How Populism May Sway Policies in Emerging Markets

14 September 2021

2 min read

Adriaan du Toit| Director—Emerging Market Economic Research; Senior Economist—Africa

COVID-19 has increased inequality and aggravated social problems across emerging market economies, fueling populist pressures—but several emerging countries share features that make them particularly vulnerable. Assessing key environmental, social and governance (ESG) metrics can help identify potential pressure points.

Crisis can be fertile ground for populism. The unique characteristics of COVID-19 may have stifled unrest initially, but the pandemic has exacerbated inequality and poverty, which could fuel public discontent, impacting political and policy paths. It has also given a double edge to the youthful nature of many emerging countries. A young demographic profile is normally a positive for economic growth, but could pose challenges if the pandemic curtails business activity and permanently increases unemployment.

Political and policy shifts are arguably more likely in countries where socioeconomic conditions are more fragile and where COVID-19 scarring is deeper. But the resulting pressure for change could lead to contagion, pushing politicians across emerging markets to pursue populist policies, delay fiscal consolidation, and/or erode democratic standards.

ESG Considerations Are Vital to Understanding Political and Policy Risks

The COVID-19 pandemic has adversely affected income, health and education across emerging markets. Lower-skilled workers have been most affected, and poverty has increased substantially in low-income countries with weak social safety nets. When we evaluate sovereign bonds, we apply an ESG framework that accounts for wide-ranging factors, including these negative development impacts.

Of all emerging regions, we think Africa has been hardest hit in terms of human development and equality. Africa’s young demographic profile probably reduced the incidence of COVID-19 deaths, but potential economic growth could be diluted if the pandemic undermines human development indefinitely. Viewed through this lens, Africa is at greatest risk of political and policy shifts due to potential COVID-19 scarring. But quite a few emerging markets in Asia and Latin America have comparable demographic and income inequality dynamics, and therefore face similar risks (Display, below).

Emerging Markets Have Younger Populations and Greater Inequality than the G7* Average

Income Distribution and Median Age

EM rates of income inequality vary around the G7 average, but the median age in EM countries is uniformly lower than the G7.

Current analysis does not guarantee future results.
As of December 31, 2020
*G7 is the US, Japan, Germany, France, Italy, the UK and Canada
Source: Haver Analytics, Our World in Data and AllianceBernstein (AB)

Economic Populism Directly Impacts Policy

Economic populism typically features the prioritization of growth and income redistribution, while addressing fiscal and inflation risks takes a back seat. Because the COVID-19 crisis has exacerbated inequality and poverty, economic populism could rise and/or democratic principles could degrade. If emerging-market economic growth disappoints and incomes and employment remain depressed, populist policy options could gain traction. These include social security expansion, a higher debt threshold and burden sharing between central banks and governments (fiscal dominance).

Africa Most Exposed to COVID-19 Aftershock

In Africa, where poverty and inequality are particularly pronounced, the political ground has already started shifting, including leadership changes and civil unrest.

In the North, Tunisia’s President Saied dismissed the government, suspended parliament, and transferred all powers to the presidency. In South Africa, President Ramaphosa responded to unprecedented civil unrest by reshuffling his cabinet, in the process giving himself direct oversight and control over intelligence gathering and operations. Saied and Ramaphosa are champions of anticorruption and are popular among voters. But public discontent has intensified during the pandemic, and the tables could turn on the two leaders if economic recovery is delayed.

Such a reversal occurred unexpectedly in Zambia last month with opposition party leader Hakainde Hichilema’s landslide defeat of President Lungu. Zambia’s economy was faltering long before the pandemic, but COVID-19 brought added pressure, and the country defaulted on its eurobonds in 2020. The government’s obstructive and opaque policies also ruled out meaningful multilateral assistance, worsening the crisis. The power of incumbency was still expected to tilt the scales in Lungu’s favor. But in the event, voter turnout surged to 70% (from 58% in 2016), with younger citizens eager for change.

Political Shifts Can Be Spontaneous or Formal

Spontaneous political shifts might become normal in post-pandemic conditions, but elections will remain formal pressure points and can flag potential positive or negative turning points (Display, below).

Over the next year, several African countries will go to the polls, and the results could alter political and policy trajectories (Angola, Kenya and South Africa). Potentially controversial elections loom in Latin America (Brazil, Chile, Colombia and Costa Rica). And in Asia, while some elections (for instance, Malaysia and the Philippines) might not be front-of-mind for investors, we think it remains important in the wake of the crisis to track public sentiment and policy signals closely.

Elections Are Formal Pressure Points

There are important elections coming up in 13 EM countries across Africa, Latin America, Asia and the Middle East.

For illustrative purposes only.
As of September 7, 2021
Source: AllianceBernstein (AB)

Key ESG Metrics Can Highlight Potential Pressure Points

While it’s impossible to predict every change in the political and policy landscape, paying close attention to ESG metrics can help identify where the temperature is rising the fastest. As we’ve seen, poverty and income inequality are key drivers of populism. Demographics can also be an important factor in unemployment rates and appetite for change. And poor governance records can exacerbate social problems and prevent timely or effective reform. While emerging economies still have great potential, it’s important to fully assess each country’s ESG status to evaluate all the risks.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Author

Adriaan du Toit

Adriaan du Toit is a Senior Vice President and Senior Economist for Africa. He also leads AB's team of emerging-market economists. He joined AB in 2017 as a Sub-Saharan Africa economist. Prior to joining the firm, Du Toit was a Sub-Saharan Africa currency and rates strategist and director at Citigroup in Johannesburg, where he worked from 2013 to 2017. Between 2007 and 2013, he held three roles at Standard Bank in Johannesburg (rates analyst, head of Macro Research and fixed-income strategist). Du Toit started his career in 2004 as an economist at the South African Reserve Bank. He holds a BCom (Hons) in economics and an MCom in econometrics (cum laude), both from the University of Pretoria in South Africa, and an MSc in financial economics from the University of Oxford. Location: London

This information is for exclusive use of the wholesale person to whom it is provided and is not to be relied upon by any other person. It is not intended for retail or public use and may not be further distributed without prior written consent of ABAL.
This webpage has been prepared by AllianceBernstein Australia Limited (“ABAL”)—ABN 53 095 022 718, AFSL 230 698. Information in this webpage is only intended for persons that qualify as “wholesale clients,” as defined by the Corporations Act 2001, and is not to be construed as advice. This webpage is provided solely for informational purposes and is not an offer to buy or sell securities. The information, forecasts and opinions set forth in this webpage have not been prepared for any recipient’s specific investment objectives, financial situation or particular needs. Neither this webpage nor the information contained in it are intended to take the place of professional advice.
You should not take action on specific issues based on the information contained in this webpage without first obtaining professional advice. Past performance does not guarantee future results. Projections, although based on current information, may not be realized. Information, forecasts and opinions can change without notice and ABAL does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained in this webpage, ABAL does not warrant that this webpage is free from errors, inaccuracies or omissions. ABAL disclaims any liability for damage or loss arising from reliance upon any matter contained in this webpage except for statutory liability which cannot be excluded.
No reproduction of the materials on this webpage may be made without the express written permission of ABAL. This information is provided for persons in Australia only and is not being provided for the use of any person who is in any other country.