France: Pension Reform Will Likely Succeed Despite Historic Strikes

PARIS, FRANCE - JANUARY 24: SNCF workers march with an estimated 400,000 people who took to the streets of Paris to protest against President Macron’s controversial pension reform on the day that it is formally presented for review in the Council of Ministers on January 24, 2020 in Paris, France. Dubbed ‘Black Friday’ by participating unions, today marks the 51st consecutive day of strikes in France and the 7th day of national strikes. (Photo by Kiran Ridley/Getty Images)GETTY IMAGES

President Macron’s ambitious but controversial pension reform agenda has triggered historically long strikes that are impinging on economic activity. After successfully overhauling labor regulation in 2017, Macron has now turned toward a three-part pension system reform that includes a simplifying reduction in pension categories, greater redistribution of benefits toward lower income earners, and an increase in the pension age from 62 to 64. Unions have coordinated strikes in response that have proven more durable than in 2017. In response, the government has backtracked on a key provision of pension reform, raising the retirement age, in an effort to bring strikes to an end. Despite the concession, strikes persist. However, the maneuver divided unions which may well weaken ongoing strikes. That is clearly the expectation of the government which maintains it will push through the remaining two pillars of pension reform.

Government Risk and Social Polarization Risk offer useful measures for tracking and forecasting where French pension reform is heading. Government Risk is well below its position during the 2017 strikes over labor deregulation, implying that Macron’s legislative support remains behind his agenda. In contrast, Social Polarization Risk is higher and forecast to remain elevated relative to where it sat in late-2017. Given the pension age concession and the resulting division within the labor movement, we still expect the government to successfully push through its diluted pension reform. Going forward, watch Social Polarization Risk as a proxy for ongoing strikes. It is forecast to fall through mid-March before regressing back to a higher trend. If that decline in Social Polarization Risk persists it will be a positive sign for pension reform enactment.

Following our “worst is over” analysis from early last month, our data continues to be relatively bullish on Lebanon now that a government has finally formed. Per the figure below, we project that Lebanese Government Instability Risk (green line) will continue to decline from the late 2019 peak following former PM Hariri’s resignation associated with large-scale anti-government demonstrations, indicating that PM Hassan Diab’s new Hezbollah-backed government will survive despite continued political violence and an ongoing economic crisis exacerbated by persistent geopolitical risks. As such, while the new government is far too weak to credibly reform Lebanon’s economy or tackle its balance of payments crisis, it can at the very least slow the bleeding. Given recent trends, the very persistence of the government should help keep our Sovereign Risk indicator (blue line) from returning to recent highs. 

Italian Government Instability Risk – while steady through March and projected to increase sharply through 2020 – is beginning to again show traction against domestic financial markets. Government Instability Risk is positively correlated (r = +0.26) with Italian 10-year yields since 2013, and the 30-day rolling correlation became positive again in December 2019 as fears that PM Conte’s technocratic government may not survive for long. Government Instability is being driven higher by the gradual splintering of its coalition partner, the anti-establishment M5S party which is more a loose coalition than the more policy coherent Lega Party. M5S Party leader Luigi Di Maio stepped down on 22 January and further defections could bring down PM Conte’s government. Pressuring the governing coalition, Salvini’s Lega Party has been winning regional and by-elections – putting pressure on weak supporters within the government to defect. On the flip side, note that Government Instability Risk does not rise above recent peaks, suggesting that the coming Italian instability is unlikely to spiral into some kind of euro crisis event in 2020. As such, and given the markets tendency to over-react to recurrent Italian political crises, there could also be an opportunity in Italy-exposed assets after the storm has passed.

Thai Institutional Stability Risk has been on the rise since former NCPO leader Prayut assumed power as civilian prime minister in June 2019. The constitutional court’s junking of charges this past week in a case against Thailand’s Future Forward opposition party — a new party that has garnered substantial popular support, and which found itself in court over allegations of attempting to overthrow the monarchy — will offer a brief period of respite, driving Institutional Stability Risk downwards through mid-March 2019. We nevertheless forecast a subsequent re-escalation of Risk driven by a series of additional pending cases that threaten to dissolve the party. Our data suggests these risk dynamics have potential material implications for the baht. To wit: the figure below displays (in light blue bars) trading days from June 2019 onwards where the direction of daily movement in Thai Institutional Stability Risk has correctly predicted the direction of daily movement in asset returns (i.e. the magnitude of baht appreciation/depreciation relative to the USD as a function of declining/rising political risk). Per the growing accumulation of light blue bars in the rightmost portion of the figure, Thai Institutional Stability Risk has served as an increasingly robust predictor of directional movement in baht returns, particularly as Risk has risen over the past few months. While the THB has strongly out-performed other EM currencies over this same time period (an issue the Bank of Thailand is struggling to address), our forecast of rising Institutional Stability Risk from Q2/2020 onwards suggests some potential for politically-induced countervailing trends, such that heightened political instability may — somewhat paradoxically — offer near-term relief for the baht, while nevertheless running the risk of further political uncertainty and related THB fluctuations further down the line.

Forward-looking updates from GeoQuant's high-frequency political risk intelligence platform. 

Publish : 2020-01-28 10:13:20

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