MOST LIKELY REGIMES AND THEIR PROBABILITIES
18-Month: *Unstable Transition 60%
Five-Year: *Military-Civilian 60%

FORECASTS OF RISK TO INTERNATIONAL BUSINESS
 

Turmoil

Financial Transfer Direct Investment Export Market
18-Month: High C B- (B) C (C+)
Five-Year: High C+ C+ (B-) C+
( ) Indicates change in rating. *  Indicates forecast of a new regime.

 

KEY ECONOMIC FORECASTS
 

Years

Real GDP Growth %  

Inflation %

Current Account ($bn)
2006-2010(AVG) 7.5 10.6 -3.72
2011(F) 3.8 12.0 -5.20
2012-2016(F) 4.6 8.3 -4.40

Implications for Investors

A status referendum held in January resulted in nearly unanimous support among the inhabitants of southern Sudan to establish an independent nation. The process is scheduled to be completed on July 9, 2011, but delays in resolving numerous thorny issues and accusations that the northern government headed by President Omar al-Bashir is lending support to rebel forces seeking to overthrow the SPLM government in the south point to a significant risk that the separation could trigger renewed armed conflict between the two regions.

Based on Bashir’s track record, it is very possible, even likely, that the northern government is abetting the rebel militias in the south. But Khartoum did not manufacture the rebellion. After six years of peace and the influx of oil revenues and international donor support, southern Sudan remains impoverished, disease-ridden, and thoroughly undeveloped outside of Juba.

If the southern government headed by President Salva Kiir Mayardit does not shape up, armed clashes will likely remain a regular feature of the political landscape, creating a weakness that can be exploited by the northern government, and an impediment to attracting the foreign investment an independent south will need to create a foundation for economic development and free itself from its dependence of the oil-transport infrastructure controlled by the regime in Khartoum.

Bashir’s government will have plenty of problems of its own. Khartoum’s impending loss of direct control over much of historical Sudan’s oil reserves has contributed to significant uncertainty with regard to state finances, and sanctions will pose difficulties for the regime as long as they remain in place.

The lifting of sanctions has been conditioned on the resolution of the conflict in the western region of Darfur. Given the numerous players involved and the large number of outstanding points of disagreement, that condition will not be met anytime soon. In the meantime, the death toll will continue to mount, ensuring that international sanctions will remain in place, to the detriment of efforts to establish a strong foundation for the northern economy in the post-separation era.

A New Nation

On January 9, the inhabitants of southern Sudan went to the polls to decide whether to remain part of Sudan or to form an independent nation. According to the official result, which has been accepted as legitimate by all of the parties involved, fully 99% of those casting ballots opted for independence. The status referendum was held according to the terms of the Comprehensive Peace Agreement (CPA) concluded between President Omar al-Bashir’s government and the former rebel Sudan People’s Liberation Movement (SPLM) in January 2005. The CPA is due to expire on July 9, 2011, the day that Sudan will be formally separated into two countries.

Overwhelming support for southern independence had been expected, but the seemingly dispassionate acceptance of the outcome by the National Congress Party (NCP) regime in Khartoum was surprising, to say the least. Much of the oil that is the lifeblood of the Sudanese economy is located in the southern part of the country, and given the ferocity with which the northern government battled the separatist rebel forces over the course of a 23-year civil war, and the frequent bad faith displayed by Bashir’s regime throughout the process of implementing the CPA, there was ample reason to suspect that the northern political establishment would not simply let the south go its own way without even threatening to resume the fight.

A number of factors may have convinced Bashir to cooperate. In November, the US held out the promise of removing Sudan from its list of state sponsors of terrorism in return for a smooth referendum process, although John Kerry, the head of the Senate Foreign Relations Committee, made clear that sanctions would remain in place pending resolution of the conflict in the western region of Darfur. Moreover, southern negotiators expressed openness to softening the economic pain of separation by negotiating the extension of oil revenue-sharing that was put into place under the CPA.

Many observers assumed that Bashir weighed the benefits of those concessions against the costs of the only other option available to him—the resumption of the civil war—and decided that cooperation was the more prudent approach. Perhaps that was the case. But if so, more recent developments suggest that the president might have had a change of heart.

Separation Unlikely to Be Clean

The status referendum was supposed to be the penultimate hurdle to be cleared in fulfillment of the CPA, a process that would culminate with the negotiation of either the terms of separation or the basis for continued national unity. In fact, the vote was held on time only because both sides agreed to proceed without resolving a number of outstanding issues, all of them contentious, including the final demarcation of the north-south border and the organization of a separate status referendum in the fertile border region of Abyei, which was to have been held in January, as well, but was postponed indefinitely owing to disagreement over voter eligibility rules.

In addition to addressing those outstanding issues, the two sides will also need to reach agreement on a basis for sharing oil income and the extent of the new southern government’s responsibility for Sudan’s debt. The failure to achieve consensus on any one of these issues could potentially trigger a resumption of the north-south conflict. As such, Bashir will have no shortage of opportunities to provoke a return to war if he is of a mind to do so. Representatives of the government of South Sudan (GoSS) have made no secret of their suspicions that Bashir is so inclined.

Since the January referendum, both the north and south have been troubled by internal unrest. In the north, the government has faced protests over the “loss” of the south, surging food prices, and the lack of political freedom. The displays of discontent have caused much anxiety in Khartoum, occurring as they have against the backdrop of popular rebellions that have toppled entrenched autocrats in Tunisia and Egypt. In a bid to inject some calm into the political climate, Bashir announced in February that he would not seek re-election in 2015.

The situation has been even worse in the south, where government forces from the Sudan People’s Liberation Army (SPLA) have engaged in pitched battles with rebel militias in the oil-rich areas near the north-south border. During the civil war, Khartoum provided weapons and support to southern groups that opposed the SPLM. None of those groups was involved in the negotiations that resulted in the CPA, and not all have accepted the legitimacy of the SPLM’s control of the GoSS. But the heaviest damage has been inflicted by rebel forces under the command of SPLM dissidents: George Athor, a former SPLA chief of staff who broke with his comrades after losing a state gubernatorial election in April 2010, and Lam Akol, who prior to parting ways with the SPLM served as minister of foreign affairs in the power-sharing government established under the CPA.

Following particularly intense fighting in mid-March that resulted in over 100 deaths, Pagan Amum, the general-secretary of the SPLM, announced the indefinite suspension of north-south talks. Amum claimed to possess documentary evidence that Bashir’s government is arming the southern militias, and accused Khartoum of plotting to topple the SPLM government of President Salva Kiir Mayardit and install a puppet regime. Although negotiations were restarted on March 18, Amum’s allegation has cast a pall over the process, and the more recent flaring of conflict in Abyei does not bode well for productive talks in the coming days and weeks.

Under the CPA, a joint north-south military force was to have been responsible for security in Abyei pending the outcome of a status referendum. However, both the northern and southern governments have deployed separate forces to the area, ostensibly to ensure that the other side does not attempt to establish its de facto sovereignty by means of military occupation. Periodic clashes between the two sides have contributed to a high level of tension in Abyei, which in turn has created an impediment to reaching agreement on the rules for the status referendum.

Bashir’s government has demanded that the nomadic Misseraya be counted as inhabitants of Abyei for purposes of eligibility to vote in the referendum, on the grounds that their access to the grazing areas of Abyei are essential to the preservation of their way of life. The GoSS contends that Khartoum’s real objective is gaining control of the oil located near Abyei, and that Bashir’s regime is insisting on the participation of the Misseraya, who fought on behalf of the government during the civil war, in hopes of tipping the outcome of a future status vote in its favor.

Southern Government Will Need to Deliver

That southern Sudan will achieve nationhood is not really in doubt, as the international community is certain to recognize its independence, and it is not within the power of the regime in Khartoum to assert its de facto authority over the region. However, the current state of affairs does not bode well for a smooth or amicable separation in July 2011, and if the SPLM fails to—or is unable to—govern in a manner that produces tangible evidence that independence is beneficial for the southern Sudanese, the world’s newest nation could quickly become embroiled in a civil war of its own.

Based on Bashir’s track record, it is very possible, even likely, that the northern government is abetting the rebel militias in the south. But Khartoum did not manufacture the rebellion. Although Athor and Akol might be motivated by ambition, rather than a commitment to justice, the fact is that the SPLM’s record in government has been rather abysmal.

After six years of peace and the influx of oil revenues and international donor support, southern Sudan remains impoverished, disease-ridden, and thoroughly undeveloped outside of Juba. To what extent these failures are the result of corruption, rather than incompetence, does not really matter. The facts on the ground indicate that both are present in abundance.

If the GoSS saw no compelling reason to be more efficient, effective, and accountable before the vote on independence, there is little reason to expect it will take steps to address those shortcomings once independence is a reality. But if the GoSS does not shape up, armed clashes will likely remain a regular feature of the political landscape, creating a weakness that can be exploited by the northern government, and an impediment to attracting the foreign investment an independent southern Sudan will need to create a foundation for economic development and free itself from its dependence of the oil-transport infrastructure controlled by the regime in Khartoum.

Sanctions an Albatross for Northern Regime

Of course, Bashir’s government will have plenty of problems of its own. Khartoum’s impending loss of direct control over much of historical Sudan’s oil reserves has contributed to significant uncertainty with regard to state finances, and sanctions will pose difficulties for the regime as long as they remain in place.

The government is currently holding talks with two rebel groups, the Justice and Equality Movement (JEM) and the Liberation and Justice Movement (LJM) in Doha, Qatar. However, both of the main factions of the Sudan Liberation Movement (SLM) have refused to participate in the talks, and the bloc headed by Minni Minnawa has issued a warning that state-run airports will be considered legitimate military targets and subject to attack. Meanwhile, the JEM has loudly rejected Khartoum’s proposal to hold an administrative status referendum in Darfur later this year, and has dismissed a plan to restructure the region into five states (it currently consists of three states) as a blatant attempt on the part of the NCP to employ a divide-and-rule strategy. Talks with the LJM have become bogged down by disagreement over the establishment of a regional authority to administer Darfur.

Given the numerous players involved and the large number of outstanding points of disagreement, it seems pretty unlikely that a comprehensive agreement for peace in Darfur will be concluded anytime soon. In the meantime, the death toll, which already stands at more than 300,000, will continue to mount, ensuring that international sanctions will remain in place, to the detriment of efforts to establish a strong foundation for the northern economy in the post-separation era.

Uncertainty Will Weigh on Growth

The significant uncertainty surrounding the process of formal separation and the unpromising outlook for internal stability in both the north and the south will weigh on economic performance in 2011, when real GDP growth is forecast to slow to 3.8%, despite a higher average price for oil. High food prices, reduced fuel subsidies, and the depreciation of the local currency will combine to keep inflation high in 2011, when the consumer price index is forecast to rise by an average of 12%.

Higher prices for oil, sales of which account for most of the country’s export revenue, will help to offset the impact of weaker production on the external accounts, but the imports bill is expected to increase owing to higher food costs. The net effect will be a smaller trade surplus and a larger current account deficit, which is forecast to widen to $5.2 billion in 2011.

Economic Forecasts for the Three Alternative Regimes

  Military-Civilian Multi-party Democracy Military
  Growth

(%)

Inflation

(%)

CACC

($bn)

Growth

(%)

Inflation

(%)

CACC

($bn)

Growth

(%)

Inflation

(%)

CACC

($bn)

2011 3.8 12.0 -5.20 4.4 9.8 -4.70 2.6 15.4 -6.10
2012-2016 4.6 8.3 -4.40 6.5 6.7 -3.20 3.8 12.3 -5.40