geopolitical risk ratings firm

PRL Volume XXXII, Number 12 December 2010


Biya Will Continue to Call the Shots
Despite evidence of spreading popular discontent and signs of growing tensions within the governing party, neither President Paul Biya nor the RDPC faces any realistic threat to their continued hold on power over the five-year forecast period. Under a constitutional amendment approved by the National Assembly in April 2008, Biya is eligible to stand for another term in 2011, and he has confirmed that he will do so.

Whatever trace of doubt might have existed that Biya will win was eliminated in late 2008, when the president stacked the membership of the country’s ostensibly independent 12-member electoral commission with representatives from the RDPC. In general, the only real threat to the RDPC’s dominance during the five-year forecast period stems from the possibility that Biya might be removed from power as a result of death or incapacitation. The president has made no effort to groom a successor, and his unexpected departure would likely produce a power vacuum, triggering a struggle for control that could splinter the governing party.


Sassou-Nguesso in Control
Now in the second year of his seven-year term, President Denis Sassou-Nguesso faces no meaningful threat to the stability of his regime. Having won the July 2009 presidential election by a comfortable margin, he has effectively neutralized the already weak opposition through a combination of cooptation and repression, and, despite serious flaws in the electoral process, his government enjoys international legitimacy, as has been made evident by his success at obtaining substantial debt relief.
The retention of all of the key members of the president’s inner circle in influential posts following a post-election government reshuffle in September 2009 suggests that the current stable political conditions will be maintained over the medium term. That said, the trend toward greater centralization of executive power—exemplified by the elimination of the prime minister’s post—has added to the uncertainty surrounding the issue of Sassou-Nguesso’s successor. As such, any deterioration in the president’s health would create a significant threat to stability.


Change in Government Expected
Prime Minister Lars Lokke Rasmussen’s minority center-right government lost its claim to a majority in the Parliament earlier this year, when a member of the right-wing DF, which has agreed to support the Liberal-KF government on confidence issues, defected to the opposition. Even so, the backing of independent lawmakers will protect the government from any moves to force an election before the November 2011 deadline.
The upcoming election campaign will play out against a backdrop of anxiety over spreading debt troubles in the euro zone. Regardless of its composition, the next government will face heavy pressure to reduce the fiscal deficit to less than 3% of GDP, as required under the EU’s Growth and Stability Pact. Under the circumstances, the opposition parties are expected to focus their campaign on the theme that another term for the center-right coalition, which is adamantly opposed to raising taxes, will result in the erosion of the social safety net, while the government parties will play up the danger that a center-left regime will increase taxes.
Barring a significant improvement in the outlook for the economy, which at the moment is not especially inspiring, the opposition’s argument is likely to resonate more strongly among the electorate. On that basis, the most likely result of the 2011 elections is the formation of a center-left coalition government, although the probability of that outcome is only slightly better than that for the re-election of the current regime.


Vote of Confidence
The governing center-left PASOK more than held its own at local elections on November 7, winning eight of 13 races for regional governor and securing the mayor’s office in both the capital, Athens, and Thessaloniki, the country’s second largest city, for the first time in more than two decades.
The result is an important vote of confidence that will strengthen PASOK’s resolve and unity as it pushes ahead with the austerity measures and structural reforms that will be required to restore fiscal order. However, the very low turnout for the second round of voting on November 14 suggests that the electorate is only grudgingly giving Papandreou and his party the benefit of the doubt. While they have resigned themselves to the necessity of austerity, they expect their sacrifices to produce results.
A general election is not required until October 2013, by which time voters will have a good idea whether there is light at the end of the austerity tunnel or just more economic insecurity and hardship. The challenge for PASOK is to get the job done, and ensure that the pain of austerity is spread equitably. Failure on either count could cost the party dearly.


Condé Faces Challenges on Many Fronts
In early December 2010, the Supreme Court upheld the official results of the disputed second round of voting held on November 7, which determined that Alpha Condé, a veteran opposition politician and head of the RPG, had won 52.5% of the vote, against 47.5% for former Prime Minister Cellou Dalein Diallo, the candidate of the UFDG. Diallo had claimed that the election process was tainted by widespread fraud, and his acceptance of the court ruling marked an important step toward the restoration of civilian rule in Guinea.
However, the road ahead remains uncertain, as dangerous ethnic tensions, the politicization of the military, and a pressing need to resolve conflicts with foreign firms in the crucial mining sector will complicate Condé’s task of establishing a firm basis for political and economic stability. Indeed, while the newly elected leader is expected to form a fairly inclusive government, the odds that such an alliance can be sustained over a full term are less than even.
A national unity government will be very unstable, as the competing priorities of the constituent groups will give rise to frequent disagreements that create a persistent threat of defections and hamper the policy-making process. A coalition that does not include a significant Fula presence will be only slightly less unwieldy, and will face the added challenge of a heightened risk of destabilizing ethnic unrest.
While the poor record of governance compiled by the military-led regime that took power in December 2008 has probably left most high-ranking military officers disinclined to play a direct political role, they will jealously guard the privileges they have long enjoyed, and the cost of purchasing the loyalty of the military brass could create a strain on state resources that contributes to tensions down the road. Moreover, until Condé proves that his government is capable of maintaining order, the possibility of military intervention cannot be ruled out.


Divisions Impede Effective Governance
In mid-November, Iraq’s main parties reached an agreement to form a coalition government that includes representatives from all three of the countries chief ethno-religious communities. The deal ended an impasse that had prevented the establishment of a new government for more than eight months following elections held in early March. Political leaders recognize that a viable government must include representatives from each of the country’s ethnic and sectarian groupings, and the prolonged delay reflects the difficulty of balancing that condition against their personal political ambitions.
Prime Minister Nuri al-Maliki’s second government will inherit several major policy challenges that his first government failed to address. Perhaps the most important of these is a still-pending hydrocarbons law, which, among other things, will establish which state entities are responsible for awarding contracts to develop the country’s massive reserves of oil and gas, and how the revenues generated by hydrocarbons sales will be distributed among Iraq’s Shiite, Sunni, and Kurdish regions.
The hydrocarbons law is widely acknowledged to be essential to the country’s economic health, which hinges on the participation of foreign firms in the exploitation of the country’s natural resources. Were Iraq to enjoy an extended period of relative calm, the country’s hydrocarbons sector could become a magnet for FDI, which in turn would enable the government to invest in improvements to infrastructure and otherwise create a more hospitable climate for expansion of the private sector, resulting in rapid growth of employment opportunities and rising incomes.
Unfortunately, the inconclusive election and the prolonged delay in forming a government underscore the continuing risk of damaging political instability and a worsening of security conditions (particularly as the drawdown of US military forces proceeds), both of which will create significant impediments to the realization of the country’s economic potential.


Bailout Merely a Stopgap
A banking crisis that threatened to bankrupt the treasury left the government headed by Prime Minister Brian Cowen with no choice but to secure emergency loans from the EU and the IMF. Under a deal concluded in late November 2010, Ireland will receive up to $89 billion in foreign loans, and will be required to contribute roughly $23 billion of its own money, much of it coming from its pension reserve fund. Cowen has resisted calls to hold an immediate election, insisting that the government must first secure approval of a four-year austerity plan presented to the Parliament on December 7.
Regardless of the fate of the budget, an early election is all but certain to be held no later than March 2011. Poll data suggests that the main opposition Fine Gael could win 60–65 seats, while its ally, the Labour Party, could win 45-50 seats. On that basis, the expected Fine Gael-Labour coalition formed after the election stands a good chance of claiming a majority of more than 25 seats in the 166-member Dáil.
Unfortunately, the government will have little scope for putting that majority to much use beyond doing whatever is necessary to keep the banking system afloat and nursing the sick economy back to health. That will be no easy task, given the constraints imposed by any fiscal austerity program acceptable to the EU and the IMF, and the persistent threat of a negative market reaction to any hint of backsliding that raises doubts about the government’s ability to bear a debt burden that will become especially oppressive when the first payments on the rescue loans fall due in 2015.
The economic and political realities point to a high probability that Ireland will have to restructure its debt. The question is whether that process will unfold in an orderly fashion, with the cooperation of bondholders, or in the aftermath of a messy default. The fact that the debt troubles in Ireland are mirrored throughout the periphery of the euro zone has highlighted a structural deficiency of the monetary union. The success or failure of the leading members of the EU to reach consensus on an effective means of addressing those shortcomings will have significant implications for the economic fate of Ireland and the broader euro zone.


At a Crossroads
The country’s first election since 1990 took place on November 7, and to the surprise of no one, the military-backed USDP won nearly 80% of the vote and large majorities in both chambers of the new bicameral legislature. Non-elected seats in both chambers are reserved for members of the military, who will be appointed by Gen. Than Shwe, the leader of the SPDC, the military junta that has ruled the country since 1988 and will remain the power behind the throne as Myanmar embarks down the road of “guided democracy.”
The SPDC is wagering that the appearance of democracy alone will be sufficient to shake off Myanmar’s pariah status. Predictably (and justifiably), many international organizations and most western governments dismissed the process as a farce. However, several countries in the region, most notably India, appear to be prepared to play the junta’s game.
But it is too early to tell whether the political maneuver will work. The main opposition NLD has been split by a disagreement over electoral strategy, but the group’s iconic leader, Aung San Suu Kyi, who was released from house arrest shortly after the elections, has resumed her effort to generate both domestic and international pressure for more substantive political reforms. At the same time, while the elections fell short of meeting any standard of democracy, they may result in a qualitative shift of power from an older generation of uniformed generals to a younger group of officers who, for the sake of appearance, were required to shed their uniforms to stand for office.
How things proceed will depend to a large degree on how far Suu Kyi is prepared to force the issue, and how much dissent the generals are willing to tolerate in the interest of ensuring a stable generational transfer of power. A hard-line response to a threat to domestic order cannot be taken for granted, particularly if responsibility for deciding how to respond to the threat were left to the new breed of leaders that will inhabit the government headed by Prime Minister Sein Thein.


Ortega’s Hopes Rest on Divided Opposition
The on-again, off-again power-sharing arrangement between the FSLN and the PLC initiated in the late 1990s has left a lasting legacy in the form of a highly politicized state apparatus that ceases to function effectively when the FSLN and the PLC are at odds, resulting in chronic institutional turf wars that are typically won by means that test the country’s constitutional order. A key case in point is the very controversial ruling by the FSLN-dominated Supreme Court that has cleared the way for the Sandinista leader, President Daniel Ortega, to seek immediate re-election in November 2011.
Currently, Ortega is polling at about 40%, indicating that he will win re-election if the opposition vote is split, but could lose if all of the opposition parties were to unite behind a single candidate. If the opposition does manage to knock Ortega out of office, the leader of a new government would likely be Fabio Gadea, a conservative radio personality and political independent who has enjoyed a rapid rise in the polls since August 2010, when he proposed himself as a possible consensus candidate for an anti-FSLN front.
Regardless of how the presidential election plays out, no single party is likely to win a majority of seats at the concurrent legislative elections, and neither a renewal of El Pacto nor a united front of liberal parties is likely to be sustained for any period of time. Consequently, there is a strong possibility that the dysfunction that has characterized Nicaragua’s political scene for much of the current decade will continue into the next.


Next in Line?
Now that Ireland’s financial weakness has forced it to follow Greece’s lead and secure a bailout package from the EU and the IMF, all eyes are focused on Portugal, which is seen as the weakest link after Ireland, and a strong candidate to be the next euro-zone country to require rescue loans. In a bid to avoid that scenario, the government has introduced an austerity budget that includes pay cuts for public-sector workers earning more than $2,000 per month, a freeze on state hiring, and a two-point hike in the VAT rate to 23%. Prime Minsiter José Sócrates and Finance Minister Fernando Teixeira dos Santos are counting on the combination of spending cuts and tax increases to narrow the budget deficit from 7.3% of GDP in 2010 to 4.6% next year, and to less than 3% of GDP by 2012.
However, the deficit projections have been greeted with skepticism, owing to expectations that fiscal tightening and the government’s failure to address the structural issues that undermine the competitiveness of the country’s exports will result in much weaker economic growth than is foreseen by the Finance Ministry. Such considerations have prompted the downgrading of Portugal’s creditworthiness by major rating agencies, which in turn has reinforced the dependence of the country’s banks on ECB financing, thereby increasing the danger of a financial crisis.
The next election is not required until 2013, but the minority status of the governing PS leaves it vulnerable to being toppled before the end of the current term. The Socialists’ hopes of avoiding an early election and winning another term rest on whether Prime Minister Socrates’ insistence that Portugal will not require a bailout proves to be valid. On that basis, an early election that results in the PSD’s return to power appears to be the most likely scenario.


Cracks Appearing in Governing Alliance
The first real test of the viability of coalition government made up of Prime Minister David Cameron’s Conservative Party and the Liberal Democrats came in early December, when the Parliament voted to approve steep hikes in tuition costs for university students, as part of a broader program of fiscal austerity unveiled by the new government back in June. The issue was particularly sensitive for the Liberal Democrats, whose lawmakers pledged before the May 2010 election to oppose an increase in education fees. In the end, less than one-half of the party’s 57 members of Parliament voted for the measure.
The lack of discipline among the Liberal Democrats raises questions about the government’s ability to survive for a full five-year term, given the many hard choices that must be made over the next several years to put state finances back on a stable footing. A steep drop in popular support for his party will discourage Deputy Prime Minister Nick Clegg from taking any action that might trigger a return to the polls in the near term, but the relationship between the coalition partners will become increasingly uncomfortable, making it likely that the next election will take place well before it falls due in 2015.
Not surprisingly, the Liberal Democrats’ decline has benefited the main opposition Labour Party, which according to recent polls is about even with the Conservatives in the popularity stakes. Labour has been reinvigorated by a recent leadership change, but as long as austerity presents the only credible path to fiscal stability, the opposition will struggle to convince voters that it is better suited to the task than the Conservatives.


Moving beyond current opinions, a seasoned look into the most pressing issues affecting geopolitical risk today.


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