Did you know that researchers from the IMF recently used 12 risk metrics from the ICRG's political risk methodology to help determine why surges in capital flows to emerging markets occur, and what determines the allocation of capital across countries during such surge episodes. Domestically, it was found that, among other items, structural characteristics matter, which explains why not all emerging market economies experience surges. See “Surges,” Atish R. Ghosh, Jun Kim, Mahvash Saeed Qureshi, Juan Zalduendo, IMF Working Paper (12/22), Research Department, January 2012.

Ethnic Divisions Create Persistent Risk of Conflict

As Sri Lanka approaches the three-year anniversary of the end of its long civil war, the political dominance of President Mahinda Rajapaksa and his SLFP is uncontested.

 

The extension of the prison term of Rajapaksa’s main political rival, former armed forces commander Sareth Fonseka, means he will not be released until after the next scheduled presidential election, which must be held by January 2016.

 

In the meantime, a campaign of intimidation against members of the press will have a dampening effect on media criticism of the administration, a prospect that in combination with a generally favorable medium-term outlook for the economy makes it likely that Rajapaksa and the SLFP-led UPFA will win re-election when their current mandates expire.  Even so, the risk of renewed instability cannot be ruled out.

 

Although the president continues to pay lip service to national reconciliation, the government is tightening military control over the northern and eastern areas in which the minority Tamil population is concentrated, and there are reports that ...

Photo via public domain.

 

POLITICS

Government Stability/Investment Profile

Tax Reform Stalls Again

Over the last decade, four successive presidents have attempted to implement tax reforms that are seen as essential to creating a basis for long-term fiscal stability, only to see their efforts stymied by the lack of a reliable legislative majority and the ease with which even a tiny bloc of lawmakers can stall bills using procedural maneuvers.  The long struggle to reform the tax code appeared to be finally heading for successful conclusion in September 2011, when opposition leader Otton Solis, the head of the Citizen Action Party (PAC), reached an agreement with President Laura Chinchilla and the governing National Liberation Party (PLN) under which the measures would be granted fast-track status.  By limiting debate on the measures, the assumption was that the tax package could be approved in time to implement the changes in January 2012.

 

Unfortunately, that timetable proved to be much too optimistic.  Although the time allotted for debate is limited under the fast-track ...

MOST LIKELY REGIMES AND THEIR PROBABILITIES
18‑Month:	*Reformist Coalition 45%
Five‑Year:	*Reformist Coalition 45% (50%)

 

FORECASTS OF RISK TO INTERNATIONAL BUSINESS
	Turmoil	Financial Transfer	Direct Investment	Export Market
18‑Month:	High	C+	C	C
Five‑Year:	High	C+	C	C+ (C)

( ) Indicates change in rating.                                                                                 *  Indicates forecast of a new regime.

 

KEY ECONOMIC FORECASTS
Years	Real GDP Growth %	Inflation %	Current Account ($bn)
2007-2011(AVG)	-9.6	7.2	18.42
2012(F)	31.0	5.0	6.10
2013-2017(F)	6.5	6.1	22.40

 

The Center May Not Hold

 

Although recent public opinion polls suggest that an overwhelming majority of Libyans remains optimistic about the country’s future, recent developments have lent credence to warnings that in the absence of a strong central authority Libya would be vulnerable to splintering along regional lines.  Large sections of the country are effectively controlled by local militia leaders who are not accountable to Tripoli, and there are cases whether the authority of the interim NTC government is being openly challenged.

 

In the resource-rich eastern region of Cyrenaica (or Barqa in ...

 

Nursultan Nazarbayev:  The dominant figure in the country’s post-Soviet politics, the president has remained in power through intimidation and electoral manipulation, and his authority has been solidified through the domination of the National Assembly by his allies in the Nur-Otan party.  Although he pays lip service to democracy and the virtues of the free market, his government’s actions have sent a clear signal that his embrace of either will be selective, at best.  His refusal to name a successor or establish a process to choose one creates a high risk of dangerous political instability if he were to depart the scene unexpectedly.  In that regard, questions about his health (he is rumored to have been treated for prostate cancer in 2011) are cause for concern.

 

Fatherland’s Ray of Light:  A pro-presidential party formed in December 2006 through the merger of Otan, Asar, and the AIST, Nur-Otan dominates what is essentially a rubber-stamp legislature.  The party won 81% of the vote and 83 of the 113 seats in the National Assembly at elections held in ...

Photo via (cc) Flickr user Natalie Maynor.

 

 

 

Reform Push Gathers Pace

The market-reform push initiated by President Raúl Castro has gained momentum over the last several months, but the changes to the economic system will not be accompanied by any significant political liberalization.  That was the clear message that came out of the first-ever national conference of the Cuban Communist Party held in late January, at which Castro rejected any possibility of dismantling the country’s one-party system as long as the US maintains a hostile posture toward the regime in Havana.

 

The government has approached economic reform with a greater sense of urgency since July, when Venezuelan President Hugo Chávez revealed that he had been diagnosed with cancer.  Venezuela’s financial support has been crucial to propping up Cuba’s moribund economy over the last decade, and Cuban officials are only too aware that the many benefits they derive from Chávez’s patronage—cheap oil, investment capital, and diplomatic legitimacy—would evaporate if he ceased to control the political reins in Caracas.

 ...

Photo via (cc) Flickr user George Appiah.

 

POLITICS

Government Stability

Elections 2012: A Heated, Yet Peaceful Campaign Expected

Oil revenues are flowing in, inflation is down to single digits, and foreign direct investment has increased fivefold over the past year, but the question of who will be administering Ghana’s new-found wealth after the general election in December this year remains entirely open. The main contenders, President John Atta Mills of the National Democratic Congress (NDC) and Nana Akufo-Addo, the leader of the opposition New Patriotic Party (NPP), have consolidated the hold on their respective political machines and will now turn their attention to what is widely expected to be a tight presidential race.

 

Mills faces an uphill battle converting the good fortunes of the economy into solid electoral support as oil revenues have yet to make a tangible contribution to job growth and disposable income of Ghanaian households. Case in point, the government looks unlikely to achieve its flagship project, an offshore pipeline linking the Jubilee oil field on the ...

MOST LIKELY REGIMES AND THEIR PROBABILITIES
18‑Month:	CPC 70%
Five‑Year:	CPC 55%

 

FORECASTS OF RISK TO INTERNATIONAL BUSINESS
	Turmoil	Financial Transfer	Direct Investment	Export Market
18‑Month:	Low	A+	A	A+
Five‑Year:	Low	A+	A (A+)	A+

( ) Indicates change in rating.                                                                                 *  Indicates forecast of a new regime.

 

KEY ECONOMIC FORECASTS
Years	Real GDP Growth %	Inflation %	Current Account ($bn)
2007-2011(AVG)	1.1	1.9	-25.33
2012(F)	1.8	1.9	-60.10
2013-2017(F)	2.2	2.3	-36.60

 

Risk of Overreach

 

Prime Minister Stephen Harper initially used the parliamentary majority attained by the CPC at the May 2011 general election to secure approval of corporate tax cuts, tough anti-crime legislation, and abolition of the national gun registry, all moves that pleased his party’s base without providing the weakened opposition with an easily exploitable issue.

 

However, more recent initiatives, such as a move to eliminate the monopoly control of the Canadian Wheat Board and the administration’s take-it-or-leave-it approach to hammering out a new formula for federal transfers to the provincial ...

Photo via (cc) author monisbu

 

 

Did you know ICRG data was used to show that the presence of domestic conflict or major political instability has a large and negative effect on FDI inflows to emerging market economies, which highlights the role of inclusive policies to promote growth and avoid sudden stops of FDI inflows. See “Economic Policies and FDI Inflows to Emerging Market Economies” Elif Arbatli, IMF Working Paper (11/192), August 2011.

 

International Country Risk Guide’s latest commentary on Syria’s Economy:

 

SYRIA

Serious Economic Risks

Real GDP contracted by an estimated 4% in 2011, as EU sanctions and sabotage of pipelines and other oil infrastructure sent daily oil production plummeting from 385,000 barrels to just 220,000 barrels, a fall of more than 40%.  The more recent addition of Arab League sanctions and new EU restrictions on trade in precious metals and phosphate will reinforce the negative pressure on the economy.  Although a 60% spending increase in the 2012 budget may reverse the downturn, any positive growth will ...