MOST LIKELY REGIMES AND THEIR PROBABILITIES
18-Month:	LDP Coalition 75%
Five-Year:	LDP Coalition 40%

 

FORECASTS OF RISK TO INTERNATIONAL BUSINESS
	Turmoil	Financial Transfer	Direct Investment	Export Market
18-Month:	Low	A-	A	A+
Five-Year:	Low	A	A-	A

( ) Indicates change in rating.                                                                                 *  Indicates forecast of a new regime.

 

KEY ECONOMIC FORECASTS
Years	Real GDP Growth %	Inflation %	Current Account ($bn)
2008-2012(AVG)	-0.1	-0.2	137.96
2013(F)	1.1	0.4	42.90
2014-2018(F)	1.5	0.9	91.40

 

Old Wine in a New Bottle

 

The landmark victory of the DPJ in 2009 promised a fresh start after five decades of the LDP political dominance, but the party failed to live up to expectations, and went down to defeat at an early election that was held in December 2012 against a backdrop of growing economic pessimism.  The LDP’s victory capped a remarkable political comeback for Shinzo Abe, whose short stint as prime minister in 2006-2007 is remembered mostly as a period of deteriorating relations with Japan’s neighbors.

 

Abe has recast himself as ...

Xi Jinping:  The former party secretary for Shanghai succeeded Hu Jintao as leader of the CCP in November 2012, and as president of China in March 2013.  The son of a former vice prime minister, Xi has experienced both the affluence of the politically connected and, owing to his father’s fall from grace and relocation to a remote village in the 1970s, the hardship of the rural poor.  He has spent much of his life in China’s coastal urban centers, and as such tends to be outward-looking in his approach to politics, and is expected to grant high priority to China’s international standing during his presidency.  He enjoys strong support among the business community in Shanghai and is generally viewed as a pragmatist on the issue of economic liberalization.  However, as is typical of mainstream thinking within the CCP, Xi is staunchly opposed to any relaxation of the party’s political control.

 

Li Keqiang:  The former party secretary for Liaoning, Li replaced Wen Jiabao as prime minister in March 2013.  A product of the ...

Impasse Broken, but Stability at Risk

Since taking the throne in 2006, Emir Sabah’s staunch defense of royal prerogatives has contributed to a deepening division between the executive and legislative branches, in the process shrinking the potential for reaching the compromises required to secure approval of reform legislation that in some cases has been gathering dust for years.  However, a breakthrough of sorts was made at yet another early election held on December 1, thanks to an opposition boycott that resulted in a large pro-government majority in the Parliament. 

 

The self-imposed exclusion of nearly all government opponents from the Parliament presumably will facilitate the process of approving stalled reforms, resulting in a more attractive climate for foreign investment.  However, the opposition has vowed to use all non-violent means at its disposal to force the annulment of the elections, a warning that points to a significant risk of disruptive political protests that could escalate rapidly if the government responds in a heavy-handed manner. 

 

The composition of the new Parliament is not an unmitigated blessing ...

 

MOST LIKELY REGIMES AND THEIR PROBABILITIES
18-Month:	Raúl Castro 70%
Five-Year:	*Reform Communist 40%

 

FORECASTS OF RISK TO INTERNATIONAL BUSINESS
	Turmoil	Financial Transfer	Direct Investment	Export Market
18-Month:	Low	D-	C	D+
Five-Year:	Moderate	C (C+)	C+	C (C+)

( ) Indicates change in rating.                                                                                 *  Indicates forecast of a new regime.

 

KEY ECONOMIC FORECASTS
Years	Real GDP Growth %	Inflation %	Current Account ($bn)
2008-2012(AVG)	2.7	1.8	-0.71
2013(F)	3.5	6.1	-0.90
2014-2018(F)	4.8	4.7	-1.35

 

Stability Will Be Top Priority

In late February, the National Assembly elected Raúl Castro to a second five-year term as president.  Far more significant were Castro’s announcements that he would retire from politics at the completion of his term in early 2018, and his call for political reforms, including a two-year term limit on the presidency and an official retirement age for all high-level figures in both the government and the ruling PCC.

 

In terms of potential successors, the clear front-runner at this point is Miguel Díaz-Canel Bermúdez, who was elected to ...

John Dramani Mahama:  The former vice president succeeded to the presidency following the death of John Atta Mills in July 2012, and won a four-year term in his own right at the December 2012 election.  However, the top-down process by which he was chosen as the NDC’s presidential nominee suggests that party leaders were concerned that Mahama did not enjoy strong enough support within the party to avoid a divisive primary contest that could undermine the advantages accruing from incumbency.  Thus, while the NDC controls a majority of seats in the Parliament, the president’s ability to count on the unified support of the party’s lawmakers, which will be essential to implementing reforms that are crucial to realizing the full potential of the country’s oil reserves and promoting economic diversification, cannot be taken for granted.

 

National Democratic Congress:  The NDC was returned to power at the 2008 elections, ending an eight-year period in opposition.  Although it retained the presidency and won a comfortable majority of seats in the expanded Parliament at the December 2012 elections, ...

Ramping up Reform Effort

Although the PRI regained the presidency at elections held in July 2012, the party fell short of winning a majority in either legislative chamber, and its members are far from united in their support for reforms that the new president, Enrique Peña Nieto, claims will deliver average annual real GDP growth of 6%.  Peña Nieto used the five-month period between his election victory and his inauguration in early December to bolster his position in the Congress, and both the center-right PAN and the left-leaning PRD have signed on to his Pact for Mexico, a wide-ranging program that includes education and tax reforms, as well as plans to expand opportunities for foreign investors in the energy sector.

 

Even before taking office, Peña Nieto played a key role in securing congressional approval of controversial reforms of Mexico’s 40-year-old labor code.  However, key provisions were stripped from the legislation by lawmakers from the PRI and the PRD with close ties to organized labor, resulting in a diluted measure that critics contend will accomplish ...

Italian voters' rejection of the austerity program carried out by the technocrat administration may deliver one of several options: a Grand Coalition catering to all political tastes, a minority center-left administration or a bridging of the Bersani-Berlusconi divide. In either case, a feisty and unstable marriage in Rome is expected, whether or not fresh elections are required.

An unstable polity is not new for Italy. But this particular crisis will deliver a net negative impact for business owners and investors, both in Italy and in the wider euro-zone, especially for the short-term.

Italian Yields OK, So Far...

Unlike last year’s Greek tragedy, no-one appears to be calling loudly for a euro exit; the 5-Star Movement would like a referendum on the country’s membership, coupled with a sovereign debt restructuring, but other parties will try to steer public sentiment in other directions. Besides, there is no great clamor for an Italian exit among the population, and bond yields, though reacting sensitively to developments, have not yet scaled the heights witnessed last year following the ECB’s underwritten ...

MOST LIKELY REGIMES AND THEIR PROBABILITIES
18-Month:	Center-Left Coalition 50%
Five-Year:	*Divided Government 45%

 

FORECASTS OF RISK TO INTERNATIONAL BUSINESS
	Turmoil	Financial Transfer	Direct Investment	Export Market
18-Month:	Low	B (B+)	B+	A-
Five-Year:	Low	B (B+)	B	B

( ) Indicates change in rating.                                                                                 *  Indicates forecast of a new regime.

 

KEY ECONOMIC FORECASTS
Years	Real GDP Growth %	Inflation %	Current Account ($bn)
2008-2012(AVG)	0.0	1.7	-49.60
2013(F)	0.2	1.8	-48.00
2014-2018(F)	1.0	2.1	-58.80

 

Hollande Encountering Headwinds

The center-left government led by President François Hollande was dealt a major blow to its economic policy credibility in late 2012, when the constitutional council ruled that a 75% income tax rate imposed on individuals earning more than $1.3 million annually was not consistent with the French ideal of equality before the law. 

 

The very high tax rate on the super-rich was always suspect in terms of its practical value, but it was a centerpiece of a campaign platform that attracted support from voters eager to punish the bankers and investors ...

The lack of political will, combined with limited resources, means Greece’s government is failing to get to grips with its deficit and debt reduction program as efficiently as it would otherwise, thus undermining its credibility and perpetuating the risk of ultimate failure. The deficit situation has improved, but substantial efforts are needed to deal with the legacy of debt, which will continue rising for another decade. Given the deep economic contraction the country finds itself in it is perhaps all the more incredible that the general government deficit shrank to an estimated 6.8% of GDP last year from 9.4% in 2011, with both the cyclically-adjusted and structural deficits coming in below 2% of GDP. Still, the deficit remains very high and with the debt burden on an upward trajectory the government needs to implement tough fiscal austerity that may further delay economic recovery and exacerbate social instability.

 

The government has thus far relied on debt relief to moderate the expenditure burden and will continue to do so in future years, despite a promising bond ...

Mohamed Morsi:  A leading member of the Muslim Brotherhood and the founding chairman of the FJP, Morsi won the presidency in a run-off election held in June 2012 with 51.7% of the vote.  Constitutional amendments decreed by the military junta shortly before the presidential elections concentrated governing authority in the hands of the SCAF, a factor that in combination with the court-ordered dissolution of the FJP-dominated Parliament in June 2012 seemed to relegate Morsi to figurehead status even before he was sworn into office.  However, his stunning announcement of the retirement of top military officers in August 2012 was accompanied by the annulment of the aforementioned amendments, moves that amounted to the assertion of civilian authority over the military.  President Morsi’s subsequent decree in November 2012 that abolished judicial review for any decisions made by his government or by the body tasked with drafting a new constitution was perceived by the secular opposition as confirmation of their fears that Morsi intended to replace a military-backed authoritarian system with an Islamist dictatorship.  Although the constitution ...