End of an era

End of an era

For many, it was an event long time in coming, as Zimbabwe witnessed the end of the Robert Mugabe era. The 93 year-old Mugabe had ruled the country since independence in 1980.

The chain of events is well-known by now: On November 14th, the military seized control of the country, taking over the state broadcasting and the capital’s main thoroughfares. The official line for the action was to target criminals near Mugabe who were “committing crimes [and] causing social and economic suffering…”

Yet the military intervention was about power and political succession within the ruling ZANU-PF, as it came on the heels of Mugabe’s firing of his vice-president, Emmerson Mnangagwa – a move that was intended to clear the way for the president’s wife, Grace, to assume the presidency. Other allies of Mnangagwa were also purged from the governing ranks.

PRS has discussed the internal divisions with clients for some time: between Mnangagwa and the top military brass, veterans of Zimbabwe’s independence movement – and the younger party cadre, the Generation 40 – generally represented by Mugabe’s wife.

Ultimately, Mugabe was persuaded to resign after Parliament had begun impeachment proceedings, and Mnangagwa returned from his short ‘exile,’ dissolved the cabinet, and vowed to enact sweeping changes in government and new policies to attract investment and revive the ailing economy – one that is in the fiscal hole, suffering from high inflation, and almost-depleted foreign exchange reserves.

Despite the jubilation expressed by most in the country, there is a sense at the moment that little will change under the new regime. A unity government formed in 2009 resulted in few, if any, reforms that were promised, and there is little hope that Mnangagawa would allow free, competitive elections.

While the politics of the country might not change all that much, there is some promise for foreign business and investment. The new president has suggested several times in the recent past that he would repeal the country’s ‘indigenization law’ which requires firms to be majority-owned by black Zimbabweans. And China, the country’s largest source of FDI, has made it clear that a revocation of the law would be most welcome.

Indeed, if at the moment there is a key player to watch as events unfold it is China. During Mugabe’s days Beijing provided interest-free loans to keep Zimbabwe afloat, and the country is a major player in Zimbabwe’s agricultural and power sectors. The country also represents more than 50% of direct investment in Zimbabwe.

(Interestingly, there are suggestions that China had some role in Mugabe’s removal: Beijing did not favor a continuation of Mugabe’s rule under his wife, and was particularly irritated when Mugabe suggested the government would nationalize diamond mines – an industry in which China plays a leading role. There was also talk that Chinese tanks were used in the coup, and that high-level meetings were held in China with Zimbabwean army chief Constantino Chiwenga just days before Mugabe’s ousting.)

Events are still unfolding, and will no doubt do so in unpredictable ways. But as matters currently stand, the most likely near-term scenario for Zimbabwe is the preservation of the political status quo, with promises of small changes to the climate for business and investment.

Turning to our ratings for the month, some countries’ risk profiles have improved. Argentina continues to look better as a cabinet shuffle was seen by many as positive for reforms in the health and agricultural sectors, and as the governing party won the mid-term legislative votes in a convincing fashion. Many saw the results of the election as evidence that the government was gaining some political traction in putting the economy on a more solid footing. Consumer confidence has been improving of late, and PRS is expecting real GDP to average near 3% over the next couple of years.

Similarly, PRS remains cautiously bullish on Egypt, despite some obvious shortcomings the country continues to experience with targeted incidents of terrorism. Foreign exchange reserves have been surging of late, and while debt repayments loom on the horizon there is strong appetite for Egyptian paper. The government has said it plans to issue about $3bn in sovereign notes this year. A new investment law is a step in the right direction, too.

Kenya appears to have sidestepped a potentially volatile situation as the presidential rerun handed over victory to Uhuru Kenyatta, the incumbent, after the opposition – led by Raila Odinga – boycotted the ballot. But the low voter turnout will do little to democratic legitimacy to the new regime, and legal challenges to the outcome cannot be ruled out. PRS thinks the risk of social turmoil will remain high for the immediate future.

On the downside, Lebanon’s risk profile deteriorated slightly as the prime minister, Saad Hariri, resigned his post unexpectedly, claiming that Iran is behind a plot to assassinate him as tensions within the region continue to undermine local stability. There were reports that the prime minister was under house arrest by Saudi authorities as a partial way of offsetting Iran’s influence in Lebanon. Relations between Saudi and Iran continue to be tense.

In any event, as ICRG was going to press, Lebanon’s president, Michel Aoun, said that Hariri would remain in his post, and that there was ‘broad agreement’ among the country’s competing political interests for him to remain in office.

To be sure, while Hariri’s political fate still seems unclear at this time, overall political risk levels in Lebanon will remain worrisome given the social fallout from tax increases and perceptions of government corruption.

PRS’s new Anti-Corruption and Investment Climate (ACIC) group had a very productive meeting in Washington in late November with Kazakhstan’s anti-corruption agency. Headed by Deputy Chair Alik Shpekbayev, the agency briefed PRS on the various measures it had taken over the past several years to eradicate graft from the workings of government and to create a more favorable location for foreign and domestic capital. The agency agreed at the conclusion of the meeting to work with ACIC in 2018 in furthering the agency’s goals.

PRS continues to receive broad coverage in the financial press. In a recent piece in the Investor Chronicle section of the Financial Times (https://lnkd.in/dCd2ejz) Alex Newman presented ICRG’s composite scores across a range of European countries, and addressed our work in the fields of artificial intelligence and machine learning. As Newman noted: “[a]pparently, not only can computer algorithms grapple with the real-time unravelling of world history; they are now flirting with geopolitical pre-cognition.”

As is the case monthly, the IMF continues to use our data in their overall research and published Working Papers. In November, the Fund queried whether the easing in cross-border bank lending (post financial crisis of 2008) was evidence of a retreat in financial globalization. Using, in part, ICRG’s composite scores, the authors provided a more nuanced consideration, highlighting increasing regionalization of lending flows, among other items. https://lnkd.in/duV4kUz

Additionally, given that PRS is one of a dozen firms, globally, to supply Transparency International with annual data for the Berlin-based group’s Perceptions Index, the Fund used PRS’ corruption scores and revisited the effects of graft on the state’s capacity to raise revenue, finding that corruption is negatively associated with overall tax revenue and most of its components. This relationship is predominantly influenced by the way corruption interacts with tax compliance. https://lnkd.in/deb4GBc