Politics will increasingly dominate policy in emerging markets (EMs) over the next several years. As global growth slows, EM policymakers must adjust to a harsher economic environment while juggling new domestic political and socioeconomic challenges. Their trajectories are set to diverge significantly.
This new environment demands a comparative and holistic approach to EMs that places politics at the center of analysis. Eurasia Group is therefore pleased to announce a new Emerging Markets Strategy group, which will identify critical political risk themes that cut across the entire EM space. The group will be led by Christopher Garman, Director of Eurasia Group's Latin America Practice, with Alexander Kliment, a senior analyst in the firm's Eurasia practice.
The EM Strategy Group's first published report, titled "Emerging Markets: Politics is back, with more divergence" argues that as EMs grapple with slower economic growth and rising political challenges, the critical variable for anticipating the quality of their policy responses is the level of political capital their leaders currently enjoy. Where it is higher, the outlook for reform and economic policy will tend to be more positive. Please contact
[email protected] for the complete report.
The report's major findings include:
-- Mexico, Brazil, the Philippines, and Colombia, where leaders have high political capital, are likely to meet lower growth with a new round of economic reforms.
-- India, South Africa, Indonesia, and Peru, where incumbents have low political capital, are unlikely to advance reforms and are more prone to short-sighted stimulus measures.
-- China and Russia, which face medium-term governance challenges, fall somewhere in between; wary of reforms, they will make some incremental adjustments, and if the economic picture deteriorates further they will unleash large stimulus measures.
-- There is convergence, however, in one policy area: A growing number of EMs are slowly (re)opening strategic sectors to private and foreign capital as a means to generate revenue and boost growth, a trend that is expected to continue.
Forthcoming reports will focus on higher volatility frontier markets, the political implications of a rising EM middle class, the cautious reconsideration of state capitalism, and how policymakers are likely to respond to a new wave of capital inflows in the wake of QE3.
The existing EM groupings-such as the BRICS, CIVETS, N11s- reflect economic criteria, but leave out the political factors driving divergence among these countries. In an increasingly challenging global environment, Eurasia Group's focus on politics is essential for investors seeking to anticipate opportunities, and risks, in the emerging markets.
