What's Next by Ian Bremmer

Author:Ian Bremmer
Language: eng
Format: mobi
Publisher: Penguin Publishing Group
Published: 2012-10-21T04:30:00+00:00

WHAT ABOUT THE SECOND-TIER EMS?

While sentiment on the BRICS economies has soured somewhat, investors are increasingly keen on the next tier of countries below them. These second-tier EMs—countries like Mexico, Turkey, Thailand, Colombia, and Indonesia—have enjoyed strong growth, but just as there is likely to be growing differentiation in the quality of policy making within the BRICS, the same goes for the next tier of EMs. While we are quite optimistic on the policy outlook in countries like Turkey and Colombia, where politics is unlikely to interfere negatively, Indonesia and Thailand are particularly vulnerable to negative intrusions of politics. Mexico is somewhere in between. We expect positive economic reforms, but the upside may not be as large as many expect.

Indonesia has shown strong growth and its developed consumer economy offers it some protection from the global dynamics that are hurting its more export-oriented neighbors. But the political calendar is limiting the leadership’s appetite for tackling key reforms. President Susilo Bambang Yudhoyono, whose second and final term ends in 2014, is already bordering on becoming a lame-duck president as popular support for him and the ruling Democrat Party wanes amid insufficient efforts to stamp out corruption. As Yudhoyono and his party look to shore up support ahead of 2014, there is little chance of politically unpopular reforms on key issues such as fuel subsidies. Overall, the electoral cycle is compressing the time horizon for Indonesia’s policy makers.

Thailand, for its part, faces some potential fat-tail risks that are potentially underappreciated. Prime Minister Yingluck Shinawatra has fared well in office, holding relatively high approval ratings even after severe floods hampered growth in 2011. And the government’s massive infrastructure plans, welcomed by industry, are fueling growth. But politically, the prime minister’s goal of managing the return of her fugitive brother, former prime minister Thaksin Shinawatra, could be a potential trigger for destabilizing conflict with the monarchy and the military. To curry support, Yingluck’s government raised the minimum wage to 300 baht in Bangkok and six other provinces in April 2012 and will expand that to the rest of the country by April 2013, raising hackles among bosses in the manufacturing export sector. A lower growth outlook would make her opponents smell blood, making for a challenging 2013—particularly if the king’s health doesn’t hold.

In Mexico, it’s less a story of political risk and more a story of how the upside to a good reform agenda may not be as large as investors hope. Enrique Peña Nieto from the Institutional Revolutionary Party (PRI) won the presidency in July, and he will assume office in December. His administration will certainly move forward on much-needed economic reforms, but we think expectations in the private sector have moved beyond political reality. While the PRI should be able to cobble together a coalition in congress to approve tax reform and potentially an energy reform for downstream investments, a constitutional reform to open upstream oil production to private investments looks unlikely.

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