Country Risk Month Ahead: August 2021

India's potential third COVID-19 wave

Epidemiologists at the Indian Council for Medical Research - the country's pre-eminent medical body responding to coronavirus disease 2019 (COVID-19) - have said that a likely third wave would begin in India by end-August. IHS Markit downgraded India's GDP growth forecast to 7.7% from 9.6% following the second wave, but an easing of restrictions has helped economic activity to show signs of normalization in June and July. However, a forthcoming wave (combined with a seemingly erratic monsoon) would probably limit a faster recovery. India's second COVID-19 wave was arguably exacerbated by large public gatherings involving hundreds of thousands of people at a time of very low vaccination rates. Although no major events or elections are scheduled ahead of August-September, vaccination rates remain relatively low (only 7% of the population is double vaccinated), offering limited protection against a resurgence of cases. The resurgence is likely to most severely affect rural areas, where vaccination rates are lower than major urban centers. In June, the government announced a USD86-billion stimulus recovery package focused on extending credit guarantees and investments in public health. A third wave and inevitable movement restrictions would increase pressure for further stimulus measures, primarily to expand budget allocations for social welfare schemes in rural India at a time when demand is already slowing and fuel prices are inflated.

Indicators to watch:

• Maharashtra announcing a resumption of major restrictions by August would portend a third wave, mirroring trajectories of the previous two waves.
• Inability to speed up daily vaccination rates in rural India ahead of the third wave would exacerbate its impact in those areas.

South Africa's potentially delayed municipal elections

The High Court is likely to deliver a decision on an application made by the Independent Electoral Commission (IEC) for the postponement of October's municipal elections in August 2021. An IEC report previously determined that if elections were held on the previously announced date of 27 October 2021, then these would not be free and fair. This is primarily because political parties are unable to campaign while lockdown measures, aimed at mitigating the spread of the COVID-19 virus, remain in place. The elections will provide an important indicator of support for incumbent President Cyril Ramaphosa, and the reform agenda that helped him to win the presidency of the ruling African National Congress (ANC) party in 2017. Supporters of former president Jacob Zuma (Ramaphosa's political rival) began a series of violent protests on 9 July following his arrest, and are likely to try to disrupt ANC campaigning in Gauteng and KwaZulu-Natal provinces in an attempt to weaken Ramaphosa within the party. A postponement of the municipal elections would provide Ramaphosa with time to ensure that Zuma's supporters do not hinder local ANC candidates' ability to consolidate popular support to win back key urban areas that party had lost in August 2016. A postponement, which would likely be challenged in court by opposition parties, would indicate that commercial agreements - particularly in the construction and energy sectors, concluded between September 2021 and February 2022 between municipalities and service providers - are therefore very likely to come under review, with a moderate risk of cancellation.

Indicators to watch:

• If the High Court rejects the IEC's application for a postponement, the matter is likely to require a constitutional amendment by parliament, which is unlikely to be finalized within the available time. This would escalate the likelihood of contract cancellation.
• If the COVID-19 infection rate - which began to decline after strong lockdown measures were imposed on 27 June 2021 - continues to decrease, thus allowing for further easing of lockdown measures, then a shorter postponement of the elections is likely.

Ecuador's IMF renegotiation

In August, Ecuador will seek to renegotiate its existing agreement with the International Monetary Fund (IMF). The agreement was signed in August 2020 under the previous administration for USD6.5 billion. So far, USD4 billion of this amount has already been disbursed, with a further two disbursements of USD400 million and USD700 million expected this year. The key issues under discussion are likely to be tax reform, subsidies, and the current administration's new economic plan, which has not yet been presented. The IMF will likely seek clarity on these before any new agreement is reached. Although the removal of subsidies and implementation of value-added tax (VAT) were conditions imposed by the IMF when the last agreement was signed, President Guillermo Lasso has repeatedly rejected increasing taxes, stating that he hopes instead to rely on increasing foreign investment in key sectors, including mining and oil and gas, to increase government revenue. Historically, negotiations between the IMF and Ecuador have been positive and, following Lasso's inauguration in May 2021, the IMF stated its willingness to renegotiate the agreement with the new administration. However, Lasso's CREO party holds only 12 of 137 seats in Ecuador's National Assembly, and the IMF remains highly unpopular in Ecuador. Therefore, an economic plan including reforms implementing austerity linked to IMF conditionality would be unlikely to pass, jeopardizing Ecuador's economic recovery.

Indicators to watch:

• Unsuccessful attempts to negotiate support from opposition parties for an economic plan would increase the risk of Lasso using executive decrees to bypass National Assembly approval.
• New legislation granting tax breaks would indicate the government's unwillingness to compromise in IMF negotiations over tax reform.

Posted 03 August 2021 by James Petretta, Country Risk Director, Economics & Country Risk, S&P Global Market Intelligence