MOST LIKELY REGIMES AND THEIR PROBABILITIES
18‑Month: *Reformist Coalition 45%
Five‑Year: *Reformist Coalition 45% (50%)

FORECASTS OF RISK TO INTERNATIONAL BUSINESS
Turmoil Financial Transfer Direct Investment Export

Market

18‑Month: High C+ C C
Five‑Year: High C+ C C+ (C)
( ) Indicates change in rating.  *  Indicates forecast of a new regime.
KEY ECONOMIC FORECASTS
Years Real GDP Growth % Inflation % Current

Account ($bn)

2007-2011(AVG) -9.6 7.2 18.42
2012(F) 31.0 5.0 6.10
2013-2017(F) 6.5 6.1 22.40

The Center May Not Hold

Although recent public opinion polls suggest that an overwhelming majority of Libyans remains optimistic about the country’s future, recent developments have lent credence to warnings that in the absence of a strong central authority Libya would be vulnerable to splintering along regional lines. Large sections of the country are effectively controlled by local militia leaders who are not accountable to Tripoli, and there are cases whether the authority of the interim NTC government is being openly challenged.

In the resource-rich eastern region of Cyrenaica (or Barqa in Arabic), a self-appointed government issued a declaration of semi-autonomy from Tripoli in early March. The self-styled Congress of the People of Cyrenaica has also rejected the electoral law that establishes the rules for democratic elections tentatively scheduled for June 2012, creating the possibility of an eastern boycott of the vote unless changes are made to increase Barqa’s representation in a future Parliament.

The drafters of the electoral law have taken care to ensure than no single party or region wields dominant influence in the legislative body, which will be responsible for drawing up a new national constitution. However, there is a danger that power within the Parliament will be so diffused as to make it impossible to form a stable majority coalition.

Although the creation of a fully-fledged democratic system based on a Western model is unlikely, Libya still stands a chance of establishing representative legislative and executive bodies capable of mediating disputes between different factions. However, as that is far from a safe assumption at this point, the probability of this scenario is less than 50%.

Slow Recovery for Devastated Economy

In general, Libya’s dependence on outside capital to reach its economic potential will create a strong incentive for policy makers to implement reforms designed to create an attractive business climate, regardless of the composition of the government. However, Libya’s institutional deficiencies, the limited experience of many Cabinet officials, and the higher priority that will necessarily be assigned to dealing with threats to security and political stability will impede progress on that front in the near term.

Foreign oil companies will undoubtedly be more willing than most other investors to tolerate the many risks, but an emerging power struggle between political leaders in Tripoli and Benghazi (the capital of Barqa) for control of the region’s oil resources points to the potential for disputes over the validity of any licenses issued by either government entity. In addition, the interim government in Tripoli has announced that it will conduct a thorough review of all contracts approved under Muammar al-Qaddafi. Given the extent of corruption within the ousted regime, the scrapping of some agreements on legal grounds and significant changes to the terms of others are distinct possibilities.

Despite an uncertain political climate, Libya’s economy, which the IMF estimates contracted by about 60% in real terms in 2011, is poised for a strong rebound this year. Crude oil production fell to an average of 510,000 barrels per day (bpd) in 2011, but is currently estimated at 1.3 million bpd. Barring security setbacks that force the withdrawal of foreign oil companies, output is forecast to return to the pre-war level of 1.77 million bpd by the end of 2013, powering double-digit real GDP growth next year, as well.

Real GDP growth will be more modest over the medium term, averaging 6.5% per year. The prudent use of oil and gas revenues will be necessary to keep inflation in check, but with ample reserves contributing to currency stability, inflation is forecast to average a fairly comfortable 6.1% per year through 2017. Steady increases in oil and gas production and sales will boost the current account surplus back up to pre-war levels, averaging $22.4 billion annually over the five-year forecast period.

Economic Forecasts for the Three Alternative Regimes

Reformist Coalition Military-Civilian Divided State
Growth

(%)

Inflation

(%)

CACC

($bn)

Growth

(%)

Inflation

(%)

CACC

($bn)

Growth

(%)

Inflation

(%)

CACC

($bn)

2012 31.0 5.0 6.10 23.0 6.5 4.50 11.8 10.4 -1.80
2013-2017 6.5 6.1 22.40 4.6 9.3 16.30 1.7 14.8 3.20

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