Fear of unpopular actions paralyses the system

By Maarten-Jan Bakkum, senior emerging markets strategist, Multi Asset at NN Investment Partners

A deteriorating economy, with an increasing amount of corporate defaults, rapidly increasing unemployment, higher interest rates, less lending and a weakening currency, inevitably increases the pressure on the political system.

The severity of the economic problems and the strength of the political institutions will determine whether a political crisis can be avoided or whether it will ultimately be inevitable.

After roughly five years of declining economic growth and exchange rate corrections, tensions are clearly building in the emerging world. This is reflected in the financial system, where defaults are common and banks’ profits are sinking fast.

It is also visible in society, where rising unemployment and interest rates are leading to a sharp drop in purchasing power, and in politics, where the government has to deal with growing deficits and dwindling support.

Reforms are needed to give the economy a bit of time to breathe, but the fear of taking unpopular actions is now paralysing the system.

The economic crisis is redefining relations inside and outside the government, leading to accusations and disclosure of improper government activities. Corruption scandals often emerge in difficult economic times.

Each country responds differently to increasing economic difficulties. In countries with a clear autocratic tradition, the government toughens state control, the media is controlled more strictly and personal freedom is scaled-down.

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