Q3 2010 Global Market Brief & Labor Risk Index

Think ouTside.

Global Market Brief & Labor Risk Index

2010 3meThodology sample reporT only

Global Market Brief & Labor Risk Index

2010

This is meThodology sample reporT only.

To subscribe to the global market Brief & labor risk index, visit kellyocg.com/marketbrief

3

conTenTs

This material was produced by Eurasia Group in collaboration with KellyOCG. This is intended as general background research and is not intended to constitute advice on any particular commercial investment, trade matter, or issue, and should not be relied upon for such purposes. Eurasia Group is a private research and consulting firm. © 2010 KellyOCG and Eurasia Group.

3 preface: rolf kleiner, senior Vice-president, kelly ocg & ian Bremmer, president, eurasia group

4 methodology

72 about sponsors

The Americas6 overview

7 risk index

8 argentina

9 Brazil

10 canada

11 chile

12 el salvador

13 mexico

14 united states

15 Venezuela

Asia Pacific17 overview

18 risk index

19 australia

20 Bangladesh

21 china

22 hong kong

23 india

24 indonesia

25 Japan

26 malaysia

27 new Zealand

28 philippines

29 singapore

30 south korea

31 Thailand

32 Vietnam

Europe and Eurasia34 overview

35 risk index

36 Baltics

37 Belgium

38 croatia

39 czech republic

40 denmark

41 France

42 germany

43 hungary

44 ireland

45 italy

46 luxembourg

47 netherlands

48 norway

49 poland

50 portugal

51 romania

52 russia

53 spain

54 sweden

55 switzerland

56 Turkey

57 ukraine

58 united kingdom

Middle East and Africa60 overview

61 risk index

62 algeria

63 egypt

64 israel

65 kuwait

66 morocco

67 nigeria

68 Qatar

69 saudi arabia

70 south africa

71 united arab emirates

cover: Torres del paine, chile © 2009 Gerad Coles

4 | gloBal markeT BrieF & laBor risk index Q3 2010

Preface

rolf kleiner,

senior Vice-president,

kellyocg

ian Bremmer,

president,

eurasia group

conTenTs

preFace

meThodology

The americas

asia paciFic

europe and eurasia

middle easT and aFrica

aBouT sponsors

continue to see a slower pace of

recovery, with continued concern

about European economies facing

fiscal crises.

Higher-than-expected growth

is pushing governments in

countries such as Brazil, Argentina,

India, Indonesia, Vietnam, and

Nigeria to turn their attention

toward managing inflation while

maintaining growth. Rising inflation

has been accompanied by pressure

for higher wages, which had been

held stable during the worst of the

economic crisis. Governments will

also be monitoring the prospects for

labor and social unrest through the

rest of the year. Recently, there have

been strikes at factories in China

and Bangladesh, and union protests

are expected in South Korea

over the next few months. As the

euphoria of a successful World Cup

subsides, South Africa’s government

will need to address stubbornly high

unemployment that also threatens

to spur social tension.

There are some prospects for

structural reform in two groups

of countries: those with stronger

economic performance that have

seen recent leadership changes

and those countries still under

pressure from fiscal problems. In

the first category, governments in

Japan, Australia, Malaysia, and New

Zealand have announced major

reforms, including of tax policy.

Meanwhile, governments in the

eurozone, especially Spain, Italy,

Greece, and Portugal, are under

pressure to push through labor and

pension reforms as part of their

broader austerity measures. While

there are implementation risks, such

reforms are necessary to improve

long-term competitiveness.

■ ■ ■

➔ Heading into the second

half of 2010, emerging markets

continue to lead the global

economic recovery; there are some

clouds on the horizon, however,

including rising inflationary

pressures and labor unrest. It

appears that many countries

in the Asia-Pacific region and

the Americas are going to have

higher-than-expected growth, but

unemployment will be the main

issue in Africa. Developed countries


Methodology

In addition to assessing the current risk environment, this report also takes into consideration the trajectory of risk trends.

Arrows alongside risk scores explain where risks are likely to show a very positive trend (X X), positive trend (X),

negative trend (Y), very negative trend (Y Y), or remain unchanged (blank) over the 3-month period of the report.

conTenTs

preFace

meThodology

The americas

asia paciFic

europe and eurasia


aBouT sponsors

➔ The Global Market Brief &

Labor Risk Index is based on detailed

analysis of hard metrics of 30 unique

labor market, socio-economic, and

political factors, layered with localized

expertise of in-country consultants.

The analysis aggregates the

individual factors into 9 core risk

variables: 5 macro variables and 4

labor variables that are each assigned

a score on a 10-point scale projecting

the degree of risk over the next

90 days. Each risk variable is also

assessed as to whether it is trending

negative or positive.

macroeconomic environment

This indicator captures the current

health of the macroeconomic

environment through an assessment

of the stability of monetary and

fiscal policy, the stability of trade

and capital flows, and the quality of

economic performance, controlling

for historic macroeconomic stability

and the quality of official statistics.

policy environment for

foreign investment

This indicator measures how

hospitable the policy and regulatory

environment is for foreign investment

by assessing the extent to which

there are barriers to economic

activity and the degree to which

the economy is a destination for

foreign investment.

laBor risk

labor market flexibility

This indicator captures labor market

flexibility, assessing the regulatory

environment that employers face

in managing human resources,

the ability of labor to influence

policymaking, and the near-term

potential for changes in the labor

regulatory environment.

labor availability

The labor availability indicator

incorporates migration, urban

population, the size of the labor

force, the extent to which women

participate in the labor force,

and unemployment.

labor quality

The quality of labor is measured

by the education and skill level of a

labor force, the general health of the

population, and labor productivity.

labor contentment

This indicator assesses the likelihood

of labor discontent by combining the

existence or potential of near-term

labor unrest with the misery index,

which incorporates unemployment

and inflation rates.

■ ■ ■

For all variables, scores range

from 1 to 10, where 1 is ‘high risk’

and 10 is ‘low risk’.

macro-poliTical/

counTry risk

political environment

This indicator estimates the

predictability of the political

environment by measuring

regime and government stability,

government and opposition

effectiveness, and how well the

government functions.

social environment

This indicator captures the presence

and intensity of social conflict

among ethnic and other minorities,

controlling for the mitigating effects

of the socioeconomic wellbeing of

the population and the equality of

wealth distribution.

security environment

This indicator captures the issues

of personal security by incorporating

both the risk of armed conflict

(either domestic or foreign) and

criminal activity.


Overview: The Americas

conTenTs

preFace

meThodology

The americas

overview

risk index

argentina

Brazil

canada

chile

el salvador

mexico

united states

Venezuela

asia paciFic

europe and eurasia


aBouT sponsors

are all expected to post impressive

growth rates this year. The US

recovery has been slower, and many

critics have begun to question

its durability given the growing

political resistance to maintaining

stimulus spending. At the other end

of the spectrum, El Salvador has

struggled to recover due to its lack

of policy flexibility since it adopted

the dollar as its currency in 2001,

while Venezuela remains stuck

firmly in recession thanks to high

inflation and stifling regulations.

Despite the general optimism

produced by strong growth in

the region, the outlook has been

clouded somewhat by rising

➔ The region is experiencing

steadfast growth, confirming signs

of a recovery at the start of this

year. Brazil is leading the recovery

with 9% GDP growth year-on-

year in the first quarter, thanks to

sustained government spending

in the run up to October’s general

elections. Chile has enjoyed an

impressive recovery after February’s

devastating earthquake, and

Argentina, Canada, and Mexico

inflationary pressures in some

states. Argentina is suffering an

increase in inflation expectations,

and prices in Venezuela continue to

increase thanks to highly restrictive

price and foreign-exchange

controls. Meanwhile, throughout

the region growth has yet to

produce many new jobs. Indeed,

Canada and Chile are two of the

only countries in the Western

hemisphere that have enjoyed

meaningful job growth; almost

everywhere else, unemployment

has been stagnant or worsened

slightly in recent months.

■ ■ ■


conTenTs

preFace

meThodology

The americas

overview

risk index

argentina

Brazil

canada

chile

el salvador

mexico

united states

Venezuela

asia paciFic

europe and eurasia


aBouT sponsors

macro risks laBor risks

political social security economicForeign

investmentFlexibility availability Quality contentment

Argentina 5 7 8 4 5 5 4 7 4 Y Y

Brazil 7 6 6 7 5 Y 3 6 5 6 Y

Canada 9 8 10 7 8 7 6 Y 8 6 X Y

Chile 7 6 9 7 X 7 7 5 8 6 Y

El Salvador 6 6 5 Y 5 6 6 4 4 6 Y

Mexico 6 6 5 Y 6 X 7 Y 4 4 5 6 Y

United States 8 Y 8 9 7 8 8 9 9 7 Y Y

Venezuela 5 4 5 3 2 Y 2 Y 4 4 2 Y

very positive trend

positive trend

negative trend

very negative trend

For all variables, scores range from 1 to 10, where 1 is ‘high risk’ and 10 is ‘low risk’.

The americas – risk index summary TaBle – Q3 2010


very positive trend

positive trend

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current quarter

prior quarter

current quarter

prior quarter

low risk

high risk

In April, the ruling National Action Party and the opposition Institutional Revolutionary Party passed antimonopoly legislation in the lower chamber of congress. The bill strengthens the Federal Competition Commission’s capacity to investigate and sanction dominant market players or those engaged in monopolistic business practices. The level of proposed sanctions was reduced during the legislative process and will be reduced further in order to gain approval in the senate, probably this fall.

El Salvador

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Political Social Security

MACRO RISKS LABOR RISKS

Economic Foreign Investment

Flexibility Availability Quality Contentment

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The americas

overview

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argentina

Brazil

canada

chile

el salvador

mexico

united states

Venezuela

asia paciFic

europe and eurasia


aBouT sponsors

forced the government to run a

high deficit (estimated to reach

4.7% of GDP) and to take on new

debt (estimated to hit 50% of GDP)

this year. Inflation has remained

low, however, coming in at 0.6% on

an annual basis in June. In another

positive development, remittances

from abroad—which account for

about 17% of GDP—have begun

to increase, up 2.6% in the first five

months of 2010 compared to the

same period in 2009.

Still, the tough economic conditions

and the need to invest in economic

development, public security,

and social initiatives have left the

government of Mauricio Funes in

➔ El Salvador was hit hard by

the downturn in the US economy

and continues to struggle, even

compared with its regional peers.

Growth is expected to rebound

to only 0.5%–1% this year, while

the projected average in Central

America and the Caribbean is

3.3%. As El Salvador’s economy

is based on the US dollar, the

government can only use fiscal

policy to manage the economy.

The fall in economic activity and

government tax revenues have

a difficult spot. His government

published a Five Year Plan in April

2010, which emphasized education,

healthcare, housing, public security,

and economic stimulus programs.

In order to finance this plan, the

government will propose new fiscal

reform measures, the details of

which will likely be unveiled at the

end of the year, aimed at raising

revenue from 14%–17% of GDP by

2014. Funes is likely to have trouble

getting all these reforms through

congress, but he will probably

get at least some of the measures

passed.

■ ■ ■


very positive trend

positive trend

negative trend

very negative trend

current quarter

prior quarter

current quarter

prior quarter

low risk

high risk

President Obama is trying to tie export promotion to job creation by doubling US exports over five years. While Obama has recently claimed progress on this front, the government in fact expects the doubling to occur as a function of global economic recovery, not any new policies. The president may move forward on free trade agreements with South Korea, Panama, and Colombia, but the aggregate impact of these deals on US labor will be negligible due to the relatively small size of these economies compared to the US economy. 0

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The americas

overview

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argentina

Brazil

canada

chile

el salvador

mexico

united states

Venezuela

asia paciFic

europe and eurasia


aBouT sponsors

United States hopes of propping up the recovery.

Inflation is not a near-term concern

since it is expected to stay below

2% through 2011.

While the budget deficit is

expected to decline from 10.2%

last year to 9.1% by the end of

this year, popular opposition to

government spending is limiting

Washington’s ability to provide any

additional stimulus. In the wake of

the healthcare battle and in the run

up to the mid-term Congressional

election, Republicans are fighting to

score points by painting Democrats

as profligate spenders. As a result,

the likely extent of stimulus into

➔ While many analysts

continue to worry about the

durability of US recovery, the

numbers suggest that the

economy is in fact stabilizing.

GDP is expected to grow by 3% in

2010. That said, unemployment is

expected to rise to 9.6% this year,

up 0.3% from last year. This will

continue to be a drag on consumer

demand. The Federal Reserve is

expected to hold its Federal Funds

target rate between zero and

0.25% through the end of 2010 in

next year will be spending the 40%

of the American Recovery and

Reinvestment Act that has yet to be

disbursed.

Meanwhile, failing new action by

Congress, a host of tax breaks

will automatically expire at the

end of the year. While Congress

is expected to extend much of

the income, dividend, and capital

gains tax breaks for all but the

wealthy, uncertainty and questions

about timing may be preventing

some employers from hiring due

to fears of the tax impact on their

consumers and investors.

■ ■ ■


Overview: Asia Pacific

conTenTs

preFace

meThodology

The americas

asia paciFic

overview

risk index

australia

Bangladesh

china

hong kong

india

indonesia

Japan

malaysia

new Zealand

philippines

singapore

south korea

Thailand

Vietnam

europe and eurasia


aBouT sponsors

toward managing risks related

to overheating—most notably

inflation and labor unrest. There are

early signs that, for many of these

economies, managing inflation

and the consequences of higher

inflation will soon become top

macroeconomic policy priorities.

In India, Indonesia, Singapore,

and Vietnam, for instance, higher

than expected growth in 2010 has

raised questions about how to keep

inflation in check while sustaining

growth in 2011. Managing labor

unrest will also be a major concern.

In China, Bangladesh, South

Korea, and Hong Kong, there are

increasing concerns about labor

issues, such as the minimum wage,

that are likely to raise business costs

and disrupt operations.

➔ The Asia-Pacific region, led

by China, India, and Indonesia, is

expected to continue to fuel the

global economic recovery over

the coming quarter, although

concerns that the region’s growth

could be affected by a slowdown

in demand for the region’s exports

remain. Policy priorities among

most of the nations with the fastest

growing economies have squarely

shifted from accelerating growth

The region’s strong economic

growth will also create space for

governments to pursue important

structural reforms, particularly in

countries that are less burdened

by rising inflation or labor

unrest. Elections, or leadership

transitions, in Australia, Japan,

and the Philippines will boost the

prospects for positive changes

in economic policy, including on

taxation. Incumbent governments

in Malaysia and New Zealand have

also announced plans for dramatic

economic reforms, but it is less

clear if these governments have the

political will to push the changes

through in the coming quarter.

■ ■ ■


conTenTs

preFace

meThodology

The americas

asia paciFic

overview

risk index

australia

Bangladesh

china

hong kong

india

indonesia

Japan

malaysia

new Zealand

philippines

singapore

south korea

Thailand

Vietnam

europe and eurasia


aBouT sponsors




Australia 7 8 10 7 X 9 7 7 8 7

Bangladesh 5 5 Y 4 3 X 4 3 5 1 4 YChina 7 5 8 7 Y 6 5 7 Y 6 4 YHong Kong 7 7 10 6 9 Y 8 6 8 7 YIndia 7 4 7 6 XX 5 X 5 4 2 4

Indonesia 6 6 6 6 X 5 X 3 5 4 4 YJapan 6 ▼ 9 10 7 X 7 6 7 9 8

Malaysia 5 3 8 7 X 5 6 4 6 Y 6 YNew Zealand 7 8 10 6 9 Y 7 7 8 7

Philippines 6 X 5 6 4 X 5 5 5 4 7

Singapore 8 ▼ 7 8 8 XX 9 6 6 8 7 YSouth Korea 8 9 7 8 X 7 3 5 7 6 YThailand 4 4 6 5 X 7 6 5 Y 4 8

Vietnam 6 5 9 4 X 6 5 5 Y 5 6

very positive trend

positive trend

negative trend

very negative trend


asia paciFic – risk index summary TaBle – Q3 2010


very positive trend

positive trend

negative trend

very negative trend

current quarter

prior quarter

current quarter

prior quarter

low risk

high risk

Although there is no immediate threat to the ruling Congress-led United Progressive Alliance (UPA), some of its allies and supporters in parliament have deserted it, leaving the coalition with only a slim majority. The government now can only push through legislation that is not polarizing or by expending large amounts of political capital. Under these conditions, controversial reforms, such as changes to India’s highly restrictive labor laws, are unlikely.

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asia paciFic

overview

risk index

australia

Bangladesh

china

hong kong

india

indonesia

Japan

malaysia

new Zealand

philippines

singapore

south korea

Thailand

Vietnam

europe and eurasia


aBouT sponsors

India sale of 3G and broadband wireless

spectrum auctions adding over

$20 billion in revenue. As a result,

the government will likely meet or

beat its projection of a fiscal deficit

of 5.5% of GDP for fiscal

year 2010–2011.

The major cloud on the horizon

is inflation, which exceeded

10% in May in annualized terms.

Worryingly, the rise in inflation

appears to be broad-based, rather

than driven by food or fuel, as had

been the case in recent months. At

the same time, industrial production

growth has picked up sharply;

in April 2010 it grew by 18%

compared with the year prior. High

inflation is likely to feed through to

➔ The economy expanded

by 8.6% in the first quarter of

2010, propelled by strong growth

in investment and exports. Solid

growth has created a strong

environment for hiring, but the

government is still concerned

about potential headwinds from

the global economy, which could

cause exports and capital inflows to

moderate. As such, the government

is only gradually pulling back

fiscal and monetary stimulus.

Government revenue is high, with

robust economic growth resulting

in strong tax collections, and the

wage demands, as many salaries

are linked to the consumer

price index.

The government plans to introduce

new legislation on corporate and

income taxes this year. Strong

industry and political opposition

resulted in the draft tax code

published in June with more

exemptions and preferences than

the previous version. The difficulties

may result in the finance ministry

not being able to cut the corporate

tax rate from 30% to 25% as

originally proposed. Overall, the

code is positive for the fast-growing

infrastructure sector, which is

becoming a major employer.

■ ■ ■


very positive trend

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current quarter

prior quarter

current quarter

prior quarter

low risk

high risk

Opposition victories in the 2 June provincial and municipal elections have rejuvenated the opposition and will further increase policy gridlock in a system already plagued by political infighting. Lee’s ruling Grand National Party performed poorly outside the capital region. Lee’s signature projects are all in jeopardy, including administrative reforms, a major waterways project, and a development plan for Sejong City. A cabinet reshuffle is likely and may include the replacement of Prime Minister Chung Un-chan.

South Korea

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australia

Bangladesh

china

hong kong

india

indonesia

Japan

malaysia

new Zealand

philippines

singapore

south korea

Thailand

Vietnam

europe and eurasia


aBouT sponsors

raise rates, albeit gradually, over the

course of the year.

Labor unrest is almost certain

to grow during the summer

given the 1 July implementation

of a law curbing the power of

trade union representatives at

Korean companies. Korea’s 1997

Labor Act banned companies

from paying full-time trade

unionists, but many of these union

representatives have continued

to enjoy payroll and benefits

packages paid by firms. Under

the revision to the law, employers

must now cap the number of union

representatives at 24 (although

some variation is permitted based

on the size of both the workforce

➔ South Korea’s robust

economic recovery is accelerating,

with the IMF now raising growth

projections for 2010 to 5.8%,

before a slight moderation back

to 5% in 2011. Economic activity

is increasingly led by the private

sector. A national debate will

intensify about whether, when, and

how to roll back the expansionary

policies pursued by President Lee

Myung-bak. The Bank of Korea,

which in mid-July raised interest

rates from their all-time low of 2%

to 2.25%, will probably continue to

and the particular union).

Some companies have already

struck collective bargaining deals

with their unions, and others may

decide to pay union representatives

under the table. On balance,

however, companies will tread

carefully given that the government

has threatened violators of the

so-called time off rule with jail and

fines. The Korea Confederation of

Trade Unions and the Korean Metal

Workers Union have promised

strikes in July. Kia Motors, which

pays more than 100 full-time trade

union representatives, is the most

prominent target of protests and

potential strike actions.

■ ■ ■


conTenTs

preFace

meThodology

The americas

asia paciFic

europe and eurasia

overview

risk index

Baltics

Belgium

Bulgaria

czech republic

denmark

France

germany

hungary

ireland

italy

luxembourg

netherlands

norway

poland

portugal

romania

russia

spain

sweden

switzerland

Turkey

ukraine

united kingdom


aBouT sponsors

Overview:Europe and Eurasia

Italy (where excessive bureaucracy

hurts the business environment)

and Greece would help boost

economic growth and improve

the employment outlook. Aging

populations are also a concern

throughout most of Europe, and

many countries are considering or

implementing pension reforms. The

effects of these kinds of structural

changes on business activity

and growth have been lagging,

however, and political instability in

Spain, Italy, Germany, and Portugal

may jeopardize implementation of

these reforms.

Russia’s situation is, however,

more positive. Increased industrial

output, manufacturing, and fixed

investments were positive drivers

for the economy during the most

➔ Europe presents many

concerns, with EU authorities

continuing to monitor the

trajectory of the eurozone crisis

and the fiscal consolidation and

austerity plans of many European

economies. A longer-term concern

looms, however, particularly for

the southern European nations of

Italy, Greece, and Portugal: Their

competitiveness is challenged by

inflexible labor markets and tax

environments that have stunted

business activity. Spain has passed

labor reforms, and similar efforts in

recent quarter, while rising retail

sales further demonstrated a

recovery in domestic demand.

Nevertheless, the price of oil

and possible tax hikes on the

economically vital oil and gas

sectors are points of uncertainty in

the near-term growth outlook.

Positive economic trends are also

evident in Turkey. The economy

grew during the first quarter of

2010 compared to the same period

a year ago, and unemployment has

been declining. If implemented

effectively, a new fiscal rule will be a

positive long-term driver of growth.

As is the case in Russia, a boost

in public expenditure ahead of

upcoming elections could support

public sector workers and social

initiatives.

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conTenTs

preFace

meThodology

The americas

asia paciFic

europe and eurasia

overview

risk index

Baltics

Belgium

croatia

czech republic

denmark

France

germany

hungary

ireland

italy

luxembourg

netherlands

norway

poland

portugal

romania

russia

spain

sweden

switzerland

Turkey

ukraine

united kingdom


aBouT sponsors




Baltics 6 6 7 4 7 X 4 6 7 3 YBelgium 4 7 Y 8 7 8 Y 5 6 7 5 YCroatia 6 7 8 5 8 3 5 7 3 YCzech Republic 6 8 8 6 6 X 7 6 8 5

Denmark 8 9 8 7 9 6 5 8 5 YFrance 7 8 7 6 8 X 4 6 8 4 YGermany 6 8 8 6 7 Y 3 6 9 5

Hungary 6 X 8 9 5 7 Y 6 6 7 4

Ireland 6 9 8 5 9 6 7 8 3 YItaly 5 Y 7 Y 7 6 6 Y 4 6 8 4

Luxembourg 7 9 8 7 8 X 3 X 5 9 7

Netherlands 6 8 8 6 7 Y 3 5 8 6

Norway 7 9 8 7 Y 8 4 5 9 8

Poland 8 X 7 9 6 7 6 6 Y 7 5

Portugal 7 8 7 5 7 Y 3 6 7 3

Romania 6 5 7 4 Y 7 4 5 6 4

Russia 7 7 6 6 X 6 6 7 5 4

Spain 6 Y 7 Y 7 4 7 Y 3 8 8 2

Sweden 7 Y 9 8 7 8 4 6 9 6

Switzerland 8 8 8 7 Y 8 5 5 9 8

Turkey 6 Y 5 5 Y 6 7 4 6 5 4

Ukraine 6 5 Y 8 3 X 5 6 4 5 4

United Kingdom 7 8 7 6 Y 9 7 6 8 5

europe and eurasia – risk index summary TaBle – Q3 2010

very positive trend

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General elections are not due until 2013, but early elections are increasingly likely and could be triggered if Italy’s public debt becomes an acute problem for markets. A sovereign debt downgrade could precipitate a further loss of public confidence in the government of Prime Minister Silvio Berlusconi, which is already suffering in the polls. Left-wing Democratic Party leader Pier Luigi Bersani is aggressively opposing current austerity plans, attempting to align his party with the angry popular mood.

Italy

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Baltics

Belgium

croatia

czech republic

denmark

France

germany

hungary

ireland

italy

luxembourg

netherlands

norway

poland

portugal

romania

russia

spain

sweden

switzerland

Turkey

ukraine

united kingdom


aBouT sponsors

EU authorities, Italy announced

austerity measures in May intended

to halve its deficit to 2.7% of GDP

by 2012. Rome will freeze public

sector wages and hiring for three

years, and decrease funding to

Italy’s regions and cities. That may

force local governments to lower

healthcare spending and raise taxes,

which in turn may constrain regional

business activity, especially in the

already stagnant south. Collectively,

these measures will probably hurt

domestic demand by decreasing

government spending and

household consumption. The current

plans do not yet, however, include

tax increases, and the markets and

➔ The Italian economy

continues to struggle, with growth

of just 0.5% year-on-year in the first

quarter of 2010, and unemployment

for the same period at 9.1%. Italy’s

public deficit, however, is not in as

dire a situation as those of Spain or

Greece. Market pressure remains a

concern and a source of uncertainty

for the business environment and

employment situation.

Public debt is estimated at 120%

of GDP. To calm markets and

EU authorities may consider that

insufficient, raising the possibility of

future tax hikes.

The government has sought

to boost competitiveness by

establishing so-called zero

bureaucracy zones in the country’s

south, significantly cutting red tape

in order to foster entrepreneurship.

Many Italian firms employ few

workers, so this may not significantly

increase employment. The failure to

deal effectively with competitiveness

is one of the main obstacles to

employment and economic growth

in Italy.

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very positive trend

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The heated campaign ahead of the 12 September public referendum will mark the beginning of a long battle leading into the general elections. The declining popularity of the ruling Justice and Development Party (AKP) may lead the party to resort to populist election spending, reducing the incentives for compliance with the new fiscal rule. The parliament has already approved the government’s proposal to create 70,000 new posts for teachers, 30,000 for the police, and 15,000 for clerics.

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overview

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Baltics

Belgium

croatia

czech republic

denmark

France

germany

hungary

ireland

italy

luxembourg

netherlands

norway

poland

portugal

romania

russia

spain

sweden

switzerland

Turkey

ukraine

united kingdom


aBouT sponsors

in March dropped by 2.1

percentage points year-on-year to

13.7%. Inflation is also declining. In

June, annualized inflation dropped

to 8.4%, a decline of just over half

a percentage point from the May

numbers. A 2.5% slide in food

prices was the main factor behind

the falling inflation, with lower

energy prices also contributing.

Lower inflation prompted the

central bank to announce that it

will probably maintain interest

rates at current levels in order to

support the economic recovery.

Analysts expect the central bank to

start tightening in September and

to increase the weekly repo rate,

currently at 7%, by 100–125 basis

points by the end of the year.

➔ Turkey’s economy remains

strong, though it does face some

obstacles. GDP grew by 11.7%

in the year ending in March 2010

compared to the same period in

2009, but there was a considerable

slowdown in the quarter-on-quarter

growth rate. GDP grew by 1.7%

in the fourth quarter of 2009

compared to the third quarter, but

output remained broadly flat in

the first quarter of 2010 compared

to the three months ending in

December.

Other macroeconomic indicators

were also positive. Unemployment

While monetary tightening is

delayed, fiscal tightening is already

underway. The government aims

to pass legislation that introduces

a new fiscal rule before the 2011

budget is implemented. If followed

rigorously, the law could encourage

fiscal prudence in the absence of an

IMF program. Currently the central

government is outperforming the

budget targets due to a strong

cyclical recovery and tax hikes.

In the first quarter, the central

government budget deficit was

4.7% of GDP. Between January

and May, the central government

deficit declined by slightly more

than half compared to the same

period in 2009.

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Overview:Middle East and Africa

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egypt

israel

kuwait

morocco

nigeria

Qatar

saudi arabia

south africa

united arab emirates

aBouT sponsors

but incentives among power

brokers in both countries to retain

the status quo are strong. Egypt

faces a number of challenges

both politically and economically

that could be aggravated by the

sudden death of President Hosni

Mubarak, while Saudi Arabia’s aging

princes are likely to compromise

on a successor, leaving most of the

squabbling behind closed doors.

The Gulf Cooperation Council

(GCC) countries are slowly

recovering from the economic crisis,

with Qatar projecting outstanding

growth numbers for 2010 and

Kuwait expecting another budget

surplus coupled with healthy GDP

growth. The United Arab Emirates

(UAE) has emerged from the worst

phase, but Dubai’s debt issues

are not over yet and Abu Dhabi

➔ As the world economy

emerges from recession, the

Middle East and Africa present

opportunities for growth but also

carry stability risks.

Regional tensions remain a concern.

The precarious situation between

Iran and Israel is unlikely to affect

growth in Israel, however, barring

military conflict. Egypt and Saudi

Arabia, which are the West’s

primary Muslim allies in the region,

are both led by aging leaders and

face possible successions in the

near term. Volatility is a concern,

enjoys new financial leverage

over its sister emirate.

Employment will be a priority

across the African continent in

2010. Unemployment continues

to dog Morocco, and despite

high government spending, new

jobs will hinge largely on the EU’s

economic recovery. Algeria faces

both ongoing political instability

and a rocky investment climate in

2010, with rising food prices and

high unemployment, while Nigeria

faces high inflation and demands

for an increase in public-sector

wages. After a successful World

Cup, South Africa must address job

creation to mitigate the possibility

of social unrest caused by crippling

double-digit unemployment rates.

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egypt

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Algeria 3 4 Y 5 4 Y 3 2 5 4 1

Egypt 6 Y 5 Y 8 5 Y 5 5 4 2 2

Israel 7 7 Y 7 8 7 5 5 7 7

Kuwait 7 6 7 Y 6 X 5 9 4 7 8

Morocco 7 6 Y 8 5 5 4 4 3 5

Nigeria 5 X 2 5 4 X 5 4 4 1 2

Qatar 7 6 8 6 X 5 7 4 5 7

Saudi Arabia 6 Y 6 6 Y 6 X 6 7 4 6 6

South Africa 6 Y 3 6 5 6 4 Y 6 4 2 Y

United Arab Emirates 7 6 7 Y 6 5 8 4 7 7

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middle easT and aFrica – risk index summary TaBle – Q3 2010


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While Israel’s engagement with Hamas and Hizbullah remains tense, and meaningful talks with the Palestinian Authority are unlikely, Israel’s relationship with Turkey and Iran are of even more concern. The government appears unsure of how to reverse its deteriorating relations with Turkey. And while the chances of an Israeli strike on Iranian nuclear facilities remain small, if international sanctions fail to influence Tehran’s behavior, hawks in Israel could start pushing for a preemptive attack.

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central bank chief, Stanley Fischer,

is high. The two-year budget

passed earlier this year means that

any fiscal controversies have been

postponed. Israel also signed an

ascension agreement with the

OECD in June. Membership in the

elite group, one of Fischer’s long-

running efforts, is taken in Israel as

approval of the country’s long-term

economic policies and will likely

mean more foreign investment in

Israeli markets. Some people are

concerned, however, that Israel

has moved from being one of the

most dynamic emerging markets

to being one of the smallest

developed markets.

➔ Israeli markets escaped

much of the fallout from the

Greek crisis and remain strong,

following the country’s relatively

steady economic trajectory

during the global financial crisis.

The Israeli Central Bank recently

raised growth forecasts for 2010

to 3.7% from 3.5% and lowered

the unemployment forecast for

the end of the year to 7.0% from

7.4%. Inside Israel, there is growing

confidence that the country has

escaped the global slowdown

and, accordingly, confidence in the

Despite economic stability, political

uncertainty in Israel is growing.

Following the poor handling of the

pro-Gaza Turkish flotilla, as well

as US pressure to extend a freeze

on settlements in the West Bank,

Prime Minister Benjamin Netanyahu

has multiple interests to balance.

His political coalition is unlikely to

collapse in the coming quarter, as

he will likely look to placate the

rightwing elements that are wary

of the government acquiescing

to pressure from the Obama

administration on settlements and

territorial concessions.

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very positive trend

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King Abdullah is 85 and succession could soon become an issue. Although the powerful Saudi princes have a competitive relationship, they want to ensure Saudi stability and the continuation of the Saud family dynasty. So while there could be intense political jockeying immediately following Abdullah’s death, the princes will rally around whomever the Allegiance Council selects as the next king. That choice will have a big impact on the pace of social reform in Saudi Arabia.

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and Saudi youths in particular have

a hard time getting jobs. Saudi

Arabia’s human capital problem will

not be resolved in the short term,

and the country will continue to

depend on foreign workers for both

its unskilled and skilled labor needs.

Saudi Arabia is embarking on

an ambitious plan to develop

alternative energy sources,

intended both to create jobs and

to address Saudi Arabia’s long-term

energy needs. Electricity generation

exhausts around three-quarters

of Saudi Arabia’s domestic oil,

and strong oil export revenues

will be necessary to support the

➔ With oil above $70 a

barrel, the outlook for the Saudi

economy is rosy. The budget is on

track for another surplus, and the

country will continue its aggressive

spending on infrastructure projects,

focusing on transportation and

utilities. This could push GDP

growth above 3% in 2010. Riyadh

wants to have infrastructure in

place for its growing economy and

population, and remains confident

about the direction of its economy.

But unemployment remains high,

government’s continued spending

on infrastructure. Although Saudi

authorities previously stated

that the country would focus on

developing solar rather than nuclear

power, King Abdullah in April

announced the establishment of a

new nuclear and renewable energy

center, indicating that Saudi Arabia

will pursue nuclear power as well.

From a political perspective, the

pace at which Saudi Arabia moves

forward on its nuclear program will

be driven by the progress of Iran’s

nuclear program, as well as the

programs of the other GCC states.

■ ■ ■


About this Report

The Global Market Brief & Labor Risk Index is jointly developed by KellyOCG, the Outsourcing and Consulting Group of human resources provider,

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Q3 2010 Global Market Brief & Labor Risk Index

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Transcript of Q3 2010 Global Market Brief & Labor Risk Index