We are delighted introduce you to The Lens, the newest addition to FrontierView’s market-leading insights. The Lens is a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business executives. Each week, we will provide our views on the most critical economic and geopolitical trends through our signature scenarios framework, key forecasts and major revisions, and the “so what, now what?” implications that will enable you and your teams to interpret these fast-moving events to power your decision making.

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In this week’s edition, FrontierView analysts provide our view on Mexico’s labor reform, cybersecurity risks, and Kazakhstan’s new president.

The Lens: April 18, 2019

Mexico’s labor reform improves prospects for USMCA ratification
  • Mexico’s lower house of Congress approved a landmark labor reform that gives workers the right to directly elect union leaders by anonymous ballot. This measure gives more power to workers, while curtailing the power of Mexican labor unions.
  • We expect the Mexican senate to approve this reform in the coming weeks, as the party of the Mexican President Andres Manuel Lopez Obrador controls both chambers.
  • Mexico’s labor reform improves the prospects for the approval of the US-Mexico-Canada Agreement (USMCA), the proposed replacement for NAFTA. The main complaint from US Democrats was that the USMCA was too weak on improving labor conditions.
Our view

The USMCA already includes substantial provisions that will raise wages for Mexican labor that are part of North American supply chains in the auto sector. However, pushback by US Democrats on the USMCA and President Trump’s ongoing threat to withdraw from NAFTA if the USMCA is not passed, remain significant risks. Maintaining free movement of goods across the US-Mexico border is essential for Mexico’s economy. This labor reform demonstrates the ongoing effort by Obrador to either secure USMCA ratification, or at the least, to demonstrate to Trump his interest in meeting US demands.

Business implications

Multinationals should look positively on this reform as it will encourage ratification of the USMCA – or at least, reduce the chances that Trump tries to end the NAFTA status-quo. Perhaps more important, this will improve the competitiveness of Mexican labor markets and increase labor market flexibility.

Alejandro Valerio, Senior Analyst for Latin America

FrontierView clients: See our most recent Mexico City Executive Breakfast presentation for further updates

As you adjust supply chains, don’t overlook cybersecurity risks
  • State-sponsored cyber-attacks have increased in recent years, with these attacks increasingly taking the form of embedded vulnerabilities in supply chains.
  • Component parts produced in complex supply chains are becoming increasingly high-tech, which creates new spaces for cyber-attackers to penetrate.
  • While technology and communications firms may be well aware of these risks, the increased use of high-tech components in traditional low-tech industries that rely on global supply chains, like autos or consumer durables, is creating new challenges for these industries.
Our view

The rate and complexity of cyber-attacks will continue to increase. Though the recent focus of the US-China trade war has put a lot of attention on IP theft, there are myriad reasons for conducting cyber-attacks. We have seen recent high-profile cases of state-sponsored or state-condoned cyberattacks involving China, North Korea, Russia, and Vietnam that were not conducted in order to steal IP.  Particularly in developing Asia, we expect state-sponsored attacks to proliferate further in traditionally low-tech component-reliant industries, as governments seek to undercut international competitors and provide support for favored manufacturers.

Business implications

Increasing cost of protecting complex supply chains from cyber-attacks, and the reputational costs to being a victim, need to factor into the cost-benefit analysis of supply chain designs. Cyber-security is an operational cost, and that cost will differ based on how firms structure their global operations are structured and the local risks to which firms are exposed. In some cases, it may be worth steering incremental investment into manufacturing hubs like Mexico or Eastern Europe. Wages will be higher, but the overall risk-adjusted cost may be lower to due reduced costs for cybersecurity and the reduced risk of exposure to a costly cyber attack.

Emilie Newton, Junior Analyst for Global Economics and Scenarios

Ecuador courts the West: Is this the next LATAM opportunity?
  • After years of isolation, socialism, and anti-US policy, Ecuador is pursuing pro-US and pro-western policies.
  • Ecuador has entered into an IMF program and is pursuing market friendly reforms, fiscal consolidation, and greater trade openness.
  • As Ecuador transitions, the government designs new policies to attract inbound investment by improving the business environment.
  • Just last week, Ecuador finally forced Julian Assange out of its London embassy, ending a long dispute with the US.
Our view

We do not guarantee implementation of these reforms, as the government will face a challenging political environment and social backlash against measures that reduce social benefits. But if reforms are successful, Ecuador is well-positioned to fit into LATAM supply chains. Firms should make sure that they have the correct market monitoring tools in place to track this economic transition, and be ready to capitalize on opportunities as they emerge.

Business implications

In the short-term, harsh IMF-style structural reforms will lead to a lower-growth environment. The main question for firms not already active in Ecuador is whether these reforms will create a new market opportunity. The first key area will be investment into the industrial sector as the state retreats and seeks new private investment.

Ramiro Sugranes, Research Analyst for Latin America

FrontierView clients: See our most recent Ecuador Market Spotlight for further insights

Reserve Bank of India cuts rates again, but it may not boost lending
  • The Reserve Bank of India cut its benchmark interest rate for the second time this year to 6% in April.
  • Industrial production and growth have remained relatively weak, and the Bank is providing monetary stimulus to boost investment and domestic consumption.
  • Headline inflation, which has been low due to subdued food and fuel prices, was estimated at 2.9% in March, well within the Bank’s target of 4%. However, the five-month high March figures and high core inflation signal increasing risk.
  • The former Governor of the Bank resigned in December amid a disagreement with the Prime Minister, who wanted more stimulus in the lead-up to the election. But global investors do not seem particularly concerned, and the Indian rupee has been relatively stable since his resignation.
Our View

The public expects the Reserve Bank to deliver another rate cut in the coming months. Rate cuts coupled with election-related risks are likely to cause weakness in the Indian rupee. This environment makes it unlikely that banks will actively pass-on additional credit to the economy in the short-term. Therefore, lower interest rates won’t provide a large immediate boost to domestic activity.

Business Implication

Executives can expect investment growth to remain subdued for the next few months. The rate cuts will do little to ease financial constraints and improve liquidity in the market. Multinationals should also prepare for higher import costs due to weakness in the rupee, which may increase the strain on their partners’ finances.

Pratima Singh, Practice Leader for Asia Pacific

FrontierView clients: See our more recent India Market Review for further insights

Kazakhstan: New President, same opportunity for investment
  • After nearly three decades in power, Kazakh president Nursultan Nazarbayev unexpectedly resigned in March.
  • Nazarbayev will retain power informally as he gradually transitions authority to his loyal ally Kassim-Jomart Tokayev, speaker of the upper house of parliament.
  • This gradual transition should ensure political continuity and stability.
  • Kazakhstan will hold presidential election held in June, but this is mostly a process check. We expect the election to confirm interim President Tokayev as the next leader.
Our view

The administration likely planned the succession far in advance. The goal of which to ensure political and economic stability both within the elite class, and in the country. This managed transition will provide policy continuity and have no major impact on the Kazakh or the nearby Russian market. President Vladimir Putin is likely looking at Nazarbayev’s managed transition as a model for his own eventual exit from power.

Business implications

We expect a peaceful succession plan, aiding market predictability and business planning in one of the most attractive markets in CIS (excluding Russia). The currency, the Kazakhstani tenge, has not weakened since the announcement of his resignation. Likewise, we do not expect any notable policy shifts in the near future as a result of this political transition.

Mark McNamee, Practice Leader for Europe

FrontierView clients: See our latest CIS Regional Outlook for further insights

Sudan’s coup undermines investor-friendly reform
  • Long-serving authoritarian leader Omar al-Bashir was ousted by a military coup on April 11, 2019. This occurred following street protests triggered by plummeting living standards.
  • Sudan has endured a protracted economic crisis that has resulted in cash and foreign currency shortages, the removal of subsidies, and soaring inflation.
  • Since the US removal of commercial sanctions in 2017, business interest in Sudan intensified. This occurred despite the economic crisis due to the country’s large and mostly untapped market.
Our view

Given Sudan’s limited experience with peaceful transitions of power, the risk of a disorderly end to military rule is increasing. Any new government will struggle to resolve the economic crisis. Social tensions will persist as protesters demand the installation of a civilian government.

Business implications

Multinationals should expect poor sales in Sudan due to difficult operating conditions, weak customer purchasing power, and low business confidence. Currency shortages will also present an ongoing challenge. Additionally, new austerity measures are likely, which will curtail opportunities for companies selling to the public sector.

Matthew Kindinger, Senior Analyst for Sub-Saharan Africa

FrontierView clients: See our updated 2019 SSA Regional Outlook for further insights