Australia

Gillard Flailing

Prime Minister Julia Gillard’s minority ALP government is continuing to hang on with the backing of members of the Australia Greens and three independent lawmakers. However, the fragility of the government’s parliamentary majority has forced Gillard to cede a substantial amount of influence over policy to her non-ALP partners, at the risk of further eroding her already sagging popular support.

The government recently managed to secure approval of a controversial carbon-tax scheme that Gillard only pursued under pressure from the Greens, but passage of a bill that would impose a 40% windfall profits tax on mining companies has been blocked by one of the government’s independent backers. Gillard is counting on revenue from the mining tax to fund tax breaks for businesses, increase pension benefits, and finance improvements to regional infrastructure, all of which she hopes will boost her approval rating.

The next election does not fall due until 2013, and the virtual certainty of a landslide victory for the Liberal-National opposition coalition in a snap poll will probably ensure the survival of the government for the time being. However, policy implementation will remain erratic, and the opposition’s pledge to abolish the carbon tax if returned to power can only heighten the level of uncertainty.

Belgium

New Government, Old Problems

After more than 500 days of stalemate, the Belgian parties appear to be on the verge of forming a government. In early October, Elio di Rupo, the leader of the francophone Socialist Party, announced a breakthrough on key issues, namely, demands for greater fiscal autonomy for the wealthier northern region of Flanders and the carving up of Brussels-Halle-Viloorde (BHV), the country’s third region, in accordance with a court ruling that the special voting rights enjoyed by French-speaking inhabitants are unconstitutional.

The flexibility displayed by the Walloon parties appears to be directly related to the growing threat that Belgium could fall victim to the contagion spreading through the euro-zone unless it moves quickly to approve a deficit-cutting budget for 2012 and structural reforms that will be required to reduce the country’s large debt burden over the medium term.

The main beneficiary of the failure of the coalition parties to follow through with the promised reforms would be the Flemish nationalist NV-A, which advocates an orderly breakup of the country. Whether that will provide sufficient incentive for the Walloon parties to honor the concessions they have made remains to be seen.

A medium-term fiscal plan will necessarily entail addressing the issue of fiscal devolution, and, according to the Constitutional Court, any election held under the existing voting rules in BHV will be invalid. Consequently, the new government will need to tackle these issues head on, sooner rather than later, and their success or failure in meeting the challenge will have significant implications for the survival of Belgium as a united entity.

Cote d’Ivoire

Stability Far from Assured

Having secured a relatively safe hold on most of the national territory with international support, President Alassane Ouattara has focused on creating a stable government.

However, there are already reports that Henri Konan Bédié, who honored his pledge to back Ouatarra’s presidential bid after finishing third in the initial round of voting, is unhappy that he was not appointed prime minister, a job that was instead given to former rebel leader Guillaume Soro. While Soro’s cooperation will be essential to the successful demobilization of the northern FN forces, he is viewed with suspicion by the president’s supporters, who fear he may undermine the government in pursuit of his own presidential ambitions.

The government is preparing a new investment code that includes tax breaks and other incentives aimed at boosting local processing industries. Even so, efforts to diversify the industrial base are likely to lag until there is clearer evidence that political stability is reasonably assured.

The prospects for obtaining substantial HIPC relief in 2012 are generally bright, but the failure to the make a Eurobond payment earlier this year will increase the cost of future borrowing that will become necessary to finance reconstruction and economic development efforts over the medium term.

Honduras

Lobo’s Majority Jeopardized

A simmering factional battle within the governing PN boiled over in September, when more than two dozen of the party’s lawmakers announced the formation of an independent bloc within the Congress. As a result, the PN’s caucus has been reduced from 71 seats to just 46.

As it appears the split was triggered by internal jockeying for the PN’s presidential nomination in 2013, it is probably safe to assume that cooperation between the two factions will be limited, at best, and will become less likely as the elections draw closer.

President Porfirio Lobo’s administration is pushing to win approval of a new mining law aimed at strengthening the legal foundation for investment in the sector. The fate of the mining law will serve as a useful gauge of how effectively the administration can govern without a formal majority in the Congress.

Although Lobo’s government has already taken steps to address several of the important deterrents to investment, other factors are likely to discourage investors for the foreseeable future. An alarming crime problem and rampant corruption are among the most obvious impediments to attracting significantly higher levels of foreign investment. In addition to the direct security risks arising from an epidemic of violent crime and the financial/legal barriers posed by corruption, the government’s failure to address the problems adds to uncertainty regarding the outlook for political stability.

Myanmar

Coming in from the Cold?

On September 30, President Thein Sein unexpectedly announced the suspension of construction of a $3.6 billion dam on the Irrawaddy River in northern Kachin State. The move came in response to pressure from environmental activists, Kachin leaders, and members of the political opposition, and the president’s decision is but one of a series of recent gestures that suggests the regime is making a sincere effort to be accountable to those it governs.

Opposition to the dam project, one of seven being financed by the Chinese government, is partly a reflection of resentment over Beijing’s meddling in Myanmar’s internal affairs. Reports that the suspension of the project was announced without consulting Beijing, which is counting on the dams as a source of electricity, suggests that Thein Sein is also looking to reduce Myanmar’s dependence on China.

Other reforms introduced by the government, including the release of dozens of political prisoners and the easing of restrictions on political speech, are clearly designed to persuade western governments to lift economic sanctions that have contributed to Myanmar’s dependence on China. Officials from the US, the EU, and Japan have taken note, but have made clear that deeper reforms will be required before they will consider any substantive shift in diplomatic or commercial relations with Myanmar.

In the near term, and the steady appreciation of the kyat against all major currencies poses a threat to the health of the export sector. The economic outlook would brighten considerably if the government’s reforms produce an easing of international restrictions, but real GDP growth will be held to less than 3% in 2011.

Papua New Guinea

Troubling Signs

The high level of instability that characterized PNG’s political environment prior to the victory of Prime Minister Michael Somare and the NAP in 2002 has reappeared with a vengeance in recent months. In early August, the Parliament voted to remove Somare, who has been dogged by corruption allegations and incapacitated by health problems. The deciding votes were cast by disgruntled former allies who were pushed out of the Cabinet in a reshuffle carried out by then-Deputy Prime Minister Sam Abal in June.

Peter O’Neill, who was sacked as minister of finance, replaced Somare as prime minister, but his hold on the position is to be determined by the Supreme Court, which is due to rule on the constitutionality of Somare’s removal before the end of the year.

The risk of renewed chronic political instability is rising as the government is hatching ambitious plans to transform the resource-rich province of Madang into an industrial zone.

Large commercial projects are already running into opposition from local communities, mainly on environmental grounds. A fragile coalition government—the likely outcome of next year’s election—will be in a weak position to push forward with the development program, which would very likely generate heightened tensions that contribute to security risks for foreign companies.

Philippines

Political Challenges Mounting

President Benigno Aquino completed his first year in office at mid-year, and assessments of his performance were decidedly mixed. Supporters noted that he had made progress in addressing poverty and tackling corruption, two of the central themes of his campaign, and pointed to a 20% year-on-year increase in new FDI and a bullish stock market as proof of a revival of business confidence. However, local business leaders sharply criticized delays in rolling out infrastructure projects, and good-government groups complained that the president has relied too heavily on precisely the sort of political horse-trading he pledged to avoid.

Aquino’s popular support has eroded significantly since he took office in 2010, but mid-term elections do not fall due until May 2013, leaving the president plenty of time to rebuild his popular support.

Of more immediate concern for the president than his popularity are reports that elements within the military are displeased with Aquino’s handling of guerrilla violence in the island province of Basilan, and are plotting to destabilize the government.

The president will not be able to count on a favorable economic performance as he grapples with political challenges. Export growth slowed markedly in the second quarter of 2011, and weaker Chinese and US demand will limit the extent of any rebound. Real GDP growth is forecast to slow to near 4% this year, from 7.3% in 2010.

If you are interested in a subscription to the monthly PRL or would like to find out more, please visit us here