– From The Great Crash 1929, JK Galbraith, 1954
Galbraith’s classic history of a bubble and its unwinding includes the above account of how plentiful liquidity can feed fraud and embezzlement in an economy, but the discovery of wrongdoing does not normally appear until liquidity conditions tighten.
We have to note these corruption scandals now bubbling up in emerging markets. To be precise, bubbling up in those emerging markets we have identified as having ‘benefited’ from large portfolio inflows in recent years. It is something we are keeping a very close eye on as we build our portfolios.
The poster child is clearly Brazil, where the Lava Jato (‘car wash’) scandal has uncovered massive payments kicked back from contractors to directors of Petrobras, with much of the money then going to political parties currently in government. This has led to the CEO of Petrobras resigning, 54 senior politicians and businesspeople being subject to a supreme court-led investigation, and street protests across Brazil involving approximately a million people.
Elsewhere, similar (if smaller problems) are appearing. In Mexico, the reformist president Enrique Peña Nieto has had his initially very positive reputation wiped out not only by ongoing violence, but also by the discovery that his US$7 million mansion is actually owned by a businessman who has won many large contracts from Peña Nieto’s state and national administrations.
Meanwhile, in Malaysia, a complicated scandal is unfolding in which it appears that the sovereign investment fund 1MBD is somehow US$11bn in debt. Media reports link the prime minister Najib Razak (who is also the chairman of 1MBD), his stepson Riza Aziz (producer of Wolf of Wall Street!) and their friend Jho Low to some transactions that may yet prove embarrassing for the government.
Finally, in Chile, major mining company Soquimich has been charged with tax evasion for millions of dollars of fake tax receipts that were used to shield illegal payments to politicians.
And the US Federal Reserve hasn’t even raised interest rates yet. We remain watchful and wary of both our country and company exposures as these issues play out.