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July 13, 2020

WEEKLY POLITICAL COMPASS

BY Teneo Macro, Luis Cornago

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EU leaders will try to agree on the recovery fund. Localized lockdowns might be ahead in the Philippines. South Africa’sgovernment has extended the state of disaster. Poland’s president retains his post. Cote d’Ivoire’s vice president has resigned. Meanwhile, flood alert levels have been raised in China, talks resume between Serbia and Kosovo, Chile’spresident is trying to shore up his ruling coalition, and the affair surrounding Nigeria’s suspended anti-graft chief continues.

WEEKLY POLITICAL COMPASS 1

The debate around some countries’ low revenue capacity will likely gain prominence over the medium term, once the impact of the economic downturn on public coffers will become more obvious. Developed economies tend to collect a higher proportion of revenue than emerging market countries where the informal sector is larger and tax administrations are often less efficient. Meanwhile, corporate income taxes have decreased over the past two decades, particularly in advanced economies. Against this background, the Covid-19 crisis might accelerate some of the political trends that were already unfolding before the pandemic. This could include the demand for higher taxation on high-income earners, large corporations (including technology firms), on wealth, and on activities with a negative climate and environmental impact.

 

WHAT TO WATCH

EU

Heads of state or government will meet for a special European Council on 17-18 July. The goal for the first face-to-face meeting since the outbreak of the pandemic is to reach agreement on a new seven-year macro budget, including the proposed pandemic recovery fund. Especially the Netherlands continue to insist on loans rather than grants, however. To achieve a deal before the summer break, another summit might therefore be required. Meanwhile, the expectations for potentially headline-grabbing announcements are limited in the run-up to the ECB’s 16 July governing council meeting.

Philippines

Reports of some Metro Manila hospitals nearing capacity, including the larger private ones and several government-run, may lead to localized lock-downs in the next two to three weeks. While this would not be as broadly damaging as the island-wide lockdown imposed in March, the persistent increase in cases (and with it the perception of sustained community transmission) and the disruptions in movement caused by these local lockdowns mean that that the economic recovery will proceed slowly at least early in the third quarter.

South Africa

The government has extended the national state of disaster until 15 August, as South Africa’s Covid-19 caseload surged to the ninth highest worldwide. While the government had little political and economic room to revert back to a “Level 5” lockdown, on 12 July President Cyril Ramaphosa announced new restrictions that will apply to the current “Level 3” regulations, including the reintroduction of a night-time curfew and alcohol ban. In addition to escalating public health risks, fresh power shortages also underscore South Africa’s bleak economic prospects. Finally, movement is also expected regarding South African Airways (SAA), with creditors due to vote on the business rescue plan on 14 July.

Poland

President’s Andrzej Duda’s victory in the second round of the presidential election paves the way for the United Right coalition to remain in power until 2023. The government is expected to continue with its controversial reform of the judiciary and could seek greater control over private media. Tensions with the EU are expected to remain high. However, Duda might prove less cooperative with the PiS during his second term in office, while divisions within the ruling camp remain a pertinent risk to government stability.

Cote d’Ivoire

Vice President Daniel Kablan Duncan resigned, the presidency confirmed on 13 July. Duncan had allegedly asked to resign for personal reasons already back in February. However, the timing of the announcement, only days after the sudden death of Prime Minister Amadou Gon Coulibaly, raises suspicion that it could be linked to behind-the-scenes wrangling over who should succeed Coulibaly as the ruling party’s candidate for the 31 October presidential election.

 

ON THE HORIZON

ASIA

China

China raised its flood response alert to the second-highest level on 12 July, as eastern and central China’s Jiangsu and Jiangxi provinces experienced severe flooding. The People’s Liberation Army has been dispatched to Jiangxi’s Poyang county to reinforce the banks of Lake Poyang. Since the beginning of July, 212 Chinese rivers have exceeded alert levels, while 19 have hit historically high levels. Overall this year, floods have damaged 3.5mn hectares of farmland, destroyed 28,000 homes, and wreaked economic damage equal to Rmb82bn (USD11.8bn). Authorities have attributed the floods to unusual weather conditions but also cited long-term changes in climate patterns as a contributing factor.

 

EUROPE

Serbia

After preliminary talks last week, the EU-mediated talks between Kosovo and Serbia on the normalization of bilateral relations will continue on 16 July. Meanwhile, Serbian President Aleksandar Vucic must prevent a further surge of Covid-19 without reinforcing the protest momentum. Public demonstrations do not pose an immediate risk to government stability, as they lack organization and backing from political movement. However, public tensions remain high and the risk of continued violent protests is significant.

 

LATIN AMERICA

Brazil

Three executive orders could see a vote in the Senate this week. The first relaxes labor-related requirements during the pandemic. The second extends BRL 40bn (USD 7.3bn) to SMEs with annual revenues of up to BRL 10bn (USD 1.9bn) in special-condition financing for payroll and labor-related debts in exchange for job security for the duration of the credit. The third would facilitate credit by means of card machines that could reach BRL 80bn (USD 15bn) to enterprises with annual revenues of up to BRL 300mn (USD 56mn).

Chile

This week, President Sebastian Pinera will be looking to shore up the governing Chile Vamos (CV) coalition.Several deputies on 8 July broke ranks to vote for an opposition initiative that would allow people to withdraw up to 10% of their savings from the private pension (AFP) system. The controversial initiative still has some way to go in the legislative process, and the government could still block it in the Senate. However, there is no doubting that last week’s vote was a major setback for Pinera and his Interior Minister Gonzalo Blumel, while it raises doubts about the viability of the June cross-party agreement for a USD 12bn economic support package.

 

MIDDLE EAST AND AFRICA

Nigeria

The affair around Ibrahim Magu, the suspended acting chairman of the Economic and Financial Crimes Commission (EFCC), will continue to produce headlines this week. Magu is scheduled to reappear before a probe committee on 13 July. According to details on the investigations against the suspended anti-graft chief that continue to be leaked to the press, Magu is accused of ‘re-looting’ recovered funds and assets, using part of the proceeds to buy property in Dubai.

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