Ones to Watch, 22 January 2018

Americas: Court to decide on Lula da Silva’s appeal against conviction

Sectors: all
Key Risks: civil unrest; political instability; corruption fallout

In Brazil, on 24 January a court in the southern city of Porto Alegre is scheduled to decide on an appeal from former president Luiz Inacio Lula da Silva against his conviction to nine and a half years in prison for passive corruption and money laundering. Should the court uphold the conviction, Lula could see his plans to run for president in the upcoming October elections severely affected. Although he is expected to exhaust all his legal options, the current frontrunner in the presidential race is likely to find it hard to keep momentum. Lula’s left-wing Workers’ Party (PT) is expected to hold protests against his conviction in Porto Alegre and an unfavourable ruling could trigger violent unrest both in Porto Alegre and in other major urban centres. Political tension will remain high irrespective of the court’s decision.

Asia-Pacific: Chinese banking sector to continue to be subjected to increased scrutiny

Sectors: banking
Key Risks: regulation; increasing debt; shadow banking

Chinese banks are expected to continue to be subjected to greater scrutiny than in previous years, with Shanghai Pudong Development (SPD) Bank the latest to be fined for corrupt practices by the China Banking Regulatory Commission (CBRS). On 19 January SPD was fined US$72m, one of the largest fines in Chinese history, and had five senior executives banned for illegal lending practices at its Chengdu branch. The branch is alleged to have collaborated to establish 1,493 shell corporations and hid around US$1.65bln in non-performing loans. The fine came shortly after a 17 January interview in which CBRS chairman Guo Shuqing told the People’s Daily that the crackdown on corrupt banks will continue. In 2017 the CBRC imposed over US$450m in fines on banking institutions and charged 270 individuals with offences. The crackdown is expected to intensify as the CBRS hopes to manage risks stemming from bad debt, shadow banking and weak internal regulations.

Eurasia: US measures targeting Russia under CAATSA to be announced 29 January

Sectors: all
Key Risks: sanctions

Under the Countering America’s Adversaries through Sanctions Act (CAATSA) – adopted over US President Donald Trump’s protests in August 2017 – new sanctions targeting Russia are due to be announced on 29 January. The law also mandates the release of a list of oligarchs tied to the Kremlin, which will effectively serve as a ‘sanctions list in waiting’. Although they will not be subject to OFAC sanctions, it will make it far more difficult for Western financial institutions to do business with those named. However, large portions of the list may be classified so as to temper this impact. CAATSA requires the Trump administration implement at least five of 12 measures against Russia listed in the bill, and the lightest potential outcome could effectively change little to the current environment. The measures will also have a major impact on the Nord Stream 2 export pipeline, which is largely being funded by European energy companies and is complicated by separate political tensions over the project in the EU. The White House is authorised to sanction such companies under the bill as well. Although such a step is unlikely, the tenor of the moves announced could heavily disincentivize the project.

Europe: Risks of major crisis in Czech Republic grows

Sectors: all
Key Risks: political stability

An extended period of political crisis appears likely if, as expected, independent Jiri Drahos defeats incumbent Milos Zeman in the Czech Republic’s 26-27 January presidential elections. Drahos has lambasted Zeman over his ties to Russia and populist actions since winning the first-ever direct election to the presidency in 2013. Drahos has also said he would not support a continued minority government of the ANO party – which holds 78 seats in the legislature, triple the number held by any other party – given the fraud investigation into ANO leader and current Prime Minister Andrej Babis, also the country’s richest man. The other parties are broadly united in their disdain for Babis – with the exception of the far-right Freedom and Direct Democracy Party, and the Communists, although they have also grown more critical of him following the October 2017 elections – and voted to strip him of his parliamentary immunity on 19 January.

MENA: Campaigning to begin as Egypt’s President Sisi announces candidacy in elections

Sectors: all
Key Risks: political stability

On 19 January, President Abd al-Fatah al-Sisi announced his intention to submit his candidacy for a second term in office in Egypt’s March presidential election. Sisi’s term in office has seen a notable macroeconomic recovery although his popularity has been negatively impacted by austerity reforms, a pervasive security crackdown and popular criticism of his government’s policy of control over Sanafir and Tiran. On 20 January, former armed forces chief-of-staff General Sami Anan announced his intention to run. The election will be held on 26 – 28 March, with a run-off round on 24 – 26 April if no candidate wins more than 50 per cent. The registration period runs between 20 and 29 January. Sisi is the most likely candidate to win. Further prospective candidates could declare this week although the approval of their application is not guaranteed in the politically repressive environment.

Sub-Saharan Africa: Time is running out for South Africa’s largest state-owned enterprise

Sectors: energy; SOEs
Key Risks: sub-sovereign default; company restructure; sovereign credit rating downgrade

On 20 January South Africa’s Deputy President and ANC leader Cyril Ramaphosa announced a new board for troubled state-owned power utility Eskom, as part of expedited measures to strengthen governance and avert an imminent debt crisis. Telkom’s chairman Jabu Mabuza was named acting chairman. Eskom has been the largest recipient of state bailouts and reportedly needs ZAR20bln (US$1.6bln) of funding by the end of its fiscal year on 31 March, which the government has stated it is unable to afford. While the board restructure has significantly bolstered business confidence and demonstrated an emboldened Ramaphosa, the government and Eskom will nevertheless need to act fast in order to avoid the suspension of its bonds by the JSE, restore lending from local banks and avoid a letter of default from the World Bank, which would trigger a 14-day recall on its US$3.7bln loan.