R&C Trendwatch Elections in key emerging markets heighten 2014 risks
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R&C Trendwatch
December 2013
Elections in key emerging
markets heighten 2014 risks
Executive summary Introduction
A number of major emerging market countries will hold national elections in 2014,
• Upcoming national elections
including Brazil, India, Indonesia, South Africa, and Turkey. The stakes are high
in emerging markets may
for both consumer goods companies and retailers.
result in stalled decision-
marking in the short term In several cases, such as in India and Indonesia, politicians seeking office may,
if elected, enact protectionist or nationalist policies that discriminate against
• In certain markets new
foreign firms. In other cases, such as in Brazil and South Africa, more business-
leadership may enact
friendly policies are expected. The next government in Turkey will probably fall
nationalistic or protectionist
somewhere in-between. Retail and consumer goods firms will want to be aware of
policies
what these electoral cycles mean for their prospects in both the short and medium
• Global retail and consumer term, and make their investment and risk management decisions accordingly.
goods companies will
want to consider potential Brazil
political risks Post-election infrastructure investments likely
According to PwC’s 16th Global CEO Survey, retail and consumer goods
companies view Brazil as one of the top five markets most crucial for growth.
President Dilma Rousseff is strongly favored to win reelection next October.
According to a poll released in October, she leads among likely voters in all
election scenarios.
This publication is produced in collaboration with Eurasia Group
(www.eurasiagroup.net). Eurasia Group is a leading political
risk research and consulting company.Key emerging market elections in 2014
Country Type Date Expected outcome Effect on R&C policy
Brazil Legislative; October 5 • Ruling PT will maintain majority The government will muddle through with
Presidential (October 26 runoff) coalition in congress only limited economic reforms before
• Rousseff will be reelected as president the election, but the next government
will tackle some of the economy’s
inefficiencies.
India Parliamentary By May 31 • Opposition BJP will win and lead a Policymaking will remain stalled ahead of
(Date TBD) coalition government with Narendra the elections, and the current restrictive
Modi as prime minister rules on FDI in multibrand retail are likely
to persist under the new government,
although it is likely to implement a
watered-down GST.
Indonesia Legislative; April 9; July 9 • Opposition Golkar and PDI-P will likely The government is likely to restrict
Presidential win the most seats imports and strengthen domestic
• A likely three-way race between Bakrie sourcing requirements, although it
(Golkar), Megawati/Joko (PDI-P), and may open the management of some
Prabowo (Gerindra coalition) infrastructure to FDI.
South Africa Parliamentary April-July • Ruling ANC will win with a smaller Populist policies, including stronger
(Date TBD) majority than they currently have affirmative action, will be implemented
• Zuma will likely remain president during the campaign, with more
business-friendly policies likely after the
election.
Turkey Local; March 30; • Ruling AKP will win local elections Broad policy continuity is expected,
Presidential July-August (Date • Erdogan will win the presidency although the economic reform agenda
TBD) will be stalled until the electoral cycle is
concluded in 2015.
Sources: IMF World Economic Outlook, World Bank World Development Indicators
The election is also unlikely to structural issues such as high taxes and After the election, the new government
significantly shift the balance of burdensome regulations that create will push harder on meaningful
power in the legislature. If Rousseff economic inefficiencies. economic policy adjustments. This will
wins, she is expected to retain a large be the case regardless of who wins,
governing coalition in the legislature. Despite this outlook, there have been but an opposition candidate would be
If an opposition candidate were to some limited policy reforms. These more likely to tackle these challenges
win, then Rousseff’s coalition would include the central bank’s recent more assertively. Infrastructure
probably fragment, and most of the cycle of rate hikes intended to fight investment will remain an important
centrist parties would pledge support inflation, the government’s plan to priority regardless of who wins. The
for the new government in exchange reduce subsidized lending from public government aims to attract private
for earmarks and jobs in the new banks to non-strategic sectors, and sector investment to construct 10,000
administration. the aggressive turn to the private kilometers of new rail lines, upgrade
sector in transportation infrastructure 7,500 kilometers of federal highways,
With annual inflation at 5.8% and the projects. In the run-up to the election, auction airports to private investors,
government’s gross debt-to-GDP ratio the government is also likely to and overhaul Brazil’s ports to boost
exceeding 60%, pressure is mounting maintain tax incentives that encourage capacity and improve logistics. If
for an economic policy adjustment. investment in housing, durable successful, these efforts would reduce
But with politicians focused on goods, and telecommunications costs for retailers and consumer goods
campaigning, major change will infrastructure, as well as tax cuts firms operating in and sourcing from
have to wait until after the election. related to labor costs in key industries Brazil.
Instead, the government will continue including retail.
to muddle through without tackling
2 R&C Trendwatch...the BJP and many of India’s regional parties have stymied
the full implementation of two key reforms that could spur
dramatic new retail expansion: the goods and services tax
(GST) and FDI in multi-brand retailing.
India substantive policy changes before
May—or even after the election. In
to withdraw approval for multi-brand
retail investment altogether, given
Reforms benefiting foreign either election scenario, the resulting the damage such a move would cause
retailers still face internal ruling coalition would likely prove to India’s already tattered investment
hurdles too weak to push through many of the reputation. As such, the status quo is
long-delayed economic reforms that likely to linger for at least several years
The outlook for multi-brand retail would put the economy back on track. after the election.
in the country remains cloudy. The This is also likely to prolong the policy
next general election, which must be uncertainties that retailers currently If implemented, a GST would
held by May, is likely to see Gujarat’s face, as the BJP and many of India’s substantially reduce compliance costs
controversial chief minister Narendra regional parties have stymied the full and sourcing delays for consumer
Modi and his Bharatiya Janata implementation of two key reforms goods producers and retailers alike,
Party (BJP) leverage a plurality of that could spur dramatic new retail taking a notable step toward giving
seats to form a fragmented coalition expansion: the goods and services tax India a domestic common market.
government. If the BJP underperforms (GST) and FDI in multi-brand retailing. Although the BJP supports the GST
expectations, India will instead likely in principle, a BJP-led government is
be led by a hodgepodge of regional Although India formally allowed 51% likely to make a series of concessions
parties in a so-called Third Front FDI in multi-brand retail operations in to the states to grant them more
government. September 2012, strict conditions have independent revenue-raising
seen the country fail to attract any such autonomy, thereby diluting the impact
Campaigning will heat up as the investment. Small retailers and traders on taxes and increasing the tax
election approaches, subsuming the make up a core BJP constituency, and challenge for businesses, at least in
policy discourse in New Delhi. Long- the party has vociferously opposed the medium term. Concessions under
pending reforms will likely continue any opening of the Indian market. But discussion include allowing states to
to languish as the opposition BJP while the new government is unlikely enact the reform at different times,
obstructs the ruling Indian National to ease any of the major restrictions apply it to different baskets of goods, or
Congress party’s legislative agenda. that have kept international retailers levy different tax rates.
As a result, retail and consumer from opening stores, it is also unlikely
goods firms should not expect any
Elections in key emerging markets heighten 2014 risks 3Indonesia Other policies needed to ensure
sustainable economic growth, such
It is unlikely that such nationalistic
policies will be tempered after the
No matter who wins, as further cuts to fuel subsidies, are election, regardless of who wins, as
a protectionist agenda on unlikely ahead of the elections. Instead, most possible presidential candidates
non-energy imports is likely given the government’s concerns over have espoused both nationalist and
a growing current account deficit, populist policies to some degree.
One of the world’s fastest-growing which is being driven by increasingly Indonesia’s elites generally agree that
consumer markets, Indonesia has expensive fuel imports, it is possible the country should attempt to move
both parliamentary elections in April that authorities will attempt to clamp up the value chain, so the government
and a presidential vote in July. The down on non-oil and gas imports. will likely push for growth in domestic
parliamentary elections are shaping This move could exert pressure on manufacturing. Companies in the
up to be a contest among the four them to require greater domestic electronics sector will be at particular
main parties, with the Golkar Party manufacturing or import-substitution. risk, as consumer demand for these
and the Indonesian Democrat Party- Either result could dramatically hike products continues to rise.
Struggle (PDI-P) likely to win more the operating costs for companies in
seats than President Susilo Bambang Indonesia.
Yudhoyono’s Democrat Party (PD) and
the Gerindra party. The presidential
election remains wide open, as formal Economic growth forecast to pick up as elections approach
nomination of candidates must await 12%
parliamentary election results.
Decision-making is likely to stall
10%
ahead of the elections, with candidates
for legislative seats starting their
campaigning in early January. The 8%
most important exception could be a
decision to allow foreign companies
to manage Indonesia’s airports and 6%
ports. Even though foreign firms would
still be precluded from owning such
4%
facilities, allowing foreign managers
could improve Indonesia’s struggling
transportation networks. This
2%
would help retailers and consumer
goods firms by reducing supply
chain bottlenecks that are common 0%
throughout the country. Brazil India Indonesia South Africa Turkey
2010 2011 2012 2013* 2014*
*Forecast data
Source: IMF World Economic Outlook, October 2013
4 R&C TrendwatchSouth Africa elections. Although initiatives like
the youth employment tax incentive
Turkey
ANC internal strife are positive for firms, the government A large, affluent consumer
resulting in negative policy will also implement policies that market, but needed reforms
environment hurt businesses—such as restricting unlikely until 2015
contract workers and punishing
South Africa remains the traditional affirmative action violations. Turkey’s large and increasingly affluent
entry point for investment in sub- population has made it a promising
Saharan Africa and is now becoming Factionalism within the ANC and market for retail and consumer goods
a conduit to the large and growing its labor allies will continue to drive companies. Despite recent social
consumer class on the continent. indecisive, and in some cases injurious, unrest, it appears that the ruling
But elections that will be scheduled policies. An example is the recent Justice and Development Party (AKP)
between April and June could drive round of revisions to the Broad Based is well-placed to win all upcoming
anti-business initiatives because the Black Economic Empowerment code, elections.
ruling African National Congress a set of affirmative action policies that
(ANC) is in its weakest position since applies to all firms operating in South In local polls to be held in March, the
coming to power in 1994. Africa and is intended to increase key battle between the AKP and the
black ownership, management, main opposition Republican People’s
The ANC will win the elections, but the and employment. These will be Party (CHP) will be the municipal
party’s share of the vote will probably implemented over the next 12 months elections in Istanbul, which the ruling
fall. The passing of Nelson Mandela and will likely cause many companies party is likely to win. Next summer,
should provide a burst of nostalgic to incur significant costs to meet the the still-popular Prime Minister Recep
support for the party, but it will still new criteria and maintain their current Tayyip Erdogan is likely to win the
lose (mostly urban) votes to opposition status. presidential election if he runs. And
parties, including the liberal (and the AKP is also likely to win the June
historically white-led) Democratic The outlook for after the elections, 2015 parliamentary elections given
Alliance and the new, ultra-populist however, is more promising for the that the opposition parties remain
Economic Freedom Fighters, led business environment. Although extremely weak and uninspiring. Policy
by former ANC youth leader Julius statist factions within the ANC will continuity, therefore, is generally
Malema. continue their efforts to hobble expected to prevail after the elections.
structural change, basic reforms and
The ANC and its allies, including more effective capital expenditures Despite the government’s strength,
the Congress of South African Trade will be easier for the ANC to pass after however, political risks are set to
Unions (Cosatu), are suffering from the elections, creating a moderately escalate through the end of the
deep internal schisms. To keep Cosatu improved economic outlook for late electoral cycle in mid-2015, mainly
in its camp, the ANC government 2014 and 2015. because of Erdogan’s increasingly
will appease labor in the lead-up to authoritarian and uncompromising
Elections in key emerging markets heighten 2014 risks 5manner. In addition, the extended growth levels. These measures After the elections, the policy
period of campaigning means changes included higher risk weightings for environment in Turkey is likely to
that are needed to improve the political credit card loans and consumer loans. improve, and Erdogan’s populist
and economic climate in Turkey are Furthermore, consumer financing rhetoric is expected to moderate. At
likely to be sidelined. Most importantly, firms will be subject to the same the same time, Erdogan’s dominant
a new, consensus-based constitution reserve requirement ratios as banks, position in the political system is likely
will not be adopted, with the AKP and and credit card limits will be capped at to weaken if he is elected president,
the CHP instead potentially agreeing 400% of monthly income. Additional because without a constitutional
on very limited revisions to the existing measures against consumer loans may change, he will have less power than
constitution. Reforms to tackle the emerge in the coming months, such as he currently does as prime minister.
economy’s structural problems, such introducing down payments. Limiting As a result, his ability to intervene
as restricting the informal economy, consumer credit will likely constrain in domestic politics is likely to be
boosting R&D and the savings rate, consumer spending in 2014. somewhat constrained.
increasing flexibility in the labor
market, and improving value-added Business environments are slowing improving
domestic production, are also likely
to be shelved. Foreign companies 75
South Africa
operating in Turkey should not expect
any vast improvement in the business
70
operating environment any time soon.
On the other hand, one important, Turkey
65
near-term, economic policy initiative
will advance: slowing the rate of
loan growth in order to reduce the 60
current account deficit. In October,
the government adopted a set of Indonesia
measures to curb demand for imported 55
products and limit consumer credit
India
50 Brazil
45
2010 2011 2012 2013 2014
Note: An economy’s score is on a scale from 0 to 100, where 0 represents the lowest performance and 100
represents the best performance.
Source: World Bank Doing Business 2014
6 R&C TrendwatchResources
John G. Maxwell Eurasia Group
Global Retail & Consumer Leader Courtney Rickert McCaffrey
john.g.maxwell@us.pwc.com Senior Analyst, Comparative Analytics
New York headquarters
Susan Eggleton 149 Fifth Avenue, 15th Floor
Global Retail & Consumer Marketing New York, NY 10010
susan.eggleton@us.pwc.com +1 212 213 3112
Mike Brewster
Global Retail & Consumer Marketing
michael.j.brewster@us.pwc.com
Denis Smith
Global Retail & Consumer Marketing
denis.s.smith@hk.pwc.com
www.pwc.com/r&c
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