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Turkey/South Africa: A Contrast In Central Bank Independence

In this Tuesday, Jan. 28, 2014 photo, people walk by an electric board showing currency rates at a money exchange brokerage in Istanbul, Turkey. Turkey’s central bank has sharply raised its key interest rate to 12 percent from 7.75 percent to try to stave off inflation and support the national currency, which has fallen sharply in recent weeks. The decision was taken late Tuesday at an emergency meeting the central bank called for after the currency, the lira, hit a record low. (AP Photo/Emrah Gurel)

ASSOCIATED PRESS

In both Turkey and South Africa, central banks are under significant political pressure to loosen monetary policy amid sluggish economic conditions and growing challenges to ruling party dominance. As long argued/analyzed by GeoQuant data, relatively higher Institutional Risk make such pressures more pressing in Turkey than South Africa, reflected in higher politically-driven Sovereign Risk and greater macro-policy risks to the Turkish lira than to the South African rand. In other words, the South Africa Reserve Bank will be able to resist political pressures on monetary policy, while the Central Bank of Turkey will not. In this vein, we project (i) decreasing Macro-Economic Policy Risk and Sovereign Risk going into the 18 July SARB meeting; and (ii) increasing Macro/Sovereign Risk going into the 25 July policy meeting of Turkey’s CBRT, All else being equal, these dynamics will help contain USDZAR while putting upward pressure on USDTRY. To wit, the graph below plots Turkish Macro-Economic Policy Risk vs. USDTRY since 1 Jan 2018.

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Turkey: Macro-Economic Policy Risk

GeoQuant 2019

Full Insight available on the app.

Spain: PSOE Pressures Potential Allies to Form Government 

Presidents Trump and Xi are scheduled to meet on the sidelines of the G20 summit in Osaka, Japan on 28-29 June against the backdrop of a tumultuous bilateral trade dispute. Recent trends in our Investment/Trade Policy Risk indicator for both China and the U.S. indicate that the dispute will decelerate slightly after the G20 meeting, but will nonetheless persist well into 2020. More specifically, while some tariff relief is possible following the summit, progress toward resolving key aspects of the broader dispute (including national security and technological concerns, and the reduction of Chinese state intervention in the economy) remains unlikely. As such, Chinese Investment/Trade Policy Risk – our most direct proxy for the dispute – will remain elevated by historical standards for the foreseeable future (see figure below).

Spain: Mass Support Risk; Institutional Support Risk

GeoQuant 2019

Per the figure above, GeoQuant’s Institutional Support Risk and Mass Support Risk indicators correctly tracked this trajectory. The People’s Party (PP) lost a vote of confidence in mid-2018, as rising Institutional Support Risk brought down its coalition government, despite steady or falling Mass Support Risk. A PSOE-led minority government replaced the PP, and has now been returned to power by winning a plurality on 28 April in its first general election since coming to power last summer. Mass Support Risk has fallen further than forecast since the election, so the PSOE is now using its improving mass support to pressure potential coalition allies into striking a bargain to form a government. As a result, expect PM Sanchez to succeed in negotiating a coalition agreement and to prevail in a vote of investiture on 23 July.

Full Insight available on the app.

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Pakistan’s IMF Agreement to Have Limited Impact on Macro Policy Risk through 2019; Longer-term Outlook is More Promising

Our Macro-Economic Policy Risk indicator suggests that Pakistan’s newly formalized IMF agreement will have a limited impact on Risk through year-end 2019 on account of low initial disbursement rates under the agreement and a slow-moving policy reform agenda. As visible in the figure below, we forecast a more substantial decline in Macro-Economic Policy Risk thereafter as a host of new economic policies begin to take effect, and IMF-aligned donors begin to contribute an additional $38b USD to the core loan package. The vertical gap between the solid line (our current forecast) and the dashed line (our forecast from the day prior to the IMF’s announcement) reflects the relative magnitude of the agreement’s anticipated impact. On the political front, we expect the agreement to hasten upward-trending Government Risk (as well as rising risk along each of its component indicators), raising the potential for long-term political fallout for both Prime Minister Imran Khan and the PTI-P prior to the next electoral cycle in 2023.

Pakistan: Macro-Economic Policy Risk

GeoQuant 2019

Full Insight available on the app.

Market Movement | Spotlight on India/10-Year Yield

Prime Minister Modi’s newly installed government released its annual budget statement for FY2020 on Friday 5 July; the budget reflects a fiscal deficit target of 3.3% relative to an earlier 3.4%. Against a backdrop of historically high unemployment rates, the deficit target will constrain the government’s ability to spend its way out of difficult employment conditions, but remains a net positive development for Macro-Economic Policy Risk given pre-election concerns that profligate fiscal policy/borrowing would emerge during Modi’s second term. On the borrowing front, we note that Indian Macro-Economic Policy Risk has been positively correlated with the average 10-year yield on Indian sovereign bonds at +.4501 since mid-2013 (when we began tracking the relationship), reflecting declining yields as risk decreases due to heightened demand. Per the figure below, the correlation rose to +.6547 on a 26-day rolling basis following the budget’s announcement on 5 July. We therefore highlight the (somewhat paradoxical) potential for a short-term reduction in government borrowing costs supported by a relative decline in Macro-Economic Policy Risk, even as the fiscal deficit target remains constrained relative to earlier estimates.

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India: Macro-Economic Policy Risk

GeoQuant 2019

The Month Ahead | Geopolitical Risk

Month Ahead: Geopolitical Risk

GeoQuant 2019

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