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2024: not only a US election story

Editorial by Andranik Safaryan

2024 is a historic year as electors in more than 60 countries, representing around half of the world's population, have already voted or are about to do so. While investors and citizens around the world are awaiting perhaps the most important of those elections - the one in the United States – the exercise of democracy has also kept many emerging economies busy. While it would be difficult to discuss the various outcomes of all the elections that have taken place so far, from Asia to Africa to Latin America, we will briefly discuss the results of some large issuers of hard currency-denominated corporate bonds: India, Indonesia, Mexico and South Africa. Without any surprise, these countries are also among the largest economies on their respective continents and together account for more than 15% of the JP Morgan CEMBI BD Index, the most widely recognised benchmark for emerging market corporate bonds. The results of these elections were broadly in favour of policy continuity, although with varying nuances. Going forward, improving the energy infrastructure and logistics apparatus is central to South Africa’s medium to long-term prospects. If this happens, the country’s growth potential will increase, and the operating environment of corporates improve. In Mexico, investors should pay particular attention to the country’s intended fiscal path and the risk of controversial institutional reforms. While sovereign risk might increase, the current economic environment remains supportive for corporates that benefit from the nearshoring story. Although Indonesia and India should continue to grow at comfortable levels, investors should be wary of potential “consumer gifts” from the newly elected governments in Asia. However, at least in Indonesia and for the time being, the new government has scaled back its plans to run budget deficits above regulatory levels and committed to fiscal discipline.

South Africa's post-election challenges and economic prospect

Starting with Africa’s largest economy, South African electors were asked to express their preferences in the general elections held at the end of May. The African National Congress (ANC) party, that once led the fight against Apartheid, has seen its popularity erode and lost its majority in parliament for the first time in 30 years. Rising crime and unemployment rates and disruptions to energy supplies were just some of the reasons for the ANC’s poor performance. The recent formation of a government of national unity has dispelled the worst outcome for investors: an alliance with the Economic Freedom Fighters, a party proposing radical reforms including land expropriation and the nationalisation of key industries such as mining. The newly formed government suggests a continuation of the fiscal consolidation trajectory with decreasing budget deficits. While this is welcomed for investors, the government’s task is not an easy one. The government debt/GDP ratio rose from 56% in 2019 to 74% at the end of last year, and the government will need to continue investing in the electricity transmission network as well as the logistics and mobility network. This year, energy generation has improved significantly, as there has been no load shedding – the deliberate interruption of power supply in some parts of the network in order to prevent a potential grid-wide failure – in the last three months. Over the past few years, the private sector has demonstrated a greater capacity for action than the government when it comes to investing in energy security. Private energy generation now accounts for more than 13% of total energy, up from 9% in 2018.

This has reduced the pressure on the system. While the worst may be over for South Africa, the government still faces a difficult task ahead. Reforms must continue, particularly those aiming to improve the energy and logistics issues. If this happens and the government is effective in convincing private investors to share the burden of the necessary investments while maintaining an improving fiscal situation, the country could set a virtuous cycle and raise its growth potential. However, investors must be patient and watchful of the situation.

Mexico's policy shift: reforms, risks and economic resilience

Moving to the other side of the Atlantic, in Mexico, the ruling party was more fortunate and increased its parliamentary majority, winning a two-thirds super majority in the lower house of parliament and falling four seats short of repeating the result in the Senate. This will make it much easier for the new president Claudia Sheinbaum to implement some potentially controversial reforms. One of these reforms is the election of judges by direct vote, which would subordinate the judiciary system to the government in power and weaken the institutional balance. In terms of fiscal policy, the incoming president has stated that the new government is committed to remaining disciplined, but investors should monitor closely whether promises are followed by facts, as the new administration has pledged to increase social spending in several areas. Another key topic is how the government plans to tackle the debt situation of PEMEX, the state-owned oil producer, with debts of USD 108bn. This debt is equivalent to around 6% of the country’s GDP and, if consolidated, could put downward pressure on Mexico’s rating. While a deterioration in the fiscal accounts could increase the debt sustainability risk, the current macroeconomic situation remains favourable for corporates in the country, which are sustained by the nearshoring story and healthy consumer balance sheets that benefit from a very low unemployment rate of 2.5%. A short-term negative catalyst could be a potential slowdown in the US economy, which would affect Mexico more than other EM economies given the close and strong economic ties between the two countries.  

Modi's punishment at the ballot box and India's return to the practice of political compromise

In Asia, India and Indonesia – the world’s most and fourth most populous countries respectively – held general elections this year. In India, the ruling party of Prime Minister Narendra Modi, the BJP, lost its outright majority in the lower house of parliament. However, the party managed to secure the support of its allied parties and elected Modi as the leader of the new coalition. This result is likely to lead to a reordering of priorities for the new government. On the one hand, infrastructure spending – which has been central to Modi’s strategy in the past years – will remain a priority, and companies that have benefited from those expenditures, such as cement and steel producers or large construction companies, will continue to do so. On the other hand, the government will need to tackle those issues that led to the BJP’s poor performance in these elections, such as rising youth unemployment and increasing rural poverty. The government might be tempted to give its poorest citizens some “consumption gifts”. While this will mainly benefit the rural economy, the challenges India faces in solving these issues are structural and will therefore require structural reforms in the medium to long term to correct them. In the next few years, however, India will continue to benefit from a rising population, an expanding middle class and extensive foreign investments. GDP growth was 7.8% last year and is expected to remain strong at +7% this year.

Political upheaval and economic ambition: Indonesia's path to the future

Finally, in Indonesia, the Indonesian constitution prevented incumbent president Joko Widodo from seeking a third term despite his huge popularity. However, he has managed to appoint his eldest son as vice-president to Prabowo Subianto, the winner of the March elections. The incoming president will inherit a strong economy with relatively low debt (government debt/GDP of 40% as of 2023) and an estimated budget deficit for 2025 of only 2.3%-2.8%. However, reforms must continue if Indonesia is to move from an upper-middle-income to a high-income country. Removing trade barriers, improving logistics and signing more trade agreements are just some of the reforms that are needed, and the status of which investors will need to monitor. The potential risks of fiscal shortfalls that come with the new administration taking office in October will also need to be monitored. Subianto campaigned on the promise of free school meals for almost 80 million Indonesian students, at a potential cost of USD 28bn a year. While literature shows that providing free meals to students has a positive impact on their health and academic performance, with long-term benefits for a country, such a program still needs to be financed somehow. However, the President-elect has recently reduced the expected spending on this program in 2025 to USD 4.3bn, stating that he remains committed to fiscal discipline without breaching the 3% budget deficit limit. Subianto also stated that increasing debt would be the last option, as the administration plans to finance the program by cutting expenses and trying to improve tax revenues.

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