PRL Volume XXXIII, Number 2 February 2011
Many of the ingredients for rebellion are clearly present in Algeria. Unemployment is quite high (by some estimates more than double the official rate of 10.2%). A surge in food prices triggered violent rioting in the first week of January, and although the government has taken steps to address that problem, tensions have continued to run high, as Algerians struggle to understand why their standard of living is deteriorating even as global oil prices have once again topped the $100 per barrel mark.
Popular unrest is not unusual in Algeria. During his first term, Bouteflika’s hold on power was in danger of being cut short when an uprising among the minority Berber population galvanized a general anti-government movement. In that instance, the president was saved by the strong support he received from the military. Should he confront a similar crisis in 2011, there is little reason to believe that the generals will come to his rescue a second time.
Economic Reform a Low Priority
President Hosni Mubarak’s government has been replaced by a military junta that is to rule on a temporary basis as the constitution is revised ahead of presidential and parliamentary elections. The transfer of power to the military was applauded by the anti-Mubarak protesters, but tensions have once again begun to rise amid signs that the reforms deemed acceptable by the generals will fall short of establishing genuine democracy.
The lingering threat of widespread unrest will likely prolong the period of transition beyond September 2011, the scheduled date for the presidential election, and it is possible that the junta will remain in charge throughout the 18-month forecast period. In any case, sufficient obstacles to truly competitive elections are expected to remain in place, resulting in the installation of a civilian government that relies on the backing of the military for its authority.
The house-cleaning conducted by the ruling NDP amid the uprising against Mubarak’s regime has resulted in the sidelining of Gamal Mubarak, the former president’s son, and many of his closest allies, who as a bloc helped to sustain the impetus behind the government’s program of liberal economic reforms. The reformist faction’s loss of influence will sap the vigor of the liberalization push in the near term, as will the inevitable focus on politics, rather than policy, over the coming months.
Policy Continuity Expected after Election
A surge in support for the nationalist True Finns party has injected some uncertainty into the general election scheduled for April 17, but the current coalition made up of KESK, the KOK, the VIHR, and the SFP is expected to be returned for another term. However, Prime Minister Mari Kiviniemi’s KESK is likely to lose its position as the leading party in the coalition to Finance Minister Jyrki Katainen’s KOK, and the shift in the balance of power between the two parties could complicate efforts to renew the partnership.
Kiviniemi has proposed a revival of the “social contract” among business, labor, and government, and suggested that the corporate tax rate could be cut in a phased manner if business upholds its side of the bargain. The idea has been met with a chilly reception from the KOK, but the center-left SDP has expressed interest in the proposal, which could create a basis for a center-left coalition in the event of tensions between the KOK and KESK.
Economic growth is forecast to slow to 2.6% in 2011, as fiscal consolidation contributes to weaker demand in Europe. However, given the danger posed by the debt crisis in the euro zone and the potential for unrest in North Africa and the Middle East to trigger a sustained jump in fuel costs, the downside risks to the growth forecast are significant.
Insecurity Will Deter Investment
Although both the timing of the general election and the presidential candidates of the main parties remain uncertain, the governing PPP-C is expected to retain control of the presidency and claim a majority of seats in the legislature.
All of the parties will promise to promote economic development, boost living standards, and reduce the level of violent crime, the issues consistently cited by voters as their main concerns. In fact, these issues are all interrelated, as a pervasive crime problem is one of the main impediments to attracting the higher levels of FDI required to create a basis for faster economic growth and job creation.
Security will be a growing concern for investors extracting Guyana’s gold reserves, which are located deep in the country’s hinterland, an area that is difficult to access and even more difficult to police. In that regard, the devotion of such a substantial amount of resources to dealing with crime in more urban areas limits the likelihood of any improvement on that front.
The government’s low-carbon development strategy has attracted some interest in the international community, but the industrial sector will continue to be dominated by extractive and agricultural enterprises producing for export, leaving the economy vulnerable to poor weather conditions and volatility in prices for commodities.
The steady accumulation of foreign exchange reserves and the stability of the currency against the US dollar will limit the risks of any tightening of capital controls, and favorable relations with multilateral lenders point to continued financial support that will similarly dampen the risk of increases in payment delays. However, given the trend in food and fuel prices, there is some risk of balance-of-payments difficulties that might encourage the imposition of import controls.
Emboldened Opposition Will Stymie Reform
The kingdom’s ruling elite are bracing themselves for a possible rebellion, as a contagion of popular unrest spreads from North Africa across the Middle East. Kuwait’s relative political openness and a system of rule that includes some measure of accountability on the part of members of the royally appointed government may protect the regime from pressure for a radical overhaul of the country’s power structure. That said, it might also provide a crucial opening for just such a movement.
Although it is unlikely that the monarchy would be toppled, even in the event of a full-fledged “people power” movement, the royal family might be forced to make significant concessions to restore order, a development that could in turn trigger destabilizing infighting among the sheikhs.
Assuming for the time being the rulers of Kuwait will not be forced to face down (or surrender to) a popular uprising, the economic outlook for 2011 is fairly bright. The regional unrest has contributed to a surge in oil prices, which will help to boost state income, providing a basis for healthy government spending that will sustain the rebound in consumption.
Trading on the stock exchange has been volatile amid the regional unrest, with the market index shedding roughly 700 points (a decline of 10%) since the beginning of the year. A protest demonstration planned for March 8 will be watched closely, and could mark a turning point (either for the better or the worse) for Kuwait’s chances of weathering the popular uprising. A negative assessment on that score will undoubtedly be reflected in market activity.
Descent into Chaos
In both Tunisia and Egypt, it was the military brass that stepped in to inform the leaders of those two countries that popular uprisings had made their continuation in power untenable. Unfortunately, the Libyan armed forces are not in a position to play a similar mediating role, and Muammar al-Qaddafi has declared that under no circumstances will he surrender power.
At present, Libya is in a state of chaos. All semblance of military discipline has broken down, much of the population is in open rebellion, and armed opponents of Qaddafi’s regime are reported to be in control of most of the country outside of the capital, Tripoli. Even in Tripoli, Qaddafi is relying on foreign mercenaries and militias made up of his loyal supporters to keep the rebels at bay. The death toll is mounting and it now appears that Qaddafi will have the opportunity to make good on his pledge to “die a martyr” in his homeland.
Even in the unlikely event that Qaddafi manages to cling to power and restore order, the cost of victory will be steep. Foreign firms have pulled their personnel from the country, the international community has imposed targeted sanctions aimed at convincing Qaddafi’s allies to end the standoff, and broader and more painful sanctions would be a virtual certainty were the colonel to remain in power.
The likely alternatives to Qaddafi’s continued rule do not hold out much hope for a better outcome than that scenario. Libyan society is organized by clans, and the current regime’s power has rested on Tripoli’s willingness and ability to cater to the interests of tribal leaders in return for their allegiance. Absent the emergence of a similarly centralized form of rule, the potential for a prolonged bout of tribal warfare will be high.
Risk of Instability Remains High
The PPP-led coalition government has become paralyzed in the face of competing pressures to address the growing threat of terrorist violence, relieve economic hardship, and move ahead with unpopular reforms, and its problems have been compounded by maneuvering by parties within the unwieldy governing coalition and a steep drop in the lead party’s popular support.
Prime Minister Yousaf Raza Gillani’s government weathered the latest threat to its survival by retreating on planned tax reforms and restoring fuel subsidies, moves that have led to the effective suspension of IMF lending, a development that threatens Pakistan’s access to international donor support that will be crucial to repairing the damage caused by last year’s devastating floods.
Delays in accessing foreign aid will worsen an already troubling economic outlook. The central bank has warned that Pakistan will be courting economic disaster unless immediate steps are taken to rein in the fiscal deficit and check the growth of the debt burden. Unfortunately, the government will be too busy fighting for its survival to devote much energy to heading off a crisis.
Healthy inflows of remittances have enabled Pakistan to build up its foreign-exchange reserves, providing the central bank with some room to intervene to stem the decline in the value of the currency. However, a prolonged delay in securing fresh international financial support could send the rupee into a steep slide, worsening the outlook for inflation (which will remain in double-digit territory in any case) and increasing the risk of serious debt-related difficulties.
IMF Support May Be Threatened
The outlook for political stability has worsened markedly since the beginning of the year, amid a brewing leadership battle within the main governing PD-L, opposition threats to impeach the president, and indications that the ethnic Hungarian UDMR, the junior partner in Prime Minister Emil Boc’s minority government, is having second thoughts about its alliance with the PD-L.
A high level of political uncertainty is par for the course in Romania, but the current maneuvering comes at a rather unfortunate time. A political crisis would almost certainly delay final approval of a new two-year deal struck with the IMF in early February, leaving Romania vulnerable to renewed bouts of currency volatility and capital flight.
The leu has strengthened against both the euro and the US dollar since falling steeply at mid-year, but central bank intervention to prop up the currency in late 2010 highlighted the shakiness of market confidence. Any serious domestic political troubles or a further spread of the debt contagion within the euro zone that raises doubts about the economic recovery in Europe will likely send the leu into a downward slide, triggering inflation concerns that could prompt the central bank to engage in growth-stunting monetary tightening.
The fact that yields on Romanian debt are running above those for Hungary, where the governing party is controversially attempting to engineer a spending-driven recovery, suggesting that the appetite for Romanian debt is rather weak, and any developments that contribute to a loss of confidence—the suspension of IMF support representing the main risk in that regard—would leave Romania vulnerable to a debt crisis, especially if the current difficulties in the euro zone are not contained.
Politics Casts a Pall over Business Climate
Russia’s political leaders continue to keep their cards close to the vest regarding plans for the 2012 presidential election. However, the recent eruption of popular unrest in the Arab world has prompted the leaders of less-than-democratic regimes across the globe to closely examine their own situations, looking for possible exploitable weaknesses and taking corrective action of one form or another. For Russia, that might mean Prime Minister Vladimir Putin’s return to the presidency sooner rather than later.
The chief threat to stability stems for the potential for widespread unrest in one or more neighboring countries, with which Russia recently concluded a collective security agreement that establishes a basis for intervention by Russian troops in the event of unrest that threatens autocratic regimes friendly to the government in Moscow.
The Kremlin’s demonstrated willingness to use the legal system against its political rivals does not pose a direct threat to foreign investors, provided they steer clear of involvement in domestic politics. However, the recently concluded partnership between BP and state-owned Rosneft has highlighted the potential for international firms to become embroiled in domestic legal/political disputes if they tie themselves too closely to state-controlled business interests.
The government has promised to take steps to improve the business climate, but investors are clearly skeptical, a fact highlighted by the substantial capital outflows recorded in 2010. While significantly lower than the losses sustained in 2008 and 2009, the figure nevertheless indicates that Russia remains the least attractive of the so-called BRIC countries, and is likely to remain so for the foreseeable future.
The repeated inability of Prime Minister Iveta Radicová’s four-party government to secure the election of its candidate for chief prosecutor highlights a lack of discipline within the coalition that does not bode well for its ability to unite in support of unpopular policy measures, including proposed reforms of the labor code currently under review.
Radicová has also suffered a loss of credibility owing to a lack of progress in efforts to wage a battle against corruption in the state apparatus, one of the signature objectives of the coalition. That failure, in particular, has contributed to a slump in popular support for the governing parties, increasing the probability that the leftist Smer-Social Democracy could be returned to power if tensions among the coalition members were to trigger an early election.
The government has taken positive steps to rein in the large fiscal deficit, but murmurings of doubt as to the wisdom of the country’s adoption of the euro are cause for concern. For the moment, Radicová has taken the position that switching currencies would be “extremely risky,” and that the government should instead focus on ensuring near-term stability and exploring options for permanent crisis-resolution mechanism. However, if the European debt crisis continues to spread and the broader membership of the euro zone fails to take decisive action, the possibility that Slovakia might reconsider its position in the union cannot be ruled out.
The current account shortfall will increase in 2011, as growth rates of imports and exports diverge further, and the repatriation of funds by foreign companies contributes to a widening of the income deficit. The movement of the transfers balance into surplus will help to hold the current account deficit to $3.1 billion, still less than 4% of GDP. Most of the shortfall will be financed by inflows of FDI, which are forecast to recover in 2011 after two sub-par years.
Regional Unrest to Weaken Reform Zeal
To the extent that the recent upheaval in North Africa and the Middle East has been fueled by anger over political restrictions and rampant corruption and cronyism within the state apparatus, Syria would seem to be a prime candidate for a domestic explosion. However, the streets of Syria have been quiet, and are expected to remain so.
No significant changes in policy are likely before the Baath Party congress scheduled for later this year, and under current circumstances, meaningful political liberalization is unlikely to be on the agenda. The bigger question is what impact the regional tumult will have on the government’s ongoing program of economic reform.
The five-year economic plan for 2010–2015 includes a target of 5.7% annual growth, which will be underpinned by investment totaling $100 billion, of which about one-half is expected to come from the private sector. Among the key aims of the economic plan are reducing Syria’s dependence on exports of natural resources and strengthening the country’s regional economic role.
However, there is cause to doubt the government’s willingness to risk a popular backlash by implementing the unpopular reforms that would be required to achieve the broad targets outlined in the five-year plan. Indeed, it is unclear whether the government is prepared to stand firm behind the reforms already introduced.
It is conceivable that the more conservative members of the ruling party will seize on the threat posed by unrest across the region to bring the liberalization process to a halt. However, government officials recognize that reforms are necessary to create a solid foundation for long-term economic stability. As such, the government is expected to proceed, but it will continue to display its characteristic caution, ready to retreat if its measures provoke an unsettling public backlash.Back to Blog