Macro Matters

Protests have erupted in emerging markets from Chile to Lebanon, and from Egypt to India. The wave of unrest has spilled from country to country, affecting Latin America in particular, and has brought back memories of the Arab Spring that rocked the Middle East earlier this decade.

These events raise three key questions. First, what is behind this burst of discontent and is there a common theme? Second, are these widespread protests a threat to the global economy? And third, what are the potential outcomes of these demonstrations?

It seems that the unifying factor behind most of these protests is simply unhappiness with the individual local governments. This is rooted in a myriad of complaints, including corruption, poor public services, an increased tax burden, and allegations of meddling in the political process.

Yet there is also a wider theme related to the dignity of individuals and their perceived role in the local and global economy, and in society. Similar to the dissatisfaction that propelled populist parties into power in developed economies – which led us to discuss the emergence of a ‘new political paradigm’ – it looks like voters in emerging markets are also rejecting the unequal distribution of benefits from growth and globalisation, the balance of power between corporations and individuals, and the economic consequences of the fairly stringent neoliberal economic reforms implemented in many emerging markets during the previous two decades.

So, even though the exact triggers that sparked protests in each country are different, they all seem to represent ‘final straws’ that pushed the public onto the streets.

From riots to recessions?

Although they are disrupting the status quo in many regions, the protests do not seem to represent a threat to the global economy at the moment. The countries most affected generate around 4.5% of global GDP in purchasing power adjusted terms, so their potential impact on the global economy is limited in the short term, even if they do lead to a slowdown at home.

This helps explain why emerging-market assets have for the most part shrugged off the protests. Indeed, the spread on emerging-market US dollar debt has narrowed by nearly 150 basis points in 2019.

Investors would probably be more concerned if the protests depressed growth in larger economies, such as Brazil, as this would also have deeper economic repercussions for their trade partners.

Finally, the question about the long-term outcome of these protests is still an open one. In general, if they lead to a more equitable distribution of the benefits of growth and a deepening of the democratic process and control, then ultimately they should be positive for the affected economies, even if they come at the expense of a short-term slowdown.

We are, however, aware that the range of outcomes is wide and depends on the local starting point. For example, countries with low debt levels can afford the cost of structural reforms and better social protection, and should see the fruits of any reforms faster.

Overall, then, the old (and sometimes boring) rule of economists applies here too: fundamentals do matter, and remain an important differentiating tool in formulating our investment views.