Asia Europe Latin America ASIA Maldives: Democracy further sets back after arrest of opposition leaders Event Opposition leader and former President Mr Nasheed has been jailed for 13 years as he is accused of having misused the military to arrest the Chief of justice in 2012. In capital Malé, two other major opposition leaders were also arrested for allegedly trying to oust current President Yameen, and the same happened for a couple of hundred protesters demanding Nasheed’s release. The international community, including the UN, has condemned ‘arbitrary arrests’ and threaten to take sanctions against rulers. Impact on country risk Those arrests are another decisive step in Yameen’s crackdown on opposition aimed to consolidate his power. With the support from the police and justice while enjoying a majority in parliament, Yameen’s position looks solid and his democratic track record continues to gradually erode. As a matter of fact, political opposition is not the only victim of Yameen’s strategy since the civil society and media are increasingly intimidated and violently repressed. Given Nasheed’s popularity, further protests from his supporters are expected in the future and foreign sanctions targeting leaders of the ruling PPM party’s international assets are looming. However, as long as Yameen is supported by the army and police, his grip on power will not be threatened. Maldives’ political and democratic outlook looks gloomier when considering the simultaneous rising Islamisation across politics and society in a country where the number of jihadists fighting for the ‘Islamic State’ is proportionally among the highest. Although the dominant tourism sector remains vibrant and unaffected so far, it could eventually be harmed by a deteriorating political situation and foreign image, notably via sanctions. Country risk analyst Raphaël Cecchi | T +32 2 788 87 45 | E r.cecchi@credendogroup.com Mongolia : Long-expected deal on Oyu Tolgoi mine expansion improves the economic outlook Event An agreement on the Oyu Tolgoi mine expansion project has finally been reached between Rio Tinto – which owns a 66% share in the mine via its Turquoise Hill subsidiary – and PM Saikhanbileg’s government. The second development phase of this giant gold and copper mine estimated at USD 5.4 bn for underground operations will resume after having been frozen for two years due to a dispute around financing and tax payments. Moreover, there is hope that the Parliament soon gives its green light to develop the other big mining project, i.e. the USD 4bn Tavan Tolgoi coal mine. Africa Impact on country risk With political obstacles being progressively lifted in the mining project saga, Mongolia’s investment framework could appear friendlier and thus raise investor confidence. A more attractive investment climate should reverse the sharp downward trend in FDI that has resulted from rising suspicion about the government’s business stance. Mongolia would largely benefit from it as it much relies on FDI to drive GDP growth (expected to tumble to 4.4% this year from an 11% average rate in 2010-2014) and to finance a wide current account deficit forecast at 11% of GDP this year. This positive evolution with regard to exploiting Mongolia’s largest mines are of particular importance in a gloomier context combining much lower commodity prices and slower Chinese demand, namely two crucial factors for Mongolia’s economic performances. It remains to be seen whether this long-awaited mining deal is a clear sign of enduring political commitment towards investors that will survive future governments, the next test being the 2016 Parliamentary elections. Meanwhile, until Mongolia bears fruit from further exploitation of its giant mines, country risk will remain vulnerable to external shocks, pressures on foreign exchange reserves and local currency. Therefore, Credendo Group’s downgrade of Mongolia’s short-term political risk rating from 3/7 to 5/7 in 2014 is not going to be reversed soon. Country risk analyst Raphaël Cecchi | T +32 2 788 87 45 | E r.cecchi@credendogroup.com EUROPE Macedonia: May was marked by political tensions Event The month of May was marked by two events, being the death of 8 Macedonian policemen and 10 Albanian militants during a battle in the northern town of Kumanovo (9 May) and protests against the government and Prime Minister Nikola Gruevski (17 May) that followed wire-tap revelations. PM Gruevski –who has been in power since 2006 and has been increasingly perceived as authoritarian - leads a multi-ethnic coalition elected in April 2014. Opposition Social Democrat leader Zoran Zaev accused the PM of mass surveillance of allies and opponents. Allegation denied by Nikola Gruevski. In the context of annoying wire-tap revelations, it is not clear whether the raid against Albanian militants in Kumanovo was aimed to divert public opinion from this political scandal. However, the raid highlights that ethnic division could be exploited by politicians. This is dangerous as it could result in heightened tensions. Impact on country risk Tensions between political parties are frequent in Macedonia as shown by past opposition’s parliamentary boycotts and protests. In this context, a solution to the current political crisis would reduce the threat of political instability. It is important for Macedonia to be perceived as a stable country by foreign investors. Indeed, over the past years the government has successfully attracted foreign direct investments by building infrastructure, granting tax breaks, streamlining red tape and ensuring direct access to high-level decisionmakers to help address potential problems. If the country loses investors’ confidence, it could have important consequences in terms of FDI prospects. Credendo Group’s MLT political risk category – currently in 5 - is unlikely to be revised as it already takes into account the frequent political tensions. Country risk analyst Pascaline della Faille | T +32 2 788 86 75 | E p.dellafaille@credendogroup.com Turkey: Legislative elections to take place on 7 June Event Parliamentary elections will take place on 7 June. While the ruling Justice and Development Party (AKP) is likely to be re-elected as President Erdogan and his ‘former’ AKP are credited for bringing Turkey unprecedented political stability and for improving the living standards of the working and lower middle classes, the main question concerns the number of seats to be won by the AKP. Impact on country risk The presidential function is highly representative in Turkey. Indeed, until now, Mr Erdogan’s attempts to change the constitution in order to transfer executive power from the Prime Ministry to the Presidency have failed as his party lacks the needed two-third majority and therefore has to reach a compromise with the opposition parties. However, the opposition has so far refused to change the constitution out of fear that the authoritarian tendencies of President Erdogan would increase. This could change if the AKP wins a two-third majority at the forthcoming legislative elections. On the economic side, one of the main tasks of the new government would be to restore policy credibility which is currently under pressure due, in part, to political interference with the central bank’s monetary policy. Even if Turkey’s current account deficit has decreased recently thanks to lower oil prices, its large reliance on short-term capital flows remains its Achilles’ heel. This leaves the currency highly vulnerable to changing investors’ confidence (cf. graph). Credendo Group’s political risk classifications are expected to remain stable as they already take into account the large reliance on volatile short-term capital flows and the risk of spill-over effects from the war in Syria and Iraq and the fragile ongoing peace process with the Kurds. On the positive side, Turkey’s economic fundamentals are strong: exports are well diversified, public finances are solid and the external debt burden is moderate. The banking sector is well regulated and capitalised although heavily reliant on short-term funding. Country risk analyst Pascaline della Faille | T +32 2 788 86 75 | E p.dellafaille@credendogroup.com Poland: Presidential mandate shifts to the right Event The run-off of the presidential race which took place last 24 May unexpectedly brought to power the opposition conservative and nationalist Law and Justice (PiS) party-backed candidate, Andrzej Duda. The latter defeated incumbent BronisÅ‚aw Komorowski, who was supported by the centre-right ruling Civic platform (PO) and had served five years as president. It seems that the corruption scandals that have tarnished the image of his party and uneven perceived gains of growth have got the better of the incumbent, in spite of the robust growth period corresponding to his mandate and political stability sentiment. Impact on country risk The shift to the right of the presidential mandate will have several implications on the domestic side and the foreign policy–making process. The most immediate consequence is that it signals a possible change of majority in view of the next October parliamentary election. An alignment of the executive with the presidential line would make it easier to implement Duda’s electoral programme. This one includes protectionist policies such as new taxes on foreign-owned banks and supermarkets and the willingness to put the banking sector under Polish control again. Other ’Hungarian-style’ policies such as a conversion of Swiss franc-denominated households’ loans at a historical rate, which is detrimental to the banking sector, have also been mentioned. Besides, Duda has announced his will to reverse the increase of the retirement age voted by the PO government, potentially damaging the ongoing fiscal consolidation effort. On the external side, nationalist and Eurosceptic views should cause the country to distance itself from EU institutions, although its high reliance on EU funds makes very strong clashes unlikely. At the same time, the new President could instil a still more adverse line towards Russia, PiS being a strong detractor of relations with that country since the airplane crash that killed Kaczynski in 2010. Country risk analyst Florence Thiéry | T +32 2 788 89 91 | E f.thiery@credendogroup.com LATIN AMERICA Guatemala : Corruption scandals deal blow to ruling party ahead of general election Event Since April, multiple cases of graft involving high-level public officials have been unearthed by Guatemalan prosecutors and the UN-backed International Commission Against Impunity in Guatemala (CICIG). Major indictments include those against senior members of the tax authority and those of the entire board of the social security institute, among whom the president of the Guatemalan central bank. Unsurprisingly, the scandals have had significant political fallout. Vice-president Roxana Baldetti resigned earlier this month (her private secretary having been named a key suspect) and so did the Minister of Mining and Energy (the opposition accusing him of irregularities in the awarding of contracts). Also, dozens have been arrested, including the central bank chief and the head of the national tax authority. Meanwhile, tens of thousands have taken to the streets to express their outrage and demand the resignation of President Otto Pérez Molina. Impact on country risk While Pérez Molina is highly unlikely to be forced to step down over the corruption scandals (he denies any involvement and has nearly completed his presidential term), his ruling Patriot Party (PP) stands to suffer the political consequences in the general election that will be held in September. Indeed, PP approval ratings have recently dropped and the opposition is set for an election victory. On the economic front, the scandals will clearly harm Guatemala. Most obviously, involved companies may see their state contracts revised (or cancelled altogether) and their access to credit confined. This may in turn force them to cut back operations, hence impairing economic activity. Another and more important issue concerns reputational damage. For one thing, the scandals may weigh on capital inflows by reinforcing foreign investors’ perception of Guatemala as a high-risk environment. Moreover, the misconduct exposed at the national tax authority will further increase distrust of this institution and thus undermine recent efforts to boost Guatemala’s notoriously low tax take. Note that with 2014 government revenues amounting to merely 11.2% of GDP, Guatemala ranks poorly, even by modest regional standards. Country risk analyst Sebastian Vanderlinden | T +32 2 788 85 13 | E s.vanderlinden@credendogroup.com AFRICA Guinea: Build-up to elections will be marked by violence Event President Alpha Conde stated on 22 May that local elections – originally scheduled for March 2014 – will not be held before the presidential elections planned in October 2015. The opposition claims that the postponement of local elections is a manoeuvre by president Conde to use the local authorities, currently all political appointees, to bring in votes on his behalf during this year’s presidential elections. Impact on country risk As a result of Conde’s statement, political unrest is set to increase the following months to force concessions before October, yet the ruling ‘Rassemblement du Peuple Guinéen’ (RPG) is unlikely to concede. Political parties in Guinea are ethnically based, which forms a persistent threat to security and political stability. President Conde’s RPG mainly represents the Malinké community, less than one third of the population. Consequently, the ruling RPG realises it is very likely to lose elections as the main opposition represents ethnic-Peul (comprising 40% of the population) and another opposition party ethnic-Soussou (20% of the population). Since 2011, Guinea has been plagued by recurrent conflict between supporters of rival political parties and security forces. Heaps of often violent street protests were held, demanding democratic progress which has been evolving very arduously since the end of half a century of dictatorship in 2010. Today, Guinea is at another turning point, though it is likely to be accompanied by arsons, fighting and disorder once again. Through president Conde’s security forces reshuffles and the appointment of loyalists, he has managed to mitigate coup risks. Nevertheless, should presidential elections be held without conceding to opposition demands and should these eventually be found to be rigged, violence could further escalate and increase the risk of civil war. Besides political gridlock, the slow response to the Ebola outbreak and weak economic development are expected to cause a GDP contraction of 0.3% in 2015; knowing that before Ebola Guinea was projected to be one of the fastest growers in the world thanks to the coming on stream of huge iron ore endowments. Country risk analyst Louise Van Cauwenbergh | T +32 2 788 86 62 | E l.vancauwenbergh@credendogroup.com Disclaimer: Credendo Group has used its best endeavours to ensure that all the information, data, documentation and other material (copy and images) in this report are accurate and complete. Credendo Group accepts no liability for errors or omissions. The views expressed herein are the author's personal views and are not intended to reflect the views of Credendo Group. 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