The bellwether economies for 2021…
The distribution of vaccines is changing the economic outlook in 2021 with most politicians and investors forecasting a continued recovery. Yet the political and economic risks that preceded the covid-19 pandemic remain alongside the lockdown measures necessary to combat the virus.
The year will be turbulent for some countries as public confidence and investor sentiment vacillates with optimism and skepticism on vaccine acceptance rates and economic output numbers. Several countries are likely to be bellwethers for the markets, or at least, provide some directional insight on the global economy’s recovery.
Brazil
Is this a pro-market or socialist administration…let’s see what happens in 2021
Brazilians may be looking to 2021 as much as anyone. The covid-19 pandemic has killed more than 185,000 Brazilians, which is more than 11% of the total deaths worldwide. President Jair Bolsonaro was vehemently attacked by his critics for not mandating masks and not taking the virus seriously enough. Amid the criticism, Bolsonaro—the right wing, pro market “Trump of the Tropics—won the support of Brazilians with the biggest welfare program in Brazil’s history.
Despite his economy minister, Paulo Guedes, originally proposing to spend no more than R$5 billion ($1 billion), which is about 0.2% of the budget, to combat the pandemic, the reality of everyday Brazilian life changed the direction of this conservative government. The Bolsonaro administration ultimately decided, as part of the auxilio emergencial program, to provide monthly payments of R$600 to roughly 68 million Brazilians during the pandemic with single mothers receiving roughly R$1,200. The payments were cut by 50% in September (with families receiving R$300) but extended through the end of the year. This fiscal response, including the job-retention schemes, amount to about 8% of GDP. The federal spending is winning supporters in the streets. That said, it is also worrying many investors who see a country with a public debt quickly approaching 100% of GDP.
Furthermore, the Bolsonaro administration is seemingly walking into 2021 in an ideological wilderness of some sort with big economic challenges and few options for solutions. The administration could reduce welfare spending to pre-pandemic levels and retake its conservative, pro-market stance, but the Brazilian economy remains extremely fragile. Unemployment is 14.6%, which is a record for the country, with incomes not recovering anytime soon, and GDP is tracking for a 5% decline in 2020. The administration could spend more, but Congress will have to raise the constitutional ceiling on spending…that would normally go against the ideology of this administration but there is still a pandemic. Bolsonaro could use a second wave of the covid-19 pandemic to advocate for major spending and economic changes, building off momentum from his pension reform success. Global vaccine distribution and uptake by the public, however, may dictate the timeframe for a bold move as the economic parameters underpinning any Bolsonaro decision will be constantly shifting. It almost seems too early for rumors to be floating around on the Bolsonaro administration’s desire to raise interest rates in a post-pandemic world…then again that may be the necessary rumor to keep investors enticed by the country.
United Arab Emirates (UAE)
Will the UAE demonstrate its resilience again?
The UAE commenced 2020 with threats of attacks from Iran following the U.S.’s assassination of Iranian General Qasem Soleimani and is now ending the year with formal relations with Israel and crowded beaches (largely consisting of Europeans escaping the lockdown measures in Europe). That summary, on the face of it, sounds positive but massages the reality of the economic challenges. The country will see its economy contract 6.6% in 2021, according to the International Monetary Fund (IMF), and is expected to grow slightly above 1% in 2021. The IMF argues that low oil prices, geopolitical issues, and covid-19 lockdown measures will underpin low growth for the UAE and the larger GCC region. The reality of the IMF storyline is there is a new oil price norm, which the region is adjusting to, and the geopolitical issues are overstated, excluding issues with Iran. That said, the covid-19 lockdown measures in the region and across the globe will undercut an economic rebound for the UAE. For example, Dubai, which is roughly 90% expat, and functions as a financial hub for the region, needs international travelers and businesspersons to start boarding flights and passing through Dubai. The sight of Europeans on the beach during the Christmas holiday gives hope to (but does not substantiate) that vision.
The UAE will benefit from an inflow of Israeli capital and ideally tourism. Yet the country will suffer from the exodus of expats, estimated at roughly 10-12% of the population since its peak in 2020. Can it attract remote workers (per latest advertisements across European tv)? Can it make potential tourists find comfort in the country’s rather superb testing capabilities and the insurance offerings by Emirates Airlines? The various questions are hard to answer today with so much unknown about the global market. The UAE leadership nevertheless will not sit idle and are actively employing different strategies. Still the realities of the country’s economic system suggest that absence global travel and business or, at least, regional travel and business, the UAE could be in for a long 2021. Scheduled for October 2021 (after being postponed this year), Expo 2021—which involves companies and institutions across the globe coming to Dubai to showcase their products, services, and related projects—is a bet on a revived and traveling world. That said, if the date moves again in the first half of 2021, consider that a bellwether for the tough times to come. Skeptics would say the empty restaurants and bars in the Dubai International Financial Center (DIFC) and across the country already indicate 2021 will be tough. But the UAE track record demonstrates that it is too early to write-off this rather resilient country.
Thailand
When will tourism return?
The Thai economy suffered during the early days of covid-19 as lockdowns decimated exports and tourism for southeast Asia’s second largest economy (after Indonesia). GDP crashed 12.1% in the second quarter, which was the highest contraction since the second quarter of 1998 when the country registered a 12.5% decline due to the Asian financial crisis. The 6.5% growth in the third quarter of 2020 accordingly provides a glimpse of hope. It is important to note that the growth comes without foreign tourists. It is the increasing domestic tourism and slight revival in exports driving these numbers.
Similar to the UAE, the country will be closely watching the rollout of the vaccine. Widespread distribution of the vaccines will take time and does not necessarily guarantee a return of public confidence in traveling. The optimistic case for Thailand may be a return of foreign tourism by the second half of 2021…in this scenario Thailand potentially attracts one-fourth of the tourists seen in 2019. Without an inflow of foreign spending, the country will be dependent on export growth to fill the gap. Exports are unlikely to rebound to 2019 numbers before the fourth quarter of 2021…it will most likely take longer. Thus, the Thai government will struggle to underwrite ongoing debt moratoriums through June 2021 and other measures to stimulate consumption (e.g., welfare allowances, tax rebates, etc.) if tourism has its issues. Political observers and investors will also have to be cautious if political unrest and protests remain a concern.
Portugal
Overcoming low tourism in 2021 would be hard…
Portugal partially fell under the radar this year. The country escaped the pernicious impact of the covid-19 crisis seen in other EU countries, in particular Italy and Spain. The pandemic and the associated lockdown measures, however, devastated the economy with a 18% crash in the first half of 2020 and an estimated 8% to 9% contraction for the entire year. The Bank of Portugal is forecasting a 5.4% growth in 2021, compared to 2.2% in 2019. The fragile nature of the EU economy and the ongoing reality of a pandemic suggests that a big economic recovery in 2021 may be hard for Portugal. The Portuguese economy is already more vulnerable than others in today’s partially lockdown world. The country has a significant tourism sector, which suffers with the current lack of travel, and depends significantly on exports, which also have not performed well this year. The country’s economy also relies heavily on family owned businesses that have struggled (and ultimately closed) across the globe amid the pandemic. Nothing suggests Portuguese family owned business will perform better than the average thus the impact on 2021 may be greater than forecasted with more than expected businesses already closed and new ones not exactly taking their spot.
Further complicating the Portuguese story is the 2021 election. To be fair, Portugal’s incumbent President Marcelo Rebelo de Sousa, supported by Christian-democrats Centro Democrático e Social (CDS) and the centre-right Partido Social-Democrata (PSD), should win. But elections, in the midst of pandemics and economic recessions, always add an extra dynamic to the situation. That said, the election is in January thus the hoopla should be over early and the country will quickly turn to reviving the economy…though no one can be too sure how Portugal does this without a global rebound in tourism and consumption of Portuguese products.
Japan
Covid-19, the Olympics, and the changing of the guard in Japanese politics…2021 will be interesting
Japan has had a volatile year…though many observers may not appreciate that when Japan is viewed against other markets. First, the country’s longest serving prime minister, Shinzo Abe, announced his second resignation in September 2020, citing health concerns related to his ulcerative colitis. Abe established 8 years of political stability with landslide victories for the Liberal Democratic Party (LDP) in 2014 and 2017. Recently elected Prime Minister Yoshihide Suga is not guaranteed the same support and political backing from those within his party let alone those outside his party. Politicians and businesspersons have long found comfort in the consistency of Japanese politics and its leader thus the change naturally creates some worry amongst the Japanese public.
Secondly, Japan has generally managed the covid-19 pandemic like a superstar with less than 2,800 deaths (for context, the United States is currently recording that death toll on a daily basis). The luster, however, is dimming with the Japanese public as the country recorded its highest number of covid-19 cases last week. Critics have panned Suga for poor leadership and his “Go to Travel” campaign, which he quickly suspended. Poll numbers suggest his approval numbers are in the 40s, compared to mid-60s when he took office. Suga is surely watching these numbers and will feel pressure to respond to them with the LDP party presidential race to take place before the end of September 2021, which will be more competitive than the quick September 2020 party race. He needs to win the party leadership race to stay prime minister.
Suga is reportedly debating more localized lockdowns to curb the spread of the virus but also weighing this against jumpstarting the economy. The government is forecasting 4.0% GDP growth for the country, which is higher than the 3.0% to 3.5% coming from local economists. The growth numbers should be buoyed by the Olympic Games, as the International Olympic Committee has officially ruled out postponing the games for a second time. Still, it is not clear if the global public will attend the Olympics. The absence of tourists would be detrimental to economic growth numbers. Japan should have a view of attendance by early spring. If the country starts to recalibrate attendance numbers and economic growth numbers, then politicians and investors will likely have to take the same approach.
Turkey
The country that always survives…
It has been a turbulent year for Turkey (per the usual in some investor’s eyes). The country’s politics naturally find their way into most global discussions. Turkey has long backed the Libyan interim Government of National Accord, led by Prime Minister Fayez al-Sarraj, as well as allied with the Syrian National Army in Syria. Turkey found its way into the Azerbaijan conflict with Armenia. And now the country faces sanctions from the U.S. over the purchase of the S-400 missile defense system. Despite the political storylines, the Turkish economy is what consumes political analysts and investors.
The Turkish lira has struggled this year, losing 45% of its dollar value…only the Argentinian peso has had a tougher year. The lira unexpectedly found some reprieve with the departure of President Recep Tayyip Erdogan’s son-in-law Berat Albayrak, following the sacking of Murat Uysal as the central bank governor and the installation of Naci Agbal as his replacement. Lutfi Elvan, a former deputy prime minister, has replaced Albayrak as the Minister of Finance. Markets will be closely watching to see if Uysal will be supplying the “bitter pills” to the Turkish economy, as described by President Erdogan. So far, Agbal appears to be walking lockstep with Uysal with market friendly comments on the currency and the economy though investors will likely want more than words to completely buy into the ‘new’ Turkey.
Investors will also be monitoring the country’s foreign currency reserves that have been decimated this year. However, it is partially a catch-22 situation where the country needs to attract more foreign capital, i.e. the country needs to woo the same foreign capital currently watching from the sidelines to see if the foreign currency reserve levels increase. Uysal and Agbal will also have to convince Turkish citizens to trust the lira and use the currency. That may be the tougher than convincing foreign investors to come back to the party.
Italy
Been here before…is that good or bad?
Italian Prime Minister Giuseppe Conte recently reiterated a focus on expansionary policy for the Italian economy: “While preserving the sustainability of debt, the approach delineated in the 2021 budget will remain strongly expansionary […] a faster reduction of the budget deficit right now would risk jeopardizing Italy’s economic recovery.” Italian public debt is already projected to reach approximately 160% of GDP by year’s end, compared to 135% of GDP last year (only Greece will have a higher debt to GDP ratio in the EU). Despite the debt situation, Conte is prepared to double-down on spending to strengthen the economy, which is expected to contract roughly 9% this year The estimated 6.1% growth in 2021 remains a precarious projection subject to Italy (and the rest of the EU) returning to a sense of day-to-day normalcy. That is hard considering the localized lockdowns and timeframe associated with vaccine distribution across the region.
Italy is expected to receive 196 billion euros in recovery funds from the EU, generally earmarked for a transition to a greener economy. It is not clear how this money will exactly plug holes and fill gaps when Conte is trying to re-underwrite the entire Italian economy. Maybe some spending on transport and digital infrastructure can be a quick boost to an ailing economy. That said, the greater focus should be on creating confidence and diversification in the Italian economy. This vision on fixing Italian economics has been the request of investors, lenders, and citizens for a long time yet the country consistently misses the target or outright resists certain demands. Thus, it is only appropriate that the market will be watching Italy with angst and a sense of opportunity.
Peru
Political and economic malaise must end at some point?
Peru has had a lousy year…that honestly may be an understatement. Martín Vizcarra, Peruvian president since March 2018, was removed by Congress on November 9th for rather flimsy corruption charges. Protests in the streets followed and led to the new acting president, Manuel Merino, resigning less than a week after taking office. Most of his ministers would follow him out the door. Current President Francisco Sagasti is doing his best to maintain the peace (or, at least, calm) until the April 2021 presidential election. He has a hard road ahead of him for multiple reasons. First, the political tension and instability of Peru is not new and traces back to the 2016 election when Pedro Pablo Kuczynski defeated Keiko Fujimori, daughter of former President Alberto Fujimori—who was sentenced to 25 years in prison in 2007 for corruption and crimes against humanity—by the slimmest of margins with 50.1% of the vote. Kuczynski would resign in March 2018 but only after surviving an impeachment attempt in December 2017, pardoning Alberto Fujimori three days after the failed impeachment vote, and having allies, including his lawyer and Kenji Fujimori (brother of Keiko), caught on video attempting to buy a vote against impeachment from one official. Peruvian politics sadly are too clouded by distrust, questions of legitimacy, and constant impeachment scandals. Sagasti will have to walk a tightrope to keep the political boat afloat until April.
The second challenge for Sagasti is the economic malaise across the country. The IMF is projecting the economy to contract 13.9% this year and grow 7.3% in 2021. The decline is easier to believe than the expected rebound. The country is dependent on fuel exports and mining, including copper and gold. External demand and prices will recover in 2021 but probably not to a level necessary to fund Peruvian stimulus spending measures. Agricultural exports will also lag in 2021. Thus, Sagasti or his potential successor are more likely to face a struggling economy with significantly less than normal to spend on welfare programs. The former Finance Minister Maria Antonieta Alva, who resigned in November, claimed that the government’s spending measures in the third quarter prevented the economy from crashing more than 20% this year. Peruvian officials, at the end of the day, will have to find a way to work together to carve out spending for welfare programs and business support in 2021…if they wait for the spoils of a global rebound to trickle down to Peru, every day Peruvians will lose and the country will look more like a distressed sovereign in 2021 more than a rebound candidate.
Ghana
President Nana Akufo-Addo may have won re-election this year but is now on trial for his economic policy…
President Nana Akufo-Addo of the New Patriotic Party (NPP) won re-election on December 7th with more than 51% of the vote, defeating his predecessor John Dramani Mahama of the National Democratic Congress (NDC). His 2020 campaign built on the 2016 campaign vision: “Ghana Beyond Aid”. Back in 2017, in response to a local journalist’s question and to the shock of many observers and the visiting French President Emmanuel Macron, Akufo-Addo stated, “we can no longer continue to make policy for ourselves, in our country, in our region, in our continent on the basis of whatever support that the western world or France, or the European Union can give us.” This Akufo-Addo manifesto to end African dependence on foreign aid and the West, however, will now face its ultimate test.
As stated in the 2020 Manifesto, the Akufo-Addo administration has made “significant progress in restoring economic stability, improved macroeconomic conditions that affect the lives of Ghanaians and the successes of businesses” and was “on schedule to maintaining our momentum for progress before the Coronavirus pandemic’s (COVID-19) major disruptions in every aspect of our national life”. Many African countries, including Ghana, have generally dodged the damage and carnage previously expected when covid-19 hit the continent. Yet, they will still encounter an economic environment that will ultimately culminate in a 1.6% contraction of the sub-Saharan African economy in 2020, according to the IMF.
Furthermore, while Ghana may avoid economic contraction this year with about 1% to 2% growth, it will require significant investment to escape the potential economic traps of 2021. The economic waivers on utilities have hurt state-owned power companies and drained the government’s coffers alongside the spending on free meals, employment support and a national election. Once the end of the year numbers are released, Akufo Addo will likely have to take a view on whether to concede to increasing external financial support to fund infrastructure investment and support local businesses. That said, it is not that political question that puts him at greatest risk…rather, it is may be the question of how quick oil prices and other commodity prices rebound, both of which depend on the global economy regaining steam. As if there is not already enough pressure on Akufo-Addo, investors will probably scrutinize and over-examine Ghana’s performance for some insight into Africa’s recovery in 2021.
Malaysia
How agile and diversified is the Malaysian economy?
The economic news coming out of Malaysia is positive with the IMF forecasting the country’s economy to grow by 7% in 2021 after 4.5% contraction in 2020. Exports were propped up in 2020 by the production of personal protective equipment (PPE) and electronics, which should continue in 2021. Malaysian officials expect a rebound for external demand of Malaysian products. They also remain committed to stimulus spending, as needed, with high confidence in their ability to direct spending to those sectors and manufacturing verticals least affected by social distancing and covid-19.
The concern for Malaysia may be its national balance sheet and the money in its coffers. Revenue for the country is expected to fall to 15% of GDP. This decline in revenue collection will give rise to concern amongst officials and investors as the country’s debt approaches 60% of GDP. Prime Minister Muhyiddin Yassin also intends to spend to protect the poor and bolster healthcare amid this pandemic based on the recent budget. His critics will say this spending is putting Malaysia on an unsustainable path. Yet a lack of stimulus spending could crash the domestic economy thus Yassin, like many leaders, will be looking to a global recovery to underwrite his covid-19 spending outlook. The good thing for Yassin is that Malaysia’s economy is more agile and diversified to navigate the more probable slow start to the first half of 2021. If Malaysia struggles, then investors can expect many other economies to be in trouble.
