Regional Rivals’ Flagrant Fleeting Flip
Despite shared global interest rate, geopolitical and deleveraging risks financial market role reversals in early January could set the regional tone, with Europe in the forefront after Poland’s surprise S&P one-notch sovereign downgrade with negative outlook battering stocks and bonds as Hungary’s outperformance continues with its likely return to prime status this year. The Law and Justice Party after taking power in parliamentary elections called the decision “dishonest” as its political and economic intervention platform has come under fire from foreign investors and the European Commission. It plans a special bank transactions tax and compulsory Swiss franc-zloty mortgage conversion which could cause heavy system losses at the same time additional divestiture of state ownership stakes is on hold. Consumption as the main GDP driver is likewise in the crosshairs with new levies for supermarkets to help fund higher pension and wage promises while keeping within the constitutional public debt limit. Government company chief executives have been replaced with party loyalists, and a bid to extend control with its absolute majority over the media and courts has prompted Brussels criticism and investigation that Warsaw dismisses as “misunderstanding.” Fitch Ratings has not changed its stance but admonished the administration’s “confrontational policies” as the contingency credit line with the IMF in place since 2008, granted on pre-qualified fiscal, monetary and structural reform excellence is due for review. Prime Minister Szydlo is considered a figurehead and the Deputy Finance Minister is often paraded out as a former banker to lend credibility but has instead alienated former colleagues.
In contrast Hungary will come in under the EU’s 3 percent of GDP budget deficit sanctions trigger, and major privatizations are foreseen to revive the stock exchange recently re-acquired from Austria. Elsewhere in Europe Turkey is getting another look after the lira and equities were down one-quarter and one-third respectively in 2015. The Syrian and Kurdish militant wars remain a deterrent, but the Prime Minister stresses an economic reform agenda after the ruling AKP reclaimed its election dominance. The fiscal and current account deficits slimmed and growth this year is projected above 4 percent for a regional standout. In exchange for hosting refugees, Ankara will receive EU aid and easier visa-free travel, and Cyprus reunification may be in the cards after four decades, with heads meeting from both sides and Athens also pushing reconciliation. Despite its friendlier approach to the dispute, Greece has still not won over investors after its worst MSCI 60 percent stock market decline. The troika still has to approve detailed pension cuts and bank recapitalization programs under enduring exchange controls, as Syriza tries to maintain two-seat legislative sway.
In Asia, Indonesia and Thailand may be gaining favor with infrastructure stimulus and cabinet reshuffling, although the latter’s military has indefinitely delayed its departure pending another constitutional rewrite. The latest terror attack against coffee shop civilians in Jakarta prompted a tough response from President Jokowi in comparison with previous reticence. In Latin America Argentina is a sudden darling after President Macri floated the peso, slashed farm export taxes, and reopened negotiations with holdout bond funds and retail associations at home and in Europe. The Finance Ministry moved separately to restart cross-border commercial credit lines with the tentative thaw.
