Political Risk’s Taxing Taxonomy
Political risk specialist Eurasia Group reverted to placing emerging market risks at the top of its annual headline list, with the observation that their abundance is “finished” and instability and volatility will again outpace advanced democracies. It divides the countries into three categories based on government capacity to reach the next economic development stage. Latin America as a region is in good shape with standout leaders in Brazil, Colombia and Mexico, and Asia is next with Korea, Malaysia and the Philippines and Turkey also deserves mention. More “problematic” mainstream markets include Indonesia, Thailand, Egypt, Peru and South Africa, with post-Mandela “steady deterioration.” Heavyweight China is in this classification as it “doubles down” on its state fixed investment model likely to exclude foreign companies from the fruits. The last “backsliders” comprise Russia, Ukraine, Pakistan, Argentina, Venezuela and oil-rich Algeria and Libya in North Africa. In the Arab world generally Sunni-Shia and civilian-militant splits are an overarching threat and Syria’s collateral damage has already entered Iraq and Jordan. Egyptian President Morsi’s “ineffective rule” may stir populism and quash moderate secular aspirations, according to the forecast. Among developed economies Japan, Israel and the UK are in the geopolitical crosshairs, as Great Britain’s decades-long fight with the EU will prompt further mutual recrimination. In Europe the upcoming election season could bring a split parliament in Italy, while a Merkel victory in Germany seems assured although crisis action may be on dangerous hold until the event. The continent’s post-debt competitiveness remains elusive, unlike in East Asia where rivalry has shifted to the defense and diplomatic sphere, with China-Japan island disputes and territorial claims also placing Asean members against Beijing. The US has tried to regain influence in Cambodia and Laos after paying little attention since the Vietnam War and refugee era.
In the BRIC contingent India and South Africa could further disappoint with ruling party obstacles and dysfunction. Indian states will attempt to take power from the corruption-tainted center, and the last-gasp reform push will soon be overtaken by full-fledged 2014 campaigning. Fiscal profligacy is due to worsen with agricultural and anti-poverty support programs that could result in demotion to “junk” sovereign status. Sub-Sahara Africa’s positive middle-class direction is offset by the high-spending interventionist drift in the Zuma administration, despite the recent deputy election of business executive Ramaphosa. Technocrat former Finance Minister Manuel left the ANC’s leadership, and social unrest intensifying with a string of mine worker stoppages will linger through 2013. The report concludes with a list of less worrisome trends despite great publicity, including global protectionism and European separation. It notes a series of trade liberalization proposals like the Trans-Pacific partnership and possible US-EU pact. In the periphery Spain has been in the forefront of the breakup debate as the Catalan premier urges independence, but the process will evolve slowly to match GDP growth and bank rehabilitation performance.
