geopolitical risk ratings firm

PRL Volume XXXIII, Number 3 March 2011


Rousseff’s Political Skills to Be Tested
Dilma Rousseff began her presidential term with a strong mandate and the backing of a legislative coalition that controls large majorities in both chambers of the Congress. The main question going forward is whether she possesses the political skills required to translate those assets into action. Her recent victory in a standoff with her main coalition partner over a minimum wage increase was an important one, at least for bolstering confidence that she will honor her pledge of economic orthodoxy. However, tensions within the coalition are sure to rise once the government gets down to the business of making some $30 billion in promised spending cuts.

The president will need the backing of the centrist PMDB to secure approval of pension, tax, and labor-market reforms, some elements of which require a three-fifths majority in the Congress. The process is certain to involve hard bargaining, and Rousseff’s room for maneuver will be limited by the recognition that she could face challenges for the PT’s presidential nomination in 2014 if she fails to stand her ground. Consequently, there is a high probability that she will lose the backing of the PMDB (or blocs within the party) in the near term, and the risk will increase as the next election cycle approaches.
The reversal of capital flows in the immediate aftermath of the disaster in Japan is likely to be a temporary phenomenon. Given the low probability of significant tightening of monetary policy in the US, Japan, or the EU in the coming year, the attractiveness of Brazil’s high interest rate will prove irresistible to investors. Consequently, the real is expected to appreciate further against the euro and to hold fairly steady vis-à-vis the US dollar, resulting in the persistence of competitiveness issues for non-mining exporters.
The rising cost of food and fuel has contributed to worrisome increases in consumer prices, but core inflation has been running only slightly below the headline figure, suggesting there is a significant demand component, as well. Should macroprudential measures fail to hold price increases in check, monetary officials can be expected to hike the key interest rate at its next policy meeting in mid-April, creating a temptation for the government to tighten capital controls in hopes of relieving pressure on the currency.


Political Divisions a Barrier to Reform
A potentially dangerous political crisis erupted in late January, when André Mba Obame, a former presidential candidate who claims that Ali Bongo and the governing PDG stole the presidential election held in 2009, declared himself to be Gabon’s legitimate head of state and presented a shadow government. Although the provocative move resulted in sometimes violent clashes between supporters of the opposition National Unity party and security forces, Obame’s hopes that it might trigger a North Africa-style mass uprising were not realized, and Obame could face trial on treason charges, as the legal dissolution of National Unity has cost him his seat in the National Assembly and the immunity that came with it.
For the moment, Bongo is not seeking prosecution, an indication that he would prefer to avoid any controversies that might ignite an explosion of unrest ahead of legislative elections due to be held in December. Similar considerations are believed to have figured into his decision to retain Paul Biyoghé Mba as prime minister during a Cabinet reshuffle undertaken in January. Biyoghé Mba has clashed with Bongo over the president’s reform plans, but sacking him would carry the risk of aggravating tensions between the PDG’s reformist and hard-line factions, and could alienate members of the prime minister’s Fang ethnic group, whose dominant presence in northern Gabon makes its support essential.
Given the president’s evident wariness of stirring discontent within his party or among the broader population, he will probably not be inclined to move aggressively on the reform front until after the election. Bongo has outlined a program for rapid diversification of the oil-dependent economy, but efforts have been slowed by bureaucratic obstacles and resistance from elements within the PDG. Although the ruling party is expected to win a comfortable majority of seats in December, economic discontent could erode the PDG’s position, leaving Bongo all the more dependent on the support of the members of his party’s anti-reform faction.


Domestic Temperature Is Rising
The partnership between President Mwai Kibaki’s PNU and Prime Minister Raila Odinga’s ODM was born of conflict and has been contentious from the start. However, the mutual hostility of the governing partners has deepened since December 2010, when the International Criminal Court in The Hague released a list of individuals it accuses of orchestrating the deadly violence that followed the disputed presidential election in December 2007, a group that includes Deputy Prime Minister Uhuru Kenyatta, who is the front-runner to be the PNU’s candidate in the 2012 presidential election.
Kibaki is intent on denying Odinga the presidency, an objective that would be much harder to achieve if Kenyatta is disqualified over his legal troubles. In a bid to convince the ICC that Kenya is capable of trying the accused on its own, the president moved to fill vacant positions at the top of the country’s legal apparatus. However, Odinga successfully blocked confirmation of the nominees, on the grounds that Kibaki had failed to consult with him on the choices as required under the new constitution approved last year. Predictably, Kibaki and Kenyatta were outraged, as was William Ruto, one of the ODM figures named by the ICC, and Odinga’s main rival for control of the party. Ruto has struck an alliance with Kenyatta and Vice President Kalonzo Musyoka aimed at marginalizing Odinga. There are already reports that the prime minister has been shut out of top-level meetings called to discuss other ways to “save” the six accused leaders, and Odinga is not likely to tolerate his isolation for very long.
The expected collapse of the unity government is troubling for a number of reasons, the most immediate being the high risk that a breakdown of the political truce will trigger renewed bouts of widespread deadly violence. In that regard, reports from human rights organizations that various groups in Kenya are arming themselves in anticipation of a repeat of the ethnic warfare that followed the 2007 elections is especially worrisome.
Renewed political instability will likewise threaten the government’s ability to tackle important tasks before it, including the implementation of numerous elements of the new constitution and bringing more force to anti-corruption efforts. Failure to follow through in those areas could threaten flows of foreign aid, which would increase the already significant risk of damaging currency volatility.
Inflation is already on track to hit double digits this year, reflecting the trajectory of global prices for food and fuel, and a steep fall in the value of the shilling could unleash hyperinflation. It is doubtful that Kenya would remain peaceful for long under such conditions.


Opposition Finds a Weak Spot
The spirit of rebellion that has swept through North Africa and into the Persian Gulf has not yet disturbed the political climate in Kuwait. The country’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 has afforded the monarchy some protection against the emergence of a movement demanding a radical overhaul of the country’s power structure. However, the resignation of the entire government in late March, a step taken to avoid the parliamentary interrogation of the minister of foreign affairs, could create an opening for just such a movement.
The opposition has repeatedly flexed its muscle by exercising its right to order members of the royally appointed government to appear for parliamentary questioning on allegations of corruption and incompetent governance. Initially, attempts to force members of the royal family to submit to the humiliation of such a “grilling” were circumvented by the formal resignation (and rapid reappointment) of the government or the dissolution of the Parliament and the holding of an early election. However, in recent years, members of the royal family, including the prime minister, have appeared before the Parliament for questioning, which has merely emboldened the opposition to press its advantage.
The resignation of the government in late March suggests that the opposition found a pressure point. Prime Minister Nasser Al-Sabah made clear that Foreign Minister Muhammad Al-Sabah would not submit to questioning due to concern that his answers might sow sectarian strife, as a Shiite lawmaker had signaled his intention to quiz Muhammad on Kuwait’s role in bolstering the regime in Bahrain, where the Sunni monarch is being pressured by the majority Shiite population to surrender his throne.
Emir Sabah Al-Sabah has periodically threatened to use his trump card—the power to suspend the Parliament and rule by decree—but is clearly reluctant to take that step. However, it is possible that he might do so, and in the current political climate, such a move could trigger an eruption of unrest. Although it is unlikely that the monarchy would be toppled, 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.
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. The emir’s handling of the current crisis (which could involve the replacement of Nasser as prime minister) 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.


Best-case Scenario Still Bad
Col. Muammar al-Qaddafi’s refusal to bend to popular pressure to end his long reign has left Libya in a state of chaos. Large sections of the population are in open rebellion, supported by a significant portion of the regular armed forces, while Qaddafi is relying largely on foreign mercenaries and militias made up of loyal supporters to wage a counter-revolution. Early gains made by the rebels were quickly reversed by the regrouped pro-government forces. However, the tide has shifted again, following the establishment of an internationally enforced no-fly zone over Libya that will prevent Qaddafi from using the advantage of air power to push the rebels into retreat.
Qaddafi contends that the rebels and their foreign supporters face a very long battle, and he has pledged that he will “die in his homeland.” He may well fulfill that promise. Even a limited role for foreign military forces will diminish Qaddafi’s ability to quickly pound the rebellion into submission, and if he manages to fight his opponents to a stalemate, it is doubtful that he can sustain that situation for a prolonged period of time, as international sanctions (including a freeze on Libya’s foreign accounts) will negatively affect the colonel’s ability to continue purchasing the loyalty of the forces now fighting on his behalf.
Unfortunately, the likely alternatives to Qaddafi’s continued rule do not hold out much hope for a better outcome. Despite Qaddafi’s best efforts to restructure Libyan society during his more than 40 years in power, the country remains organized along clan lines. Unless a post-Qaddafi regime is similar to the current one in terms of its centralization of authority, the potential for a prolonged bout of tribal warfare would be high.
Even if the so-called “Somalia scenario” does not come to pass, it is highly unlikely that whatever kind of government is formed will be a functioning democracy. Such evidence points to a danger that Qaddafi’s downfall could prompt an attempted takeover by religious extremists, or, more likely, trigger a separate conflict between secular elements among the rebels and extremist insurgents. In that event, the likelihood of a takeover by top members of the military establishment who have joined the rebellion would be rather high. If the alternatives were an explicitly theocratic government or an unstable civilian regime, the international community might be willing to tolerate the installation of a military government, provided it was capable of imposing order, which is hardly a given.


Tensions Unlikely to Influence Policy
Since winning re-election with a parliamentary majority in 2009, the unity of the Red-Green coalition government made up of the DNA, the SV, and the Sp has come under increasing strain. Ideological differences between the center-left DNA, the lead party in the coalition, and the centrist Sp, the most junior partner in the alliance are the primary cause of the difficulties, but falling popular support for the Sp and the SV, which is likely to be confirmed at municipal elections in September, has also undermined relations among the partners.
Despite the inter-party fissures, overall government stability will not be undermined significantly. Facing the possibility of being excluded from Parliament if there popularity does not rebound ahead of the 2013 general election, the junior coalition partners will most likely rally behind the DNA, counting on a favorable opinion of the government’s performance to boost their standing over the next two years. As such, there is little reason to expect any deviation from the current policy course, which focuses heavily on the longstanding High North Strategy.
The Financial Crisis Commission established in the aftermath of the 2008 crisis presented its recommendations to the government in January. The most notable prescriptions were the introduction of a financial stability fee, which amounts to an insurance payment to the government for its implicit guarantee of bank debt, and a financial transactions tax on bank profits and wages that is designed to discourage excessive risk-taking. Not surprisingly, the domestic financial sector has reacted negatively to the recommendations, but Finance Minister Sigbjorn Johnsen is likely to implement the changes this year.


Stable Conditions
In general, President Ma Ying-jeou and his KMT party are in a good position as they begin to look ahead to next year’s presidential and legislative elections. The KMT controls nearly two-thirds of the seats in the Legislative Yuan, and it is doubtful that it might lose enough seats at the 2012 elections to threaten its majority status. As for the president, Ma’s approval rating has trended upward of late, rising to 40% in January, from 34.6% in late 2010.
The jump in the poll numbers reflects the very favorable performance of the economy in 2010 and growing trust among the electorate that the KMT will pursue peaceful (and economically beneficial) relations with the mainland without compromising Taiwanese interests. In March, Ma confirmed his commitment to a cross-strait policy based on the principles of no unification, no independence, no use of force, and continuing economic integration.
The main source of uncertainty going forward is whether that optimism and trust will be sustained through an economic slowdown, the severity of which has become rather uncertain in the wake of the natural and nuclear disasters in Japan. Although most of the impact of Japan’s troubles will be felt in the second quarter, problems could persist into the second half of the year, particularly if power shortages resulting from damage to the country’s nuclear capacity are not resolved in a timely manner. Moreover, increased Japanese demand for energy imports will reinforce upward pressure on global prices for oil and other fuels, complicating the central bank’s task of containing inflation.
In combination, these factors could trim as much as a full percentage point off the growth rate in 2011. On that basis, the pace of economic expansion is forecast to slow to less than 4%, and given the potential for additional shocks from the sovereign debt and bank solvency issues in the euro zone and/or spreading unrest in the Middle East, the risks to the forecast are weighted toward the down side.


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