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June 8, 2020

WEEKLY POLITICAL COMPASS

BY Teneo Macro

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( 6 mins)

China might suspend debt repayment obligations for some low-income countries. In Brazil, the Covid-19 death toll and political polarization continue to increase. The IMF board is likely to approve a stand-by arrangement for Ukraine. Meanwhile, Malaysia’s national assembly has ratified a free trade agreement with the EU, the UK could bring forward the reopening of bars and restaurants, regime-controlled institutions continue gaining power in Venezuela ahead of December’s legislative election, and South Africa’s government faces legal battles over its lockdown.

WEEKLY POLITICAL COMPASS 1

People in developed economies appear less worried about losing their job than those in emerging markets. For instance, in France, Germany, the UK and the US only around 20% of respondents are worried about their job situation, while in Mexico, Malaysia, the Philippines and Thailand the percentage raises to around 60%, and even 80% in Indonesia. At least two factors may help to explain this phenomenon. The first is the larger size of the informal sector and other precarious, unstable forms of employment in emerging markets. Secondly, most developed economies are using short term work (STW) schemes, which compensate for a temporary loss of working hours through (partly) state-sponsored wage support. This makes the phasing-out of respective support scheme an even more crucial signpost to watch over coming weeks and months.

WHAT TO WATCH

China

China has agreed to suspend debt repayment obligations for 77 developing countries hit by the coronavirus pandemic, the Ministry of Foreign Affairs announced on 7 June. A ministry official said China was fulfilling the commitment on debt relief for low-income countries that China endorsed as a member of the G20 in April. China also continues to seek “fast track” border entry arrangements with other countries, the official said, as the country moves gradually to loosen controls on inbound travel. Last week the government also announced an increase in the number of foreign airlines allowed to resume flights to China.

Brazil

Brazil may overtake the UK this week as the second country in the world in number of deaths. This comes at a time when an army general with no medical training was confirmed as the third health minister since the beginning of the pandemic. This week will also see much debate regarding the government’s controversial decision to delay the daily release of official data on the outbreak until after prime-time TV news programs – seemingly yet another peculiar retaliatory action against those who report about the pandemic. In addition, state governments who have started to lift containment measures have been criticized strongly by epidemiologists. Lastly, politics this week will also be a function of an anti-Bolsonaro, pro-democracy movement which took to the streets this Sunday, 7 June, in bigger numbers than last week despite the worsening of the pandemic.

Ukraine

On 9 June the IMF board is expected to approve the 18-month USD 5bn stand-by arrangement aimed at helping Ukraine to weather the economic consequences of the Covid-19 crisis. Ukrainian authorities expect to receive the first tranche of around USD 2bn by the end of June. If approved, the agreement will shore up the country’s public finances and provide important policy anchor for future reforms.

ON THE HORIZON

ASIA

Malaysia

The government announced on Sunday that most economic activity would be resumed and inter-state travel allowed starting 10 June. Social, education and religious activities will still have some restrictions, as well as large sporting events, theme parks and night clubs. International travel will still be prohibited.

Sri Lanka

A decision on the dates for the parliamentary elections will be announced by the election commission this week.Earlier scheduled to be held on 20 June, the polls were postponed indefinitely because of the Covid-19 pandemic. A coalition led by Prime MInister Mahinda Rajapaksa is expected to win the elections.

Vietnam

On Monday, the national assembly ratified a free trade agreement with the EU. This is expected to reduce or eliminate tariffs on 99% of the goods trade between the two economies over the next ten years. The trade deal will take effect in July and be the second EU agreement in the region after Singapore.

EUROPE

Italy

The next round of regional and local elections is expected to take place on a single “Election Day” on 20 September. The decision on when to hold these elections is politically controversial and is set to stoke tensions between Rome and regional governments. Seven regions and 1,049 municipalities will go to the polls, which will be an important political test for both governing and opposition parties.

UK

The government might this week decide to bring forward the reopening of bars, pubs and restaurants. Non-essential shops are due to reopen as of next Monday, 15 June, and pubs could now follow one week later. At the same time, the virus reproduction rate seems to remain high in some local areas, while testing and local tracing capabilities remain dubious. The risk is that a premature reopening leads to a second wave, again challenging the country’s still shaky public health capacities.

LATIN AMERICA

Venezuela

The political battle over the National Electoral Council (CNE) will continue following the decision late last week by the Supreme Court (TSJ) to take over the CNE nomination process. On 5 June, the TSJ declared that the opposition-dominated National Assembly had failed to name new CNE board members and therefore was in contempt. The CNE, which is currently controlled by regime loyalists, will be in charge of legislative elections that are supposed to take place in December. The Court is likely to take over the nomination process and appoint a new slate of loyalists in order to ensure an election “victory” in December by manipulation and fraud; under the regime’s likely plan, a cosmetic, politically pliant opposition will be tolerated but most/all genuine opposition parties – and opposition leader Juan Guaido – will be voted out.

MIDDLE EAST AND AFRICA

South Africa

The government faces legal battles over its lockdown regulations. While South Africa’s pandemic risk level was reduced to “3” as of 1 June, specific regulations have proven highly controversial. The Ramaphosa administration could soon be forced to review its regulations unless it wins an appeal against a recent Pretoria high court judgment declaring the Level 3 and 4 regulations “unconstitutional and invalid.” The appeal is expected this week, as is a court case challenging the rationality of a ban on the sale of tobacco products, which has contributed to the gaping hole in revenue collection and fueled illicit trade.

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