State of emergency and new lockdown to tackle third wave of Covid-19
On 11 January, in the face of an accelerating Covid-19 pandemic, first in Kuala Lumpur and then in the state of Selangor, PM Muhyiddin Yassin announced a two-week lockdown in half the country, including five states and the capital Kuala Lumpur. The day after, King Abdullah of Pahang declared a state of emergency that might last until August if necessary. Since last October, the number of infections has been on an upward trend and a recent intensification highlights an ongoing third wave. Compared to its previous peak last spring, daily infections are ten times higher at more than 3,000 on average. The state of emergency prevents parliamentary sitting and general elections from being held.
The extraordinary state of emergency is motivated by the need to address effectively the ongoing third wave of the pandemic. Besides, the opposition blames it for being politically motivated, as it will offer temporary relief to PM Muhyiddin Yassin after months of political turmoil. Since the new government took office last March, PM Muhyiddin Yassin’s policies have indeed been hindered by his narrow majority by recurrent instability and infighting within its fragile coalition. Therefore, the prime minister might take advantage of the state of emergency to take (pro-Malay) measures favouring his election, amid an intense power struggle, potentially later this year. The handling of the pandemic will nevertheless be a dominant concern in the next elections.
The Malaysian economy has been among the hardest hit by Covid-19 in South-East Asia. Its high reliance on exports, the importance of the oil and gas and tourism industries have made it very vulnerable to the global trade slump, global supply disruptions, tourism crisis and collapse in oil prices. As a result, Credendo decided last year to downgrade Malaysia’s ratings for ST political risk (from 1/7 to 2/7) and commercial risk (from A to B). Last October, the IMF forecasted the expected 6% recession in 2020, mitigated by moderate fiscal and monetary support, to be followed by a strong rebound in real GDP growth close to 8% this year. The vaccination rollout across the region is also likely to support external demand for Malaysian exports. However, a continued Covid-19 shock, with the re-imposition of lockdown measures weighting on private consumption and business activity while travel restrictions will probably be prolonged, will cloud the ST outlook and reduce the size of the recovery. Based on the previous three-month lockdown, the new one will certainly last much more than the announced two weeks, as the current wave is much more intense (at least according to regional standards). Until now, the Covid-19 crisis has deteriorated Malaysia’s fundamentals, particularly public finances with a fiscal balance expected at 6.5% of GDP and a general government debt expected at a 30-year high above 67% of GDP this year. The new lockdown is likely to affect further not only public finances but also foreign investments amid continued risks of political uncertainty (with both the government and the opposition in delicate positions for distinct reasons) until general elections are held. This being said, the country risk increase still looks manageable on the back of a persisting current account surplus, a sustainable external debt and adequate foreign exchange reserves.
Analyst: Raphaël Cecchi – firstname.lastname@example.org
Sadyr Japarov won the presidential election by a landslide
On 10 January, Sadyr Japarov won the presidential election by a landslide. The presidential election followed the October parliamentary election that had to be cancelled following large protests during which Sadyr Japarov was released from jail by his supporters. Days after, former President Sooronbay Jeenbekov stepped down and Sadyr Japarov was appointed prime minister and acted as president. This was the third time since Kyrgyzstan’s independence that a president was overthrown by protesters.
Alongside the presidential election, the electors also approved the organisation of another referendum to vote on a new constitution that will give more power to the presidency. This second referendum on constitutional reforms will be organised later on this year, tentatively in March.
Mr Japarov has pledged to maintain good relations with Russia, which has a military base in the country and is the main host of Kyrgyz migrants – and hence the main source of remittances, which account for more than 45% of current account receipts. He has also pledged to prepare a new draft constitution. The planned constitutional reforms, if successfully approved and implemented, would increase the power of the president and transform the political system into a more authoritarian one. It is not the first time that the constitution is changed. The latest constitutional changes, establishing a parliamentary republic, were approved in 2010 following the ousting of President Bakiyev. Hence, the new constitutional amendment is no gage for more political stability. Indeed, clan rivalry, ethnic divisions, endemic corruption, cronyism and related political purges are recurring themes, which carry risk of renewed unrest. On top of that, the economy has been hit hard by the Covid-19 pandemic and political instability.
In the past, Sadyr Japarov vowed to nationalise the Kumtor gold mine, which accounts for almost 10% of GDP and more than 10% of current account receipts. Production at Kutmor is expected to cease in 2026. Whereas the president has said that he no longer wants to nationalise the mine, he is still seeking a better distribution of the profit. In this context, the outlook for expropriation risk is stable as it is not the first time that a president expresses such a demand. That being said, any steps aiming at expropriating the mine would lead Credendo to review its classification for the expropriation risk, which is currently in category 5/7.
Analyst: Pascaline della Faille – P.dellaFaille@credendo.com
End of blockade eases regional tensions and benefits longer-term Qatari development plans
Three and a half years after it started, a hug between Saudi Crown Prince Mohammed bin Salman and the Emir of Qatar, Sheikh Tamim bin Hamad Al Thani, before the start of the GCC summit seems to put an end to the rift between Qatar and Saudi Arabia. The development comes after Kuwait and the USA brokered the deal between both countries and the détente seems to be triggered by the upcoming change in the US government. The three other countries that participated in the boycott are expected to follow suit. Nevertheless, while this step will ease regional tensions, underlying differences between the countries are expected to remain, as Qatar will continue its independent course.
Mid-2017, Saudi Arabia, the UAE, Bahrain and Egypt cut diplomatic ties with Qatar and blocked all land, sea and air links with the country. This happened as they claimed Qatar was sponsoring terrorism and undermining the security of its neighbours. The main trigger was Qatar’s independent foreign policy as it supported the Muslim Brotherhood, Hamas and Hezbollah and had friendly ties with Iran. Now the restoration of ties comes without any significant alteration of Qatar’s foreign policy.
In general, the Qatari economy weathered the boycott well, largely due to the support measures of the government. Among others, the government intervened to support the local banking sector that was facing withdraws from depositors in the boycotting countries and supported the flag carrier that was facing increased costs due to the airspace closure of the boycotting countries. The boycott especially affected commercial risk and was particularly hard at the beginning of the boycott. Indeed, real GDP contracted by 1.5% in 2017 and remained subdued in the following years. This impact, however, is dwarfed by the Covid-19 crisis and the subsequent drop in oil prices that led to a 4.5% contraction of GDP in 2020. Medium- to long-term political risk classification was, however, also impacted by the increase in external borrowing (total external debt to GDP rose to more than 125% of GDP in 2019).
The lifting of the blockade will have an important positive impact on the longer-term development plans of Qatar, as in the years before and during the boycott the country invested heavily in a number of sectors significantly affected by the blockade. Most notably in the local banking sector that was expanding regionally and was suddenly cut off from its clients. Secondly, the country’s ports and airports were expanded to develop the country into a regional transportation hub as Qatari ships were no longer allowed to moor into the ports of the four countries ports and the flag carrier was no longer allowed to use their airspace. This has significantly increased costs. Additionally, almost all sectors relying on imports have been facing increased costs, for example the construction sector and the food sector. Now that the blockade has been lifted, a steady normalisation is expected, which will positively impact the economy.
Analyst: Jan-Pieter Laleman – email@example.com