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Speyside’s Predictions for 2017

Speyside’s Predictions for 2017

With 2016 likely to be the answer to any future ‘In what year..?’ general knowledge quiz question, it would be quite the understatement to have called the events of 2016 unpredictable as we look ahead to what 2017 might bring. From Brexit and the US election to more localised events in the vote for peace in Colombia, the rise of anti-establishment sentiment has brought about a change in global politics and democracy.

With lessons learnt from 2016 to expect the unexpected, we at Speyside have put some our finest minds to the test again in our yearly predictions. So, what might 2017 bring for these influential emerging markets?

Latin America
A new era for Argentina but time running out for economic results to prove Macri’s worthArgentina

Twelve months on from Macri’s surprising election victory in 2015, initial hopes of a grand reopening have somewhat diminished as economic reality and the failure of foreign investors to follow Argentina’s political transformation have set and resulted in last month’s departure of Finance Minister Alfonso Prat-Gay. Repeated assurances of economic recovery have been pushed back quarter by quarter, and whilst GDP will rebound as expected to near 3% in 2017, any moderate recovery will be exaggerated due to the dire economic indicators of 2016.

Macri’s efforts in building a long-lasting legacy and being able to fully convince foreign investors of an encouraging longer-term picture falls squarely on the results of next October’s midterm elections, where half the seats in the Chamber of Deputies and a third of the seats in the Senate are up for vote. 2017 will therefore be highly politicised (when is it not in Argentina) with both the government and opposition switching to campaign mode. Despite the arrival of a more fiscally prudent Nicolás Dujovne as the new treasury minister, Macri will likely water down implementing further painful policies to slash the deficit faster in a bid to keep voters onside, whilst opposition causes will move from being cooperative to openly defiant in a bid to strengthen their positions in Congress before the vote. A flicker of what to expect in 2017 has been on display over the last weeks of December, where the previously supportive Sergio Massa headed an income tax bill proposed by the opposition that passed through Congress at the expense of Macri’s administration own proposal.

With a congressional majority next year, Macri would be able to move from a period of transition towards implementing a transformational structural reform programme. But, if Macri cannot fall back on positive economic results to convince the electorate of his political vision, his Cambiemos party’s standing in Congress and the Senate will be reduced and reform short lived.

Ever the optimist, and with Macri’s approval ratings having remained above 50%, and social unrest and mass protests that characterise a troubled Argentina having largely been averted, we predict that the administration will increase its seats in congress but fall short of a majority as the economy gradually emerges from its current recession. Time for results to show, however, is running out.

Brazil flagTemer stays, but Brazil will continue to crumble while the judiciary tries to hold the fort

The rise to power of Vice-president Michel Temer in August 2016, after Dilma Rousseff was impeached, did not put an end to the economic and institutional crisis affecting Brazil. While it will not get much worse in 2017, the country is unlikely to make a quick recovery either. Interest rates are to remain high, inflation is steady, and the unemployment rate is settling at over 11%, indicating that at best we can expect the economy to stabilize or grow by a percentage point in 2017. This will continue weighing down on already devastating public accounts, in spite of a recently adopted 20-year cap on public spending.

The political crisis, which in 2016 seemed to affect mainly the Workers Party (PT), has spread throughout the political spectrum with widespread corruption charges against members of Cabinet and Congress. The allegations point to systemic deficiencies which will be hard to address as long as political elites unite to salvage their grasp on power. The Judiciary is in a crusade against graft – to the delight of public opinion. But in doing it has affected the separation of powers and created legal uncertainty, which might aggravate the ongoing institutional crisis even further in 2017.

Yet, this doomsday scenario will not be enough to catapult Temer from the Alvorada Palace. Contrary to Dilma, Temer is an expert political waltzer, with deep and longstanding support from political and economic actors alike. His public approval is still very low, but grassroots organizations are more divided than they were throughout the impeachment process. Unless the economic situation takes a further plunge, citizens are unlikely to take to the streets.

Nonetheless, this economic desert presents some opportunities in 2017. A privatization and concessions plan is in place for projects in advanced planning stage. State governments which are close to bankruptcy are already starting to resort to privatizations and public-private partnerships in their recovery plans. Local content requirements in the oil and gas sector, and possibly in the automobile industry, will be reduced with the expectation of attracting investments.

Overall, there is no short-term magic for Brazil in 2017. But it may still bring good return for investors willing to get on board before the start of a much more promising 2018.

ColombiaTimes of peace in Colombia but much to do

The modified peace agreement signed between the FARC guerrillas and the Government last November, and its support within Congress and the Constitutional Court, has brought an air of optimism among both the local population and the international community after the sombre mood the country was left-in post the damaging referendum defeat. Opposition voices in Congress still remain strong and they are likely to both delay the accord’s implementation - which involves passing numerous amendments and legislature – and use the upcoming elections in 2018 as a second referendum by fielding candidates promising stricter penalties on the FARC.

With beginnings of peace achieved, both the people of Colombia and its Government must make use of this opportunity to ensure that the whole nation benefits, rural and urban, rich and poor. To do this, huge swathes of investment is needed to properly address the inequality imbalance where the State currently has little or no presence and for the Government to develop its institutions. Only with a united country will the Government be able to continue its prediction of a 2% of GDP peace dividend and reap an influx of funds from foreign investment and international institutions such the World Bank and the EU. GDP growth slowed to 2% in 2016 – still, however, remaining the region’s second best performing economy – but is expected to rise in 2017 as an increase in infrastructure spending and higher oil prices add their weight. Peace has turned a new page for Colombia to rewrite, the Government must not waste it.

A familiar face in Chile’s new president

For the first time in 7 years, Chile’s economy contracted in annual terms in October 2016 as the country continues its struggle with lower copper prices and a fall in investment. Although Chile’s GDP is expected to grow between a respectable 1.5 percent and 2.5 percent in 2017, investors will hope that the presidential elections due to take place next November will reactivate private investment as a market friendly government re-takes power. Weak economic growth, a series of corruption scandals, together with an overly ambitious reform agenda that disappointed many will taint Bachelet’s tenure and has left her governing coalition deeply unpopular before November’s presidential elections where Bachelet is constitutionally barred from seeking re-election.

In a bid to recapture an economic growth that was the envy of the rest of the region, voters are looking back towards ex-President Sebastián Piñera who led polls at the time of writing with a mere 22% of support, although he hasn’t yet formally declared he will stand for election. We expect Piñera to run for President, but a major challenge for both himself and other candidates will be to re-engage with the electorate that has become massively detached from politics and the political class. Municipal elections in 2016 had an abstention rate of 65% as right-leaning parties won dozens of mayoralties in what would seem to be of benefit to Pinera’s chances of victory in 2017, but with disillusionment with mainstream politics riding high, anti-establishment senator Alejandro Guillier has been gaining ground and may cause an upset.

The long-term issue with Chile’s economy has always been its dependence on copper and the vulnerabilities to commodity prices that this entails. Bachelet has spoken previously about the need to build a “post-copper economy” but has done little to spark the industrial innovation needed for its diversification, which is likely to be a priority for a Piñera administration with opportunities in energy, infrastructure and tourism.

MexicoMexico will diversify its bilateral political relations, turning toward Asia and South America

With the election of Donald Trump in the United States, Mexico has found itself with few other commercial relations rivaling that of its northern neighbor. As a government, Mexico will begin to look to strengthen commercial ties with fellow Pacific Alliance members and Trans-Pacific Partnership agreement members. China, especially, could play an important role for Mexico. Mexican President Pena Nieto met with State Councilor Yang Jiechi a few weeks after the U.S. election to discuss deepening ties between both countries.

Foreign Direct Investment in the Energy sector will come pouring in

The last two years have seen increasing foreign direct investment in manufacturing and in the supply chain of the telecom sector, the latter being principally responsible for FDI in 2015 and 2016. In the next few years, we will see the effects of another of Mexico’s reforms – the energy reform. The first bid round has allotted blocks for deep-water, shallow-water, and onshore exploration. In addition, there have been many natural gas transportation bids. The supply chain of the energy industry will now come in droves to establish up-stream and mid-stream operations that were non-existent before.

PeruPeru’s PPK must find a solution to bullying congress

Pedro Pablo Kuczynski's (PPK) initial tenure in government has been dominated by an open confrontation between the Executive and Congress, which of course is controlled by the Fuerza Popular, the main opposition party led by Keiko Fujimori. 2017 will be no different.

Although PPK has attempted to adopt a non-confrontational style in the hope of keeping an open dialogue with the Fuerza Popular to pass through legislation, governance has proven to be problematic. The weakness of PPK’s mandate in office was left brutally exposed by the forceful removal of his much respected Education Minister Jaime Saavedra in December by the opposition-led Congress, in a bid to curtail the education reforms headed by Saavedra that imposed tougher standards and regulations on private universities that have often provided funds for political parties such as the Fuerza Popular. PPK had initially backed away from his threat to dissolve Congress and call for congressional elections if the motion to remove Saavedra went through in a bid to ease the growing tensions between the executive and Fuerza Popular.

In 2017, the President will have to find a solution to this, either by forming alliances with Fuerza Popular (and risk antagonizing the large numbers of votes who rallied behind him as a Fujimori protest vote) or continue to govern as a minority and risk increasing political instability and years of congressional difficulty from an opposition that is only too eager in showing the power it yields.

PPK will continue the former government's market-friendly approach, with proposed tax reforms likely to help Peru achieve its predicted GDP growth rate of 4.7% next year, but growing congressional tension and political instability will damage foreign investment and the country’s new found reputation for stability.

Presidential Elections in Honduras could see re-elections for the first time

In 2014, the Supreme Court of Justice in a controversial act struck down a law that prohibited re-elections for presidents, and so, the Partido Nacional is actively seeking the possibility of re-election for president Juan Orlando Hernandez, whereas the opposition party is naturally against it. Former President Manuel Zelaya, who suffered a coup in 2009, plans to run for President under the coalition of Partido Libre, PAC and Partido Liberal. The opposition coalition’s priority are guaranteeing free, fair and non-violent democratic elections.

Peaceful elections key for Kenya

2017 is a pivotal election year for Kenya, where memories of the bloody elections of 2008 still loom large. So far, most commentators expect the elections to pass off relatively peacefully, although we expect tensions to rise as polling day nears – as evidenced by a small number of violent clashes between authorities and protesters this year.

Kenya can ill-afford another tumultuous election, given the wider security issues that have dogged the country in the last three years and negatively impacted its vital tourism sector. The complex relationship with Somalia remains a constant and potentially high-impact issue.

Like many, we expect President Uhuru Kenyatta to secure a second and final term, in spite of growing talk of an opposition super alliance lining up against him. Whoever wins will face an ongoing battle to balance the positive outlook for Kenya as a key emerging hub for sub-Saharan Africa with ongoing issues around corruption and quality of healthcare and education (both of which are on an upward curve but from a low base).

We expect the ongoing stand-off (led by Tanzania and Uganda) around the East African Community’s signing of the EU Economic Partnership Agreement to be resolved positively early in 2017 – perhaps with Kenya being forced to sign unilaterally to protect its critical horticultural exports.

2017 will see the continuation of significant inward investment into infrastructure, led by Chinese firms. A host of major deals has already been announced, including plans to upgrade the railway and electricity networks, as Kenya seeks greater efficiency and reliability for both transport and, critically, energy supply. A raft of loans from the World Bank for infrastructure should accelerate these improvements.

On the whole, we see another strong year for Kenya ahead, but echo the comments elsewhere that growth is being held back by corruption and security fears. A peaceful election season and a quiet year away from the headlines are what most Kenyans, we hope, were asking for this Christmas.

Ethiopia continues its struggle through drought and conflict

A trend that shows no sign of abating is that of clients asking us about Ethiopia, one of Africa’s largest potential markets (population 100m) but beset of late by ongoing ethnic conflict (resulting in a six-month state of emergency being declared in autumn this year) and severe drought conditions that have impeded agricultural output. The banking and telecoms sectors remain closed to foreign investment, but inward investment into manufacturing is on the rise, as is Chinese investment around major infrastructure projects.

The human impact of the conflicts cannot be understated, with over 500 deaths and 11,000 arrests since protests began a year ago. We see no let-up in the ruling party’s (the Ethiopian People’s Revolutionary Democratic Front, which has been in power since 1991) heavy-handed approach to dealing with the protests, most specifically from the Oromo communities, Ethiopia’s largest ethnic group, which claim political and economic marginalization. The Government claims these are the necessary growing pains of a nascent democracy, while critics counter that its response has been superficial and led to enduring violence.

Despite the fact that we expect no major impact on the political status quo, the political situation could impact inward investment flows, with a number of foreign companies having been targeted during recent protests. The Government has scrambled together a number of reforms, but only time will tell if these are sufficient.

Despite the challenges, we still expect international corporate interest in Ethiopia to grow and , if both the political and weather situations improve, then FDI rates may well rebound. We are just one year into Ethiopia’s latest 5-year plan, which aims for annual growth at 11%. While seemingly ambitious, there is no doubt that sustained growth should continue and, if other factors can be overcome, this cradle of Africa could become a significant focus among emerging market players, with significant opportunities for investors in hydropower, construction, infrastructure and manufacturing.

Rapprochement with Russia

2017 should be a better year for Russia. Oil prices are up, and are likely to remain so, in part due to U.S. president-elect Trump’s expected global economic impact. Indicators point to a slow, but steady, economic recovery; the rouble will stabilise, and inflation will remain low.

While the EU’s sanctions have been extended until July of next year, we predict these sanctions will be reduced as of summer 2017. Time will tell, though, just how the critical US-Russia relationship fares after Trump’s accession. Positive rhetoric towards Russia pre-accession is one thing, but improving ties from the White House entirely another, particularly after the high profile diplomatic expulsion over the holiday period.

Should the relationship improve, we may see an easing of U.S. sanctions also, although this looks less likely than a few months back. However, the growth in Russian import substitution - not least in the well-protected healthcare sector - and the localisation of business by Western investors, will need to be balanced with the economic possibilities opened up any sanction reductions.

Robust measures will be initiated to jump start the economy – President Putin’s stated top priority – and fulfil Russia’s ambition of achieving a faster rate of growth than the world average by 2020. In last month’s state of the nation address, Putin focused on the importance of the agricultural, defence and IT sectors. An economic reform plan is due in May, and while this offers a potential glimpse of the much-needed structural reform, the necessary major, difficult and unpopular changes with regard to the retirement age and in the judiciary sector are unlikely to be pursued in the 12 months before a Presidential election.

2017 will almost certainly see President Putin – whose popularity is as high as it has ever been - commit to running for a fourth presidential term in 2018. Anti-corruption and a fair tax system are just two of the issues likely to receive an increasingly high profile throughout the year as strategic points on which the election will be fought.

Poland the EU’s next major headache

As we write, Poland has just experienced a weekend of street protests – the latest escalation of opposition parties’ accusations that the ruling Law and Justice party is undermining democracy and attacking press freedom. Earlier this year, the right-wing Government was met with a six million person-strong protest against the effective banning of abortion.

While, on balance, we expect the government’s fulfilment of some of its populist pro-growth policies – including child allowance and public sector wage increases – to shore up domestic support throughout 2017, external political support has plummeted and the outcome of the European Commission’s unprecedented investigation into the rule of law in Poland is likely to result in the imposition of penalties on the CEE giant for going against the EU’s democratic values. Poland’s role as natural leader of the Visegrad Four countries (Hungary, Czech Republic and Slovakia) looks set to perpetuate, as long as Poland manages to avoid losing its EU voting rights in its current stand-off with the European Parliament.

Poland’s economy has offered solid growth rates throughout 2016, and is very much seen as a safe destination for investment, although the lack of predictability and uncertainty regarding economic policies have kept international investors awake at night. As long as EU funding is safe – and there is no suggestion otherwise – we predict that investment will continue to grow steadily next year. 2017’s economic growth will be largely due to the next tranche of EU funding - Poland is currently the largest recipient of EU funds - but also down to initiatives to stimulate and drive entrepreneurship, such as the Government’s Business Constitution – a set of principles providing a transparent and stable framework for small business growth.

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Ian Herbison
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