As is well known, Spain has been thrust into a major political crisis following an illegal referendum on independence held in Catalonia on October 1, in which 90% of voters backed the move, although the turnout was just under half the total electorate. Prime Minister Mariano Rajoy failed in his effort to persuade the regional government to cancel the referendum, and the unrest triggered by a heavy-handed attempt by security forces to disrupt the vote only stiffened the resolve of Catalonia’s regional president, Carles Puigdemont, to proceed toward a formal declaration of independence.
Madrid countered the move by invoking Article 155 of the country’s constitution – a first for Spain. The provision allows the central government to take any “necessary measures” to ensure compliance of a rogue autonomous region. Consequently, Madrid fired the Catalan leaders, dissolved parliament and called regional elections for December 21. The central government also announced that it would charge at least 20 nationalist leaders with rebellion and sedition, including Puigdemont and the speaker of the Catalan parliament, Carme Forcadell.
The recent events are not without their roots. For decades, nationalists in Catalan have argued that the region sends a disproportionate share of money to poorer parts of the country. Fiscal policy and taxation is largely controlled by Madrid and a change in 2010 to the autonomous status of the region is said to have undermined Catalan’s distinct identity.
At the time of writing, Puigdemont and several cabinet members had fled to Belgium, and there were suggestions that Puigdemont would be seeking asylum, and wilder suggestions that a government-in-exile would be established. Both rumors were later discounted by Puigdemont at a press conference, who said he would return to Catalonia in time for the December vote, as long as he was given certain ‘guarantees’ by Spain, and that the vote was a step along the ‘long road to independence.’
In early October, we suggested that Spain could very well exercise this constitutional authority to strip the regional government of its powers and place Catalonia under the direct political control of Madrid - a move that would the run the risk of triggering a backlash and protest-related disruptions to economic activity in a region that accounts for roughly one-fifth of Spain’s GDP.
Prior to the vote on independence, Spain offered to hold all-party talks on Catalonia’s status, while making clear that independence is not an option. Given the election outcome, we suspect the two sides will sit down and hammer out an agreement that results in significant autonomy for the region, along with an affirmation of Catalonia’s commitment to national unity.
On the national side, the immediate threat to the survival of Rajoy’s minority government is limited by the fact that there is broad consensus in support of national unity among the main parties in the national Parliament. However, the People’s Party (PP) administration only managed to secure approval of the 2017 budget with the backing of the Basque Nationalist Party (PNV) and the lone lawmaker from the Canarian Coalition, regional parties that may already have decided that the government’s heavy-handedness in dealing with the vote in Catalonia precludes further cooperation.
On that basis, the probability of the minority PP government’s survival even for the next 18-months is lower than it was before the referendum, as is the likelihood that the current government will be able to implement any significant reforms during what remains of its tenure. That said, to the extent that Rajoy is perceived by the majority of non-Catalan Spaniards to be tough but fair in his handling of the secession threat, there is a good chance that the PP would make sufficient gains in an early election to form a majority government.
Turning to our ratings for the month, Mexico’s risk profile deteriorated slightly as the former first lady, Margarita Zavala, said she would stand as an independent candidate in next July’s presidential vote. Zavala quit the opposition National Action Party (PAN) following clashes with some of the party brass. The move is really a hammer blow to the PAN and likely to cause some issues with overall political stability in the run-up to the vote. The PAN had earlier forged an alliance with the leftist Democratic Revolutionary Party (PRD), and Zavala’s move could very well shift support from the PAN to the ruling Institutional Revolutionary Party (PRI), further fragmenting the opposition.
Moreover, while business confidence was improving of late, uncertainty over the fate of the NAFTA agreement will do little to help the trend along. Indeed, Mexico’s foreign exchange reserves had been deteriorating over the last little while given the need for the central bank to lend support to the failing peso.
In Brazil, consumer confidence is trending down again, in the face of another successful attempt by the country’s lawmakers to prevent President Temer from standing trial on obstruction of justice and corruption charges. Temer was forced to make concessions to various coalitions within the parliament, which resulted in the channeling of millions of dollars in federal funding to politically-favored projects. Temer will likely see out the remainder of his term in office, our models suggest, but he remains one of the most unloved politicians in Brazil’s history: Temer is currently polling in the single digits in recent electoral surveys.
Conversely, the risk profile of the Czech Republic improved marginally as president Milos Zeman asked Andrej Babis, the leader of ANO (Yes), to form the next government. ANO won 78 seats in the 200-seat lower house of parliament earlier this month. Eight other parties and groups also won seats.
Babis will be sworn in as prime minister after the first session of the new house and the outgoing government’s resignation. However, whether his tenure – and indeed policy objectives – will significant opposition is not entirely clear: none of the major parties that captured seats in the election have agreed to join a coalition headed by Babis, since they consider him not quite suited to lead the government given that he is facing fraud charges linked to EU subsidies.
Clients and friends should note that PRS and Queen’s University (Canada) will soon formally announce the establishment of an Artificial Intelligence Initiative that will truly reset the way political and country risk analysis has been conducted traditionally by investors, transnational firms, and research scientists. The Initiative is the first of its kind globally, and early-stage testing results have proved to be remarkable.
The collaboration effectively positions Queen’s University as the R&D Hub for The PRS Group. The five-year collaboration will allow PRS to leverage the expertise of Queen’s research scientists and the expertise and resources of the University’s Centre for Advanced Computing, thereby broadening and deepening the company’s analytical capabilities.
Stay tuned for a major announcement within months that will also accompany a new web platform for PRS along with some new lines of business.
As is the case monthly, the IMF used our internationally-acclaimed corruption data as part of a regression to determine how tax systems in Africa affect investments and growth. Significantly, the authors of the study found that tax systems are often designed to collect short-term revenues rather than pursue long-term developmental objectives. Additionally, low income, informal business activities, and inefficient tax administrations result in a deficit of voluntary compliance. (https://lnkd.in/d8ufdyh)
Finally, clients of ICRG should note that some 52 countries had their political risk profiles adjusted this month, affecting 62 individual risk metrics.