The wave of uprisings that is sweeping across the Middle East and North Africa (MENA) is set to have a major impact on the risk of doing business. As political instability rises in the region, companies around the world need to prepare for the repercussions on supply chains and business costs across most sectors.
Instability in the MENA region
Between December 2010 and January 2011 a series of demonstrations spread across Tunisia as people took to the streets to protest against deteriorating living conditions and political repression. The sudden collapse of President Ben Ali’s regime opened a political vacuum, which was later filled by a transitional government. During the protest, most business activities remained closed and re-opened only gradually after the downfall of the regime. Overall, supply chain disruptions and damages to offices and production plants were considerable across the board.
Only a few days after Ben Ali’s decision to leave the country, similar developments followed in Egypt. Protests against deteriorating living conditions, corruption and authoritarianism blocked the country’s main cities for weeks; under intense domestic and international pressure, President Hosni Mubarak stepped down and handed over his powers to the military authorities, thus opening the way to an uncertain political transition. In addition, a series of demonstrations took place in Algeria, Bahrain, Iran, Jordan, Oman and Yemen as well. Libya was engulfed in a violent spiral of protests and harsh military repression that led the country into civil war and, as the country plunged into chaos, foreign companies shut down hydrocarbon production and the economy ground to a halt. In the following weeks, international sanctions hit Libya’s government assets, while the UN authorised a military coalition led by France, the UK and the US to impose a ‘no-fly zone’ to protect civilians from the regime’s military repression.
Re-pricing political risk
Besides its regional relevance, the latest events in the MENA region are likely to have a wider impact on the risk of doing business. In the years that preceded the 2008-09 global economic downturn, emerging markets became increasingly central to the world economy and international business. As countries such as Brazil, Russia, India and China recorded extremely high growth rates and showed reassuring political stability, investors’ and exporters’ attitudes towards the risk of doing business in these countries slowly relaxed.
Nevertheless, the recent wave of protests and the possibility of a ‘domino effect’ in the MENA region are likely to prompt many market players to reconsider the impact of political risk on doing business in emerging markets. Businesses are likely to re-price the risk premiums attached to trading and investing in other countries characterised by social instability, political authoritarianism or ethno-religious divides. Although this reassessment is unlikely to concern all emerging markets, it means that insurance and financing costs for both foreign and local companies are liable to increase as the credit risk associated with businesses based in developing economies rises.
Impact on energy markets
Unsurprisingly, in early 2011 oil prices reacted quickly to instability in Egypt and Libya.
Whereas operations in the Suez Canal and SUMED pipeline continued unabated even at the peak of the crisis, turmoil in Libya meant that foreign oil companies had to evacuate their personnel and reduce or shut down production. As a result, the price for Brent broke the psychologically sensitive $100 per barrel (/b) mark and hovered around $115/b for weeks. As the MENA region sits on top of some of the world’s largest oil and natural gas reserves, in the short term there is a growing risk that increased instability in the region might boost oil prices further. Moreover, disruptions in natural gas supply could negatively affect businesses in Europe, which is highly dependent on this region; in particular, countries to watch for potential repercussions are Spain and Italy. In the long term, rising political risk and project financing costs are also liable to constrain investment in the hydrocarbon sector, thus further exacerbating energy costs for companies. In this context, companies should shorten supply chains and adopt less energy-intensive production processes, where possible, to minimise risks.
| Risk Rating Changes | |||
| Upgrades | WW Headline | Extended WW Headline | |
| Latvia | DB4a | D&B upgrades Latvia's country risk rating due to lower political risk and signs of a more balanced economy. | D&B has upgraded Latvia's risk rating on the basis of lower political risk and the improving position of the country's public finances. That said, Latvia remains in the 'moderate risk' category because of the still-fragile economic and business outlook as the country recovers from a steep economic downturn. |
| Netherlands | DB2a | D&B upgrades Netherland's country risk rating due to the improving economic outlook, although several downside risks remain. | D&B upgrades the Netherland's country risk rating owing to the improving economic outlook, driven by both stronger external and domestic demand. However, risks to the recovery include a tight fiscal policy undermining growth, and weakened policy-making from a fragile government. |
| Tunisia | DB5a | D&B upgrades Tunisia's country risk rating amid the improving political and security risk outlook. | D&B upgrades Tunisia's country risk rating following a change of prime minister that has led to an improvement in the security situation and reduced instability. However, the economic outlook remains mixed and GDP growth is expected to slow over 2011. |
| Downgrades | WW Headline | Extended WW Headline | |
| Bahrain | DB3d | D&B downgrades Bahrain's country risk rating in the wake of serious political unrest. | D&B has downgraded Bahrain's country risk rating in the wake of serious political unrest. The government is likely to be forced into making wide-ranging political concessions, including reforms long demanded by the majority Shi'a community. The government will keep its raft of subsidies in place in order to avoid any price-related discontent. |
| Greece | DB4d | D&B downgrades Greece's country risk rating in response to deteriorating economic and political conditions. | D&B has downgraded Greece’s country risk rating for a second consecutive month, from DB4c to DB4d, due to deteriorating economic and political conditions. The economy shrank by 6.6% year on year in Q4 2010 and the pace of structural reforms faces strong public and political opposition. |
| Japan | DB3a | D&B downgrades Japan's country's risk rating due to the power shortages and nuclear safety concerns caused by the tsunami. | D&B downgrades Japan’s country risk rating in the wake of the most powerful earthquake and tsunami in the country’s recorded history, and amid fears over nuclear safety following explosions at nuclear plants in the region. Power generating capacity is also severely limited, with serious implications for industry nationwide. |
| Kuwait | DB3c | D&B downgrades Kuwait's country risk rating owing to the deteriorating political outlook. | Political risk increases as tensions between the government and opposition parties remain high, although these are likely to remain contained in light of Kuwait’s democratic system. Modest economic growth, driven mainly by government spending, is unlikely to be negatively affected. |
| Libya | DB7 | D&B downgrades Libya's country risk rating in the wake of the UN-sanctioned military intervention to establish a 'no-fly zone'. | D&B downgrades Libya's country risk rating into the 'highest risk' category in the wake of the UN-sanctioned military intervention to establish a 'no-fly zone'. The UN has also adopted sanctions against the regime, involving a freeze on foreign assets. Political and security risks are likely to remain extremely high. |
| New Zealand | DB2c | D&B downgrades New Zealand's risk rating as the recent earthquake increases payments and financing risks. | D&B downgrades New Zealand’s country risk rating due to the impact of a 6.3 magnitude earthquake in February. The resulting major disruptions to business activity will increase supplier risk, and downward pressure on public finances will increase governmental borrowing needs. |
| Panama | DB3c | D&B downgrades Panama's country risk rating due to rising political uncertainty. | D&B downgrades Panama’s country risk rating as continuing popular resistance to wide-reaching reforms indicates a population at odds with government aims to improve the business environment, while increasing opposition to the president threatens to see the coalition crumble over 2011-12. |
