February 3, 2020

WEEKLY POLITICAL COMPASS

BY Teneo Macro

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( 7 mins)

China might continue to intervene in markets to prevent excessive falls in benchmark indexes. Both the EU and the UK have presented their plans for trade talks. Argentina’s Buenos Aires province could enter default this week. South Africa’s currency is bracing for a crucial month. Meanwhile, Sri Lanka’s prime minister will visit India, France’s president is travelling to Poland, Brazil will regulate the establishment of quarantines, and the main opposition party will boycott elections in Cameroon.

CHART OF THE WEEK

 

WEEKLY POLITICAL COMPASS 1

The European Commission will this week publish a review of its “two-pack” and “six-pack” reforms. In the heydays of the Eurozone crisis, these were intended to formalize domestic reform efforts, mainly focused on boosting countries’ global competitiveness. The development of current account balances demonstrates how south European economies have begun to catch up with their northern peers, but it also shows that structural differences remain. These very differences will likely ensure that, absent a major crisis, governments will continue to sit on their hands rather than embarking on bold reform or build-out programs.

WHAT TO WATCH

China

New cases of coronavirus outside the outbreak’s epicenter in Hubei province declined for two separate days through 2 February. This has offered tentative hopes that the epidemic is reaching its peak. However, Chinese onshore financial markets in Shanghai and Shenzhen dropped sharply following the Lunar New Year holiday recess, which was extended due to the virus. Though the drop will largely be a catch-up response to the fall in global markets over the previous week, China’s “national team” of state-owned institutional investors could continue to intervene modestly this week to prevent excessive falls in benchmark indexes.

EU/UK

Both the European Commission and PM Boris Johnson presented their plans for the trade talks on 3 February. Rejecting EU “alignment”, the UK is once again drawing red lines; but once more, the UK remains unclear about what this is supposed to mean in practice. The UK already outperforms many of the basic standards the EU will insist on in the context of level playing field talks. Just like in the withdrawal negotiations, the immediate risk is a loss of time as the UK tries to figure out how exactly it wants to position itself regarding its future relationship with the EU. Meanwhile, Commission President Ursula von der Leyen is expected to travel to Washington for talks with US President Donald Trump, amid continued fears in Brussels that the US election year could see the imposition of new tariffs on European goods.

Argentina

4 February is the new deadline for bondholders to accept a proposal by the Buenos Aires provincial government to defer an amortization payment originally due 26 January to May. Provincial governor Axel Kicillof early today, 3 February, sweetened the deal by offering to pay immediately 30% of the capital payment due. If there is no agreement – and assuming there is no last-minute U-turn from Kicillof or a bail-out from central government – the province will enter default on 5 February. A default by the country’s most economically important province would inject fresh uncertainty into the incipient national debt renegotiations. President Alberto Fernandez is this week continuing his European tour in an attempt to drum up support for Argentina in the International Monetary Fund (IMF).

South Africa

Markets and the rand will brace for a critical month. The currency, which briefly broke through ZAR15/USD last Friday, is under pressure not only from exogenous factors like the coronavirus, but also from domestic pressures including renewed power shortages, which may worsen according to new Eskom CEO Andre de Ruyter. While high-profile court battles may trigger political noise, the main concerns will be economic and fiscal travails. President Cyril Ramaphosa will struggle to provide reform evidence in his State of the Nation Address on 13 February, while Finance Minister Tito Mboweni must deliver fiscal stabilization against all odds in his 26 February budget or risk triggering the loss of South Africa’s final investment-grade credit rating.

ON THE HORIZON

ASIA

Sri Lanka

Prime Minister Mahinda Rajapaksa will visit India on 8 February. This will be his first foreign trip as prime minister. Rajapaksa has had a difficult relationship with India especially after he extended concessions in investment and trade to China and accused India of tampering with the last presidential elections that led to his defeat. He is an interim prime minister and elections are expected on the island in March-April.

Southeast Asia

Political and public scrutiny of government plans to protect their local populations against the novel coronavirus are likely to continue. This might even intensify in the coming weeks, because the perception is still of the continuous rise in cases and fatalities. Should the health crisis continue, the next focus could be on helping affected sectors, from exporters to tourist operators, cope with the disruptions in trade and travel.

EUROPE

Hungary

The European People’s Party (EPP) is expected to extend the suspension of Fidesz during its political assembly in Brussels on 3-4 February. The suspension will likely continue until Fidesz addresses rule of law concerns and tones down its anti-EU rhetoric at home. Despite calls by new EPP leader Donald Tusk to expel Fidesz from the center-right bloc, the European party appears to lack unity to implement any harsher measures. Considering that Fidesz’s influence within the largest political bloc in the European Parliament will remain significantly constrained for the foreseeable future, it might eventually pull out from the EPP voluntarily and join other conservative groupings.

Poland

On 3-4 February, French President Emmanuel Macron will visit Poland, the first bilateral meeting on the highest level since 2015. The visit should be viewed as Macron’s attempt to establish a closer dialogue on a variety of bilateral and EU issues, including security and defense, taxation, climate change, the next EU budget and the rule of law. The Polish government will likely use Macron’s visit to downplay EU concerns over the controversial judiciary reforms pushed by the ruling Law and Justice party.

LATIN AMERICA

Brazil

This week, when Congress is back from recess, will be dominated by the need to pass an executive order that regulates the establishment of quarantines. 55 Brazilian citizens in Wuhan will be evacuated once the order is approved, which is expected to happen on the same day it arrives in Congress. In the absence of an executive order that permits quarantines, they could be contested in the courts. The week may also serve to clarify reform priorities at a time when tensions seem to have decreased between President Jair Bolsonaro and Congressional leaders, particularly House Speaker Rodrigo Maia.

MIDDLE EAST AND AFRICA

Cameroon

Legislative and municipal elections on 9 February will be boycotted by the main opposition party. The Cameroon People’s Democratic Movement (CPDM) of long-term president Paul Biya, which currently holds 148 out of 180 seats in the National Assembly, is certain to defend its absolute majority. The main opposition party, the Cameroon Renaissance Movement (CRM) of Maurice Kamto, will boycott the vote in protest of president Biya’s re-election in 2018, which was marred by fraud and irregularities. Against this background, voter turnout and the conduct of the polls – especially in the restive Anglophone region – will be as important for the ruling party as the actual results.

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