary, Pakistan and Peru are both classified as secondary emerging markets, while China A share may be reclassified as secondary emerging.
Spain gets ready for a do-over election as party leaders debate
On Monday, the leaders of Podemos, the PP, PSOE, and Ciudadanos will hold a televised debate ahead of the June 26 parliamentary election, the result of the failure of the 4 parties to forge between them a workable parliamentary majority. Recent polling has suggested that Prime Minister Rajoy’s PP and the new Podemos-United Left coalition (Unidos Podemos) have slowly made gains while the traditional left party PSOE and the center-right anti-corruption Ciudadanos have lost support.
In fact, while all party leaders will need to present their case to the Spanish people, pressure may be particularly strong on PSOE leader Pedro Sanchez to deliver both a strong performance and a clear rationale for Spanish voters as to why they should select the PSOE over Unidos Podemos to be the voice of the Spanish left. Unidos Podemos leader Pablo Iglesias has already indicated his party would be ready to work with the PSOE to craft a leftist parliamentary majority after the June 26 elections should both parties succeed in collectively earning enough votes and seats. For the PSOE, every vote will count; a Unidos Podemos-led leftist government would likely look and act demonstrably differently from a PSOE-led government if it means Iglesias rather than Sanchez accedes to the prime ministership.
Even if Prime Minister Rajoy’s party emerges as the top vote and seat-getter, and despite suggestions that a PP-Ciudadanos coalition may be in the offing, the underlying dynamics for his party are unlikely to change; a Ciudadanos condition for joining a PP-led government would likely demand that Rajoy step down as prime minister, which he refused to do during previous coalition talks. Nothing in that dynamic has shifted significantly, implying that even if the overall conservative votes outnumber the liberal ones, a stalemate could end up being the result again if the liberal parties can’t forge a cohesive majority.
Kenyan opposition to march in defiance of government order
Beginning Monday, the main opposition party of Kenya, the Coalition for Reforms and Democracy, has stated it will hold talks with the Government on reforming the Independent Electoral Boundaries Commission, backing off a previous threat to hold protests in defiance of an order by the Kenyan Interior Secretary Joseph Nkaissery outlawing protests after the death of 5 people from previous April rallies by the CORD. These talks appear to be focused on two major issues for the CORD: resolving a dispute between opposition forces and President Uhuru Kenyatta’s government regarding the Independent Electoral and Boundaries Commission, and mobilizing CORD supporters and potential supporters ahead of the 2017 elections. On the IEBC front, the Commission came under disrepute following a separate British report that reviewed a series of emails which suggest that members of the Commission may have been bribed or open to bribery.
The subsequent controversy has led to questions from the CORD that the upcoming 2017 elections may be tainted by the independent elections tribunal, and have called for significant reforms of the government body. In terms of the 2017 elections, President Uhuru Kenyatta and his center-right Jubilee coalition is likely to have a tough rematch against center-left CORD leader Raila Odinga. Several have suggested that these issues are likely to come to a head, and that the controversies swirling around the IEBC could make the race much more competitive. Any backtracking on reforming the IEBC by the Kenyatta administration has the potential to backfire and further mobilize CORD voters and activists.
Economic Forum in Colombia could highlight political shift in Latin America
On Thursday, the World Economic Forum will host its Latin America summit in Medellin, Colombia. The summit, which will include both Colombia’s president Juan Manuel Santos and Argentine president Mauricio Macri, is slated to discuss ending the narcotics cycle, protecting public-private collaboration, regional integration, energy and growth potential, and the digital economy.
The direction of fora like these in South America could have an increasing right-leaning and market-friendly tilt, due in part to a steady shift across Latin America away from left-leaning, frequently populist movements in favour of more market-friendly, center-right heads of state and legislatures. In Brazil, the collapse of the coalition between the Workers Party (PT) and centrist PMDB, with the impeachment and temporary removal of PT President Rousseff, is likely to move the Brazilian policy space to the right. In Argentina, the election of center-right PRO Buenos Aires mayor Mauricio Macri to follow left-leaning populist firebrand Christina Fernandez de Kirchner has shifted Argentine politics rightward and following Venezuela’s Assembly election last year, the anti-Maduro MUD coalition has created a significant right-leaning counterbalance against the Maduro administration and the Supreme Court. Despite the shift right, the left in South America still has significant strength — President Bachelet in Chile for example, though her own reform efforts have slowed.
The GRI Weekly Risk Outlook (WRO) provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, the WRO presents a series of potential upside/downside risks, shedding light on how political decisions affect economic outcomes.
This Weekly Risk Outlook was written by GRI analyst Brian Daigle.