Strategy Note /

Misery in emerging markets: Is Sri Lanka the protest canary in the EM coal mine?

  • High misery (inflation plus unemployment) relative to history indicates protest potential

  • Weak government is a necessary factor for this potential to erupt into serious disruption

  • Ex-Sri Lanka, high misery versus history and weak government in Lebanon, Pakistan, Romania, Thailand, with Turkey close

Misery in emerging markets: Is Sri Lanka the protest canary in the EM coal mine?
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
11 July 2022
Published byTellimer Research

Is Sri Lanka the disruptive protest canary in the coal mine of emerging markets? Keep an eye on Lebanon, Pakistan, Romania and Thailand, with Turkey close behind.

In light of the ransacking of the residences of the President and Prime Minister of Sri Lanka, we look for signs of vulnerability to mass disruption elsewhere in the emerging markets.

Protests and disruption of the scale seen in Sri Lanka occur when there is a backdrop of economic stress, without recent precedent, in addition to weak government.

We measure economic stress using the misery index — inflation plus unemployment — relative to the prior 10-year peak, as opposed to a high misery index in absolute terms alone. There is likely no absolute level of tolerance for misery before protests erupt but, rather, a relative level defined by the specific experience of a population.

And we define weak government as one which lacks a clear popular mandate or a stable coalition in a democratic state, sufficient control mechanisms in an authoritarian state, or has insufficient external support where there is questionable domestic political legitimacy. Protests are more likely to have a disruptive effect when the government is not strong enough to contain or counter them.

  • Extremely high misery relative to the last 10-year peak (over 10 percentage points higher) is evident in: Lebanon, Sri Lanka, and Turkey.

  • High misery relative to the last 10-year peak (between 4 and 10 percentage points higher) is evident in: Ghana, Pakistan, Poland, Romania, Russia, Thailand.

  • Apart from Sri Lanka, among those with unusually high misery and weaker governments are arguably:

    • Lebanon — PM Mikati was nominated by merely 42% of MPs and will likely struggle to establish, let alone maintain, a stable coalition, particularly given the unpopular economic laws drafted by the previous government, which still need to be passed to secure external funding, and the looming succession battle for the office of the President when the term of incumbent Aoun (aligned with Hezbollah) ends at the end of October 2022.

    • Pakistan — Incumbent PM Sharif is having to swallow unpopular economic decisions to re-track the IMF deal, is reliant on the support of Army chief Bajwa (which is not an unusual arrangement but the tarnished domestic image of Bajwa is), faces an opposition led by Khan which is highly organised and popular, and has an election due before October 2023.

    • Romania — The governing coalition is a schizophrenic one, straining between the market-unfriendly PSD (with 34% of parliament) and the market-friendly PNL (29%), and locked-in to a tricky 18-month alternating PM arrangement (supposedly until the next election in March 2025).

    • Thailand — Incumbent, military-backed PM Chan-o-cha suffers from low popularity, is opposed by a candidate with family name recognition (Shinawatra) and long-established party support infrastructure (Pheu Thai), and faces an election before May 2023.

    • Turkey — President Erdogan's recent reform of the electoral law, which suits his parliamentary ally, the MHP, by lowering the threshold for a party to enter parliament to a level low enough for the MHP but not low enough for a number of opposition parties, is designed precisely to reduce his government's vulnerability to unprecedentedly high misery, in the run-up to the election due by June 2023.

Misery (inflation + unemployment): very acute EM cases

Misery (inflation + unemployment): less acute EM cases

Our EM Country Index in this context

Domestic political risk – via size of legislative mandate, income inequality, and youth unemployment – and quality and credibility of short-term growth – via real GDP growth and real interest rates – are incorporated into our EM Country Index, where the weight attached to these factors can be customised.

Related reading

Misery in the emerging markets, May 2022