Risk Report 2010 Print Manager PDF

Risk Report 2010 Print Manager
Africa
2010 heralds mixed prospects across sub-Saharan Africa. The implications of the global
economic downturn have varied widely, and the path to recovery will likewise not be uniform.
The continent in general is likely to be out of step with the prevailing international trajectory.
While a handful of countries – among them Congo (DRC) and Nigeria – will begin to feel some
relief in 2010, many others may find themselves suffering a second wave of recessionary after-
effects. Increased unemployment or underemployment, state spending cuts, high consumer prices
and the slow recovery of remittance rates from abroad will all have political and socio-economic
consequences.
Weathering the storm
Through 2008, the general sense among Africa’s finance ministers and central bank governors
was that the continent was and would remain relatively insulated from the effects of the global
financial crisis. By and large, they appear to have been right: growth on the continent has
generally been steady, though it is likely to have fallen to below 3% in 2009 – about half the
average annual rate seen since 2000. Most countries are expecting to see the beginnings of an
upturn in 2010.
These figures, though, do not tell the whole story. There is evidence of increased structural
resilience across Africa’s markets to the types of challenge thrown up by the economic crisis.
However, there are clearly limitations to the role that governments can play in guiding the post-
slump recovery. With their export-led growth models, most countries will have little choice but
to wait for global recovery to buoy them in its slipstream.
This generalisation is to some degree challenged in the continent’s two largest economies, South
Africa and Nigeria. Both have been disproportionately affected by the downturn, but at the same
time have a wider range of resources to deploy, and greater room for manoeuvre, in managing
their recoveries. The implications of the downturn are perceived to have been more pronounced
for South Africa, given its neater integration into global markets. Meanwhile, the crisis has also
provided a sharp reminder that even the most sophisticated economy on the continent is still
hugely exposed by its reliance on primary commodities, having been badly buffeted by the
vagaries of world metal prices. The country is set to run its first budget deficit since 2006, while
the financing requirements of its counter-cyclical capital-spending programme stand to heighten
debt-financing pressures to levels not witnessed since the late 1990s. The 2010 football (soccer)
World Cup tournament will undoubtedly provide a stimulus effect, while moderate concessions
to business during the crisis have demonstrated a degree of adaptive capacity on the part of
government. However, overall the crisis has only accentuated the political challenge of managing
the economy and emboldened the left’s demands for change – a dynamic that will reverberate
throughout President Jacob Zuma’s term of office.
Nigeria’s commodity vulnerability has also been made even more apparent, with the slump in oil
prices bringing a close to 40% dip in the value of its 2009 exports and threatening the long-term
viability of oil windfall savings. Signs of stabilisation in oil prices will be welcome. But the
feasibility of a government amnesty plan for Niger delta militant groups – which were
responsible for attacks on oil facilities that saw production levels plunge by 30% in 2009 – could
be called into question as politicians position themselves for a boisterous campaign in 2010
ahead of the 2011 polls. Moreover, the government’s frantic search for deficit-financing sources
and talk of more borrowing to sustain infrastructure investment will test adherence to improved
levels of fiscal discipline.
Continuing commodity dependence
Elsewhere, the crisis has shone a spotlight on continued primary commodity dependency in
almost all other sub-Saharan countries. It has reinforced long-standing obstacles to
diversification, both by hampering efforts to raise domestic revenues and by reducing the
prospect of FDI inflows into non-traditional economic areas such as labour-absorbing
manufacturing and services, as well as the commercial exploitation of previously untapped
primary commodities.
Moreover, attempts to stimulate investment have to rely predominantly on measures such as tax
cuts or periods of tax exemption, or the subsidisation of energy to industrial or commercial
consumers.
In light of such measures, even when investment inflow figures start to look healthier, it is
questionable to what extent governments will be in a position to extract benefits from them,
particularly in the form of revenues or employment guarantees.
Thus, despite pre-crisis perceptions of Africa as the last frontier for investors of all shapes and
sizes, commodities are set to remain the primary – if not sole – determinant of African markets’
relevance and direction. The continent-wide balance of power and balance of interests between
governments and foreign investors has barely altered, despite some positive trends in individual
countries.
Open for business
The continent’s traditional attractions are still the main draw for investors from China and other
emerging markets, despite their increased sensitivity to the need to pay lip-service to the
economic aspirations of domestic governments. State-backed Chinese companies acquired oil
reserves in Cameroon, Gabon and Nigeria in 2009, and will be looking to make headway into
Uganda and Ghana, as well as offshore reserves off Liberia and Sierra Leone, in 2010. They are
also likely to seek to consolidate major mining deals in Guinea, and acquire additional mining
assets in countries from Liberia to Zambia.
Notably, the model that Chinese interests initially used to break into sub-Saharan extractive
opportunities – whereby infrastructure construction and loans were exchanged for access to
mineral resources – shows signs of being replaced by more traditional deal structures, supported
by local banks that are also increasingly being bought into by Chinese interests. The change of
approach is likely to enable a wider breadth of Chinese penetration across sectors.
At the same time, 2010 will see the stepping up of interest in Africa from other emerging market
players. The free-trade agreement (FTA) between India, Brazil and the countries of the Southern
Africa Customs Union is likely to finally be cemented. Meanwhile, Russia’s hastening of debt
forgiveness, along with President Dmitry Medvedev’s tour of oil- and mineral-producing
countries in mid-2009, is expected to foreshadow enhanced strategic investment from that
quarter.
No more no go
The entry of new players, and the expansion of the interests of China and other emerging
markets are increasingly coming to mean that no part of the continent is off-limits in terms of
investment potential. Even in Somalia, oil companies are waiting impatiently for the chance to
begin exploring long-held blocks in its somewhat less anarchic semi-autonomous regions.
Beyond that, the Horn of Africa’s variable security climate has proved no deterrent to business,
illustrated by the volume of Chinese investment in Ethiopia in recent years. In the continent’s
other principal problem area, the Great Lakes region, increased investor interest is having a
positive effect on the security situation. The unexpected rapprochement between Rwanda and
Congo (DRC) at the start of 2009 is being consolidated largely on the back of a shift in emphasis
from Rwanda. Kigali has ambitious plans for the development of a methane-extraction and
energy-generation industry around Lake Kivu on the shared border, as well as wider economic
goals. These were not being aided by continued international perceptions of Rwanda as a
destabilising influence in eastern Congo.
Equally, an improvement in relations between Uganda and Congo (DRC) is largely being driven
by mutual pragmatism over the need to create conditions that will facilitate the development of a
viable oil sector on both sides of the Albertine Graben. Further assets are likely to be confirmed
in the area in 2010, adding to already significant oil finds there.
Although the spike in piracy in the Gulf of Aden has eclipsed maritime insecurity in the Gulf of
Guinea during 2009, the region will remain a hotspot for pirate activity in 2010. Attacks will be
especially prevalent in Nigerian waters and, increasingly, offshore Cameroon. However, the
ever-evolving tactics of Niger delta-based militant groups and copycat pirate gangs mean that
areas as far west as Sierra Leone, where prospective oil finds have recently come to light, and as
far south as Equatorial Guinea may not be immune to insecurity.
Infrastructure deficiencies to hold back progress
One risk that will re-emerge as recovery kicks in is infrastructure deficiency, which has been in
many cases slightly – but only temporarily – alleviated by crisis-related falls in the use of port
and other transport facilities, and in demand for energy. Major upgrade projects, including
Botswana’s Morupule B coal-fired power plant and power-generation facilities in South Africa
and Zambia, have been delayed – in some cases due partly to temporary reductions in
consumption, but largely because of a shortage of finance. In the Morupule case, insufficient
funding is allied with the obstacle of South African power utility ESKOM’s stalling over signing
a power-purchasing agreement, despite the country’s critical need for new capacity to support
existing as well as new investment.
Given the suspension of new projects and the simultaneous falling off in maintenance spending,
much key but already overstretched infrastructure will be in a worse state of dilapidation post-
crisis than it was two or three years ago. The consequent lack of spare capacity to support an
economic upturn will once again impose an unbreachable ceiling on growth and expansion
prospects pending progress in key upgrades. South Africa is an important exception; the 2010
World Cup infrastructure budget has provided generous resources for infrastructure ancillary to
the tournament, as well as for more general projects such as port upgrades.
Feeling the strain
The state of infrastructure supporting economic activity, however inadequate, is still vastly
superior to the utterly abject state of the services provided to many ordinary people. Where
demand is stretched, it is the general public that tends to lose out as scarce resources are
channelled to investors. The continuing infrastructure deficit, along with resurgence in demand,
is likely to see increasingly regular electricity and fuel shortages (and therefore increased
transport costs). These stresses are likely to be accompanied during the course of 2010 by
recovery-linked rises in food prices.
Such circumstances, in tandem with the reduced ability of governments to spend to appease
fractious public opinion and mask their limited legitimacy, will increase the likelihood of
outbreaks of popular volatility across many parts of the continent. Countries including South
Africa, Senegal, Kenya and Mozambique are particularly at risk. With potential orchestrating
forces – notably labour unions – seeing their influence and bargaining power considerably
dampened by the continuing effects of the crisis on availability and security of employment,
discontent is likely to manifest itself in less focused ways, such as spontaneous civil unrest and
sabotage.
Kenya in particular is one to watch. The extent of disorder seen in response not only to economic
conditions, but also events such as the publication of census results early in 2010 and any
prosecutions of senior political figures by the International Criminal Court, will provide a useful
indicator of the atmosphere that will surround preparations for the next elections, due in 2012.
Governments not under threat
However, neither unrest nor any wider effects of the financial crisis are likely to materially
undermine the legitimacy or survival prospects of incumbent governments. In all looming
elections, inherent and usually long-standing domestic factors will be key in determining
outcomes. Presidential elections due in Burundi, Burkina Faso, Guinea, Togo and Tanzania in
2010 will each showcase a different dominant dynamic in the spectrum of familiar sub-Saharan
themes.
The sudden death of a long-standing authoritarian leader in Guinea has exposed the hollowness
of state structures, and the extreme weakness of the foundations for democratic and civilian
governance. In Burundi, an externally mediated and imperfectly executed post-conflict transition
has left a country that may be able to weather the test of an election, but where the zero-sum
logic of war is only slowly being softened. In Burkina Faso, Togo and Tanzania, to varying
degrees, the failings of dominant parties may result in popular disenfranchisement and
disenchantment, but incumbents are vulnerable primarily to internal machinations rather than
opposition threats. In none will the fallout from domestic or international economic events
genuinely alter the electoral playing field. In all, the incumbent is likely to remain in office.
Put away the red flags
We see relatively few red flags marking the broad political risk landscape for investors in Africa
in 2010. By and large, most countries have stayed the economic liberalisation course and resisted
the temptation of knee-jerk responses to the financial crisis. No African country save for the
Seychelles has been in real danger of sovereign-debt default despite the financial crisis, testifying
to improved domestic economic management in recent years and a broader international refusal
to allow vulnerable countries to fail.
While rhetoric on resource-nationalisation and ‘use it or lose it’ ultimatums has become more
common, this has generally been aimed at appeasing a domestic audience. Governments by and
large appreciate that they have neither the expertise or credibility – nor probably the desire – to
run key economic sectors. In cases where the government intervened directly in investment
projects in 2009, notably in Congo (DRC) and Guinea, drivers were more political and strategic
than economic. All provide positive indications that governments generally continue to recognise
the need to maintain consistency for investors regardless of short- and medium-term pressures.
Angola
Political risk: M
Security risk: M; H north-east of Cabinda exclave
The ruling Popular Movement for the Liberation of Angola (MPLA) will remain in power in
2010 and broad stability will be maintained. The MPLA’s announcement that a presidential
election can now only be held in 2012 renders a 2010 vote highly unlikely. The delay reflects a
growing power struggle within the MPLA over constitutional reform, which will take centre
stage in 2010. Despite the submission in July 2009 by the MPLA of a constitutional proposal
supporting the direct election of the presidency, President José Eduardo dos Santos has since
revived his push for an indirect system of election. The public consultation phase of the reform
process is intended for 2010. However, the adoption of an indirect system would first require
new parliamentary elections – currently scheduled for 2012 – before the president could be
elected. Dos Santos no doubt believes he can push indirect elections through the MPLA-
dominated Constitutional Commission. He will be able to maintain his control of the party and
the National Assembly, but the disagreement is unlikely to be resolved swiftly and 2010 could
see the first sign of cracks in the sweeping support of the MPLA rank-and-file for their leader.
Economically, Angola will continue to deal with the lasting impact of the economic crisis. It
appears to be past the worst – with the rise in oil prices stabilising its foreign-exchange reserves
and restoring some balance to its fiscal position – and notwithstanding another dramatic collapse
in the oil price, the country’s fiscal position should continue to improve. Nonetheless, building
domestic capacity and diversifying sources of investment and financial assistance will remain
key strategic objectives of the MPLA administration.
The global economic crisis has also precipitated an unlikely rapprochement with multilateral
financial institutions, which we expect to continue in 2010. The MPLA administration is
probably looking for a potential counterweight to excessive reliance on Chinese finance, while
the IMF and World Bank, keen to exploit this unparalleled opportunity to gain leverage and
exposure in Angola, may be willing to reduce their expectations in terms of transparency and
economic management. Meanwhile, Angola’s key strategic relationship with China will
continue. China’s ambitions in Angola extend beyond short-term objectives and will be
unperturbed by the potential prospect of increased competition from Western public entities and
multilateral finance.
Insurgency in the north-east of Cabinda exclave will continue to pose a threat to operators in the
remote region and sporadic reports of clashes with the Angolan Armed Forces will continue.
However, the capabilities of the insurgent Front for the Liberation of the Cabinda Enclave
(FLEC) will remain limited and the group will not threaten the oil sector based around Cabinda
city and the Malongo oil complex. Outside Cabinda the risk of community militancy will remain
low, though socio-economic pressures will perpetuate a gradual rise in crime in the capital
Luanda, representing the most significant risk to operators in the city.
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Benin
Political risk: M
Security risk: L; M on Nigerian border
While basic stability will prevail in 2010, a resolution of the political deadlock that has come to
mark the first term of President Yayi Boni is unlikely, and political tensions are likely to increase
in the run-up to the 2011 presidential election. Boni’s alliance of small parties has lacked a
parliamentary majority since he came to office in 2006, and the new coalition arrangement is
even less coherent than its predecessor. The president has been unsuccessful in co-opting
oppositionists, and is unlikely to be able to break the impasse by pushing through constitutional
changes bolstering the power of the executive. The reform agenda that was central to Boni’s
initial election campaign is heavily compromised by his need to appease competing opposition
elements, and any significant change will remain stalled. Opposition groups will have plenty to
capitalise on, particularly as economic austerity measures will persist in a climate of socio-
economic stress. However, possible civil unrest is unlikely to trigger wider destabilisation.
Botswana
Political risk: L
Security risk: L
The ruling Botswana Democratic Party (BDP)’s victory in the October 2009 legislative elections
will prolong the party’s uninterrupted rule since independence in 1966. However, behind the
veneer of tranquillity lie the most serious internal party ructions in more than a decade. Induced
by a global drop in diamond demand, Botswana’s outlook is also clouded by the most serious
economic slump in decades, with GDP expected to contract by 10.3% in 2009-10. While the
country’s investor-friendly framework is not directly threatened, persistent infighting could
hamper ministerial agendas and institutional effectiveness, engendering uncertainty in a
traditionally stable business environment. The economic downturn has highlighted the urgent
need for economic diversification away from diamond dependency, but a combination of
political tensions and structural constraints may well continue to hamper such efforts.
Burkina Faso
Political risk: M
Security risk: M
President Blaise Compaoré’s ruling Congress for Democracy and Progress (CDP) will win
elections in 2010. Compaoré’s position has been strengthened by his role as chairman of the
Economic Community of West African States (ECOWAS) between 2007 and 2009, and his
involvement in regional peace efforts in Côte d’Ivoire and Togo. Several ruling-party insiders
appear to be vying for the presidency, though Compaoré will be keen to avoid succession talks in
a bid to demonstrate his continued state control and dispel rumours of ill health. Consistently
ranked by the World Bank as one of Africa’s best reformers, the country will continue to make
progress in business environment reforms. While infrastructural hurdles such as power shortages
will persist, the regulatory framework for business is likely to remain consistent and investor-
friendly. Crime levels will remain stable, though a pre-election spike in major urban centres is
credible.
Burundi
Political risk: H
Security risk: M; H in north-western provinces
Presidential and parliamentary elections are due in July 2010. While a victory for President
Pierre Nkurunziza is likely, the post-conflict transition is insufficiently consolidated for the
process not to pose some threat to stability. However, following the peace agreement signed in
early 2009 by the last remaining active rebel group, the Forces for National Liberation (FNL), no
group has the capacity to sponsor widespread violent destabilisation. Nonetheless, the prevalence
of weapons in society and the likely association of informal youth militias with all major
political parties – but in particular the ruling National Council for the Defence of Democracy-
Forces for the Defence of Democracy – are likely to lead to a short-term deterioration in the
security situation in parts of the country. Increased vulnerability to coup or destabilisation
attempts is likely immediately after the election result.

Cameroon
Political risk: M
Security risk: M; H in Bakassi peninsula, Douala, Yaounde, Bamenda and far north
The potential for political unrest and socio-economic protests will increase in the run-up to the
presidential election scheduled for 2011, resulting in a turbulent 2010. President Paul Biya will
use his strong executive powers, the overwhelming dominance of his ruling party at national
level, and intimidation and repression of opposition and civil-society activities to prepare the
ground for his likely re-election. However, he will have to carefully manage ructions within his
ruling party, which has become increasingly divided over the years.
Cameroon’s history of violent demonstrations means that political violence and protests against
the government are likely to become increasingly pronounced as elections approach. Past
protests have already shown that socio-economic and political grievances are highly interlinked,
and discontent in response to slow growth – despite the country’s ample natural resources and
overall disillusionment with the government’s intentions – is likely to lead to protests in the year
ahead.
Militant and piracy activity in the Bakassi peninsula – which, after years of wrangling, was
handed over from Nigeria to Cameroon in August 2008 – is likely to continue despite army
special forces deployments to counter the threat. Cameroon will continue to receive international
support – mainly from the US, which has become increasingly active in fighting insecurity
across the Gulf of Guinea – for its efforts to improve domestic naval capabilities. However,
Niger-delta-style operations by fluid groups of fighters that engage in activities ranging from
militant attacks to opportunistic piracy, arms for hire and the illegal crude trade mean that
undermining these activities will be an uphill struggle. Although further waterborne attacks are
possible amid a lack of central state presence and engagement with the local population on the
peninsula, we do not anticipate that militancy will spread beyond the peninsula area. However,
several previous pirate-style attacks across Gulf of Guinea waters, including the high-profile raid
on Malabo (Equatorial Guinea) in 2009, mean that the risk of cross-border organised crime will
remain elevated.

Cape Verde
Political risk: L
Security risk: L
Cape Verde’s long-running democratic tradition and political stability will be sustained during
2010. However, the impact of the global economic crisis on the country’s tourism industry will
increase pressure on the ruling African Party for the Independence of Cape Verde (PAICV) to
deal with rising levels of crime and unemployment. The opposition Movement for Democracy
(MpD) will use the economic slowdown to challenge the ruling party, and political tensions are
likely to increase in the run-up to parliamentary elections scheduled for January 2010.
Economically, the government will be forced to address the issue of diversification and will look
to attract investment outside the tourism industry. It will continue to entertain hopes of exploiting
ultra-deep oil concessions within its maritime boundaries, but successful exploitation remains
unlikely. It will persist with its efforts to improve relations with the EU, while simultaneously
continuing positive bilateral relations with lusophone territories, particularly Angola and Brazil.
Côte d'Ivoire
Political risk: H
Security risk: H
Delays to the implementation of the 2007 Ouagadougou peace agreement – including, most
importantly, the repeated postponement of the long-awaited presidential election – will continue
to cast doubt over the commitment to the accords of the various political protagonists, such as
President Laurent Gbagbo and Prime Minister Guillaume Soro. Preparations for elections – most
recently scheduled for November 2009 – have only inched forward in 2009, and while a number
of obstacles have been overcome, such as the conclusion of the voter identification and
registration process at the end of June 2009, many other issues must be tackled before polls can
take place. Although operational difficulties have been blamed for the delays, we believe that a
lack of political will at the top to hold elections will continue to slow progress and make election
preparations an uphill struggle. The polls will continue to preoccupy political and business
players both at home and abroad in 2010.
When elections take place – most likely in the first half of 2010 – a run-off is likely. In the
absence of credible opinion polls and with a significantly altered voter register – which is likely
to include many new voters from the north who did not have registration documents in past
election cycles – the advantages that Gbagbo gains from incumbency could be outweighed by
increased support for the two main opposition candidates, who have their constituencies in the
north and centre of the country.
The handing over of control of the formerly rebel-held north by several rebel warlords to a
central administration that is slowly being redeployed marks progress. However, informal
control of the north will continue to rest with renegade rebel elements, which carry out banditry-
style attacks and levy local ‘taxes’. Despite the reduced number of UN peacekeeping forces
(currently about 8,300), the force will maintain sufficient numbers to contain any large-scale
outbreaks of political and civil unrest. Beyond the demonstrations and unrest that can be
expected around elections, protests triggered by socio-economic hardship aggravated by high
prices for basic commodities and general fatigue with the lack of political progress could
increase in 2010. Bouts of unrest in the former rebel-held northern territories over benefits for
demobilised rebels are also likely to occur occasionally, but are unlikely to lead to full-blown
conflict.
While economic recovery will continue to be closely tied to political progress, the green light
given by the IMF in May 2009 for debt relief under the Heavily Indebted Poor Countries (HIPC)
initiative is an important step towards bolstering the economy. Paired with a comprehensive loan
programme, this will go some way towards restoring the country’s standing in the eyes of
international donors, investors and creditors. However, to qualify for complete multilateral debt
relief, the government will have to implement comprehensive reforms, including in public
finance, debt management and governance. Criticism of extra-budgetary spending has fuelled
considerable doubts over the government’s accountability, and we remain sceptical whether
international financial institutions will be able to pressure it into effectively implementing these
reforms in 2010.
Central African Republic
Political risk: H
Security risk: M; H in north-western and north-east prefectures; Congo-Sudan tri-border

area
The hope engendered by the signing of a multilateral peace accord in January 2009 has faded.
The accord provided for the formation of a broad-based government of unity, the holding of free
and fair elections, and a programme of rebel disarmament, demobilisation and reintegration
(DDR). However, President François Bozizé’s more ‘representative’ government was rejected
and various rebel factions have broken from the accord. Presidential and legislative elections are
scheduled for March 2010, but a fair and transparent process is highly unlikely. A number of
rebel factions are likely to boycott the election process, and Bozizé is likely to rely on systems of
patronage to ensure his re-election. Broad stability will be sustained in the capital Bangui, and
Bozizé will continue to court investors from Asia and France. Ineffective DDR programmes and
armed violence will lead to persistent insecurity in the north-western and northern prefectures,
and in the tri-border area with Congo (DRC) and Sudan.
Chad
Political risk: H
Security risk: H; E on Sudan border
Heavy investment in military hardware to counter the eastern rebellion has strengthened
President Idriss Déby’s position. An army bolstered by new combat helicopters and fighter jets
in mid-2009 swiftly repulsed rebel movements from across the Sudanese border (where Chadian
rebels retreated to rear bases after their last attack). A rebel alliance that was formed at the
beginning of 2008, incorporating the main warring factions, has been weakened by internal
power struggles and increasing desertions. The crumbling alliance, paired with improved army
capabilities, means that significant rebel advances that could push through to the capital
Ndjamena are unlikely in 2010. However, insecurity in the east – mainly in the form of banditry
– will continue to challenge foreign operations in the region, particularly in the immediate border
area with Sudan’s Darfur region.
Incentives for dialogue with the rebels and the opposition are likely to be significantly reduced in
light of the regime’s improved military strength in relation to the rebellion. However, the risk of
a coup d’etat will persist because of continued factionalisation within the government, though
continued French support for Déby’s regime renders a successful coup attempt unlikely in the
short term.
The country’s economic situation deteriorated throughout 2009 and recovery is set to be painful
in 2010. The government failed to improve its revenue management following the World Bank’s
departure from the important Chad-Cameroon pipeline project in 2008; fiscal policies, hampered
in particular by an unrealistic oil-price benchmark, have become unsustainable in light of falling
global oil prices, continued high military expenditure and infrastructure projects equivalent to
about 35% of non-oil GDP. Significant investment by Chinese parastatals in new oilfields and
the construction of a refinery will open a new source of revenue that is not subject to conditions.
As these revenues are only expected in 2011, the government is likely to settle for limited short-
term improvements to accommodate donors and secure external financial support for 2010.
Comoros
Political risk: H
Security risk: L; M in Moroni and Mutsamudu
Political stability will remain a key challenge in the coup-prone archipelago, where President
Ahmed Abdallah Sambi’s pursuit of constitutional and structural reforms has strained relations
with island administrations and parliamentarians. A nascent rapprochement with the IMF, which
in September 2009 released a $21.5m financial package, marked modest progress in the
country’s strategic reform programme and spells improvements in macro-economic
management. However, the true measure of any success will be the management of the next
presidential election, at which Sambi will be constitutionally required to vacate office for a
candidate from Mohéli island – a transfer of power that could prompt a fresh round of instability.
Congo
Political risk: M
Security risk: M
Although President Denis Sassou Nguesso won another seven-year mandate in elections in July
2009, the brazen manipulation of the process and low voter turnout emphasised popular
disengagement from his regime. The president’s hold over state institutions, and opposition
weakness and fragmentation mean that the only way he might lose the presidency
constitutionally is by retiring. This is virtually unimaginable given the lucrative benefits of
presidential office and his ever tighter grip on the oil-fuelled economy. While opposition parties
have proved that they are not a force to be reckoned with, the harsh treatment of their leaders –
who were made subject to travel bans after the election and may yet face legal proceedings in
2010 over nebulous allegations of coup-plotting – will further undermine Sassou’s international
legitimacy.
Government responsiveness is highly unlikely to increase in 2010. After the election, Sassou
reappointed many uninspiring former ministers with mediocre performance records, disregarding
high public hopes for new faces. The reappointment of key loyalists suggests that the president is
in longer-term danger of becoming hostage to a small knot of influential figures, casting doubt
over his ability to appease popular discontent or agitation within his ruling Congolese Labour
Party (PCT). However, any upswing in popular protest is likely to be gradual, and a marked
threat to basic order and stability is unlikely in 2010.
An increase in banditry and armed attacks in Pool region towards the end of 2009 raised the
spectre of a resurgence of the supposedly defunct Ninja rebel movement. However, a return to
conflict in the region in 2010 is unlikely. Although former Ninja leader Frédéric Bitsangou has
not taken up the government position offered to him under a 2006 peace agreement, Sassou’s
success in co-opting other Pool elites, the extension of public administration into the province
and a degree of success in disarming the rebels after their formal dissolution in 2008 have eroded
Bitsangou’s leverage.

Congo (DRC)
Political risk: H
Security risk: H; M in Kinshasa, southern Katanga province; E in Ituri district, Orientale

province, North Kivu province (excluding Goma); South Kivu province(excluding Bukavu)
The unexpected but widely welcomed rapprochement with historical antagonist Rwanda in early
2009 alleviated one of Congo’s major headaches of recent years – the insurgency by the National
Congress for the Defence of the People (CNDP) in the east, which at times looked as though it
could threaten the state beyond its heartland provinces of North and South Kivu. With
charismatic rebel leader Laurent Nkunda under house arrest in Rwanda and CNDP combatants
integrated – albeit highly imperfectly – into the national armed forces, the immediate threat has
subsided and is likely to remain in abeyance through 2010. The wider improvement in bilateral
relations was pragmatic on both sides, but mutual mistrust is deep. However, both sides have
staked a lot on the rapprochement’s success, with President Joseph Kabila standing to lose too
much in the way of credibility and security guarantees ahead of polls in 2011 if progress is
reversed.
The security situation in the east remains unstable, and Congo’s weak and undisciplined army
will not eradicate the fluid and resilient militias that have operated there for well over a decade.
Moreover, while Rwanda ultimately became so embarrassed by former ally Nkunda that it was
willing to turn on him, almost pathological enmity towards Congolese people of Rwandan origin
persists and has the potential to generate new lines of combat in future. Nonetheless, no new
major insurgency is likely to develop in the coming year.
The government will remain in functional disarray, dominated by intrigues and factional politics,
and riven with high-level vested interests, rendering any substantive improvement in the business
environment extremely unlikely. It is extremely doubtful whether a reshuffle in late 2009 or
early 2010 would result in an administration capable of materially enhancing the prospects of
Kabila’s Alliance of the Presidential Majority (AMP) at the legislative and presidential polls
scheduled for 2011. Concern over a potential poor election showing means that there is some
possibility of the government seeking to delay the polls – a move that would further undermine
the international legitimacy of Kabila’s regime. This legitimacy would be damaged even further
in the credible event that proposals to extend the presidential term to seven years and remove the
two-term limit are pushed through.
Planned decentralisation and the associated subdivision of existing provinces will not go ahead
as scheduled in 2010. This will on balance mark a positive development for operators, which
under the new system would have to negotiate a number of new complexities and contradictions
in the business environment. However, the contentious issue is far from resolved and will rear its
head again in the near future, though it is likely to be pushed off the agenda as much as possible
during 2010.
Government interference in the crucial copper- and cobalt-mining sector shows no sign of
abating and may become even more overt in 2010. Should a revision of the 2002 Mining Code
also go ahead – as recommended in a 2009 Senate report – political risks for foreign mining
companies operating in the country would escalate significantly, compounding the negative
effect of the politicised and protracted 2007-09 review of mining contracts.
Djibouti
Political risk: M
Security risk: M; H in Eritrea border region
We anticipate increasing political tensions during 2010. President Ismael Omar Guelleh
continues to dominate the political environment, but support for his plan to amend the
constitution to allow him to run for a third term in 2011 has been far from unanimous. Although
we doubt that there was any real expectation that Guelleh would step down in 2011 given the
absence of any significant political opposition, this issue will dominate the political environment
in 2010 and will prove divisive. However, Djibouti’s strategic importance in the Horn means that
international donors are unlikely to condemn efforts to extend his presidential mandate despite
the evident lack of open democracy. Meanwhile, the tense political climate is likely to stir latent
tensions between Guelleh’s Issa and the Afar ethnic groups. This has the potential to stoke unrest
among Afar rebels in the north, particularly if Eritrea, which has a significant Afar population,
decides to play troublemaker.
Equatorial Guinea
Political risk: H
Security risk: M
The announcement that the presidential election that was expected to be held in 2010 would be
held at the end of November 2009 has further undermined the preparations of an already
marginalised and oppressed opposition. The overwhelming victory of the ruling Democratic
Party of Equatorial Guinea (PDGE) in legislative elections in May 2008 (the party secured 99 of
100 available seats in the legislature) reinforced President Teodoro Obiang Nguema’s control of
the political system, and Obiang and his PDGE will ensure that the presidential election delivers
him a similarly strong victory.
An audacious waterborne attack on the capital Malabo in 2009 – blamed on Nigerian militants –
has further increased the regime’s paranoia with regard to coup attempts. Given the tendency of
personal and political rivalries to generate serious tensions over political and economic control,
we believe that the threat of a regime overthrow from within will persist. In light of a
significantly increased security force presence in the aftermath of the Malabo attacks, the
successful overthrow of Obiang remains unlikely. However, the increasing spread of piracy and
militancy across the Gulf of Guinea is likely to lead to further high-profile attacks in the region.
Tensions over the presidential succession are also set to continue in 2010. Obiang’s advancing
age will increasingly stir debate, though such discussions will remain firmly behind the scenes.
Although popular resentment will persist because of socio-economic inequalities between those
who benefit from profits in the oil and gas industry and those who do not, unrest remains a
remote prospect given that the security forces swiftly repress any disorder. Should unrest occur,
it would be most likely to affect low-income areas during the election period.
Eritrea
Political risk: H
Security risk: M; L in Asmara; H on Ethiopian, Sudanese, Djiboutian borders
Despite positive efforts by the government to encourage burgeoning interest in the country’s
extractive sector, Eritrea is likely to face increasing international isolation during 2010.
Allegations that the government is financing Islamist insurgent groups in Somalia will continue,
and international calls for diplomatic and economic sanctions against Eritrea will intensify.
Multilateral sanctions are a credible threat in 2010. Tensions with all bordering countries –
Sudan, Ethiopia and Djibouti – will remain high. President Isaias Afewerki will continue to use
the perceived threat of foreign invasion to justify his tight control of political and civil society,
and policy decisions will remain unpredictable. Certain private-sector concessions may be made
to accommodate investors, but political liberalisation will remain a distant prospect and the
ruling People’s Front for Democracy and Justice will continue to suppress political dissent.
Ethiopia
Political risk: M
Security risk: M; H in regions bordering Eritrea, Somalia, Kenya, Sudan
Federal and regional elections scheduled for June will be the main challenge for the ruling
Ethiopian People’s Revolutionary Democratic Front (EPRDF) in 2010. Substantial pressure from
international donors for free and fair elections will raise the stakes ahead of the polls, but the
EPRDF will not allow a truly competitive electoral process. The ruling party remains unable to
tolerate even the lowest levels of dissent and will continue to clamp down on political and civil
society as the elections approach. Consequently an EPRDF victory is almost assured, but is
likely to be marred by accusations of political violence, coercion and repression. However, in the
event of flawed polls, the importance of the West’s strategic alliance with Ethiopia will limit
diplomatic repercussions.
The ruling party’s rejection of Prime Minister Meles Zenawi’s resignation in 2009 no doubt
formed part of a longer-term strategy, but will at least allay the prospect of a destabilising
succession battle in 2010. Meles will continue to dominate the political environment and to drive
policy decisions. Economic reform will continue to be guarded, though deteriorating economic
and monetary factors may invigorate efforts to encourage foreign investment.
Meanwhile, the election process is likely to intensify existing ethnic tensions and drive insecurity
in marginalised regions of the country. The potential resurgence of localised ethnic insurgencies,
particularly in the Somali, Oromo and Afar regions, is a credible threat, exacerbated by regional
security issues in the Horn and Ethiopia’s troubled relationships with its neighbours. Ethiopia
withdrew its troops from Somalia in January 2009, but is likely to continue to discreetly sanction
cross-border operations into Somalia, with the potential for a return to full-scale engagement in
the longer term. Domestically, Ethiopia will struggle to deal with massive food scarcity. Hunger
and poverty will increase levels of disaffection with the ruling party and the potential for social
unrest around the election period.
Gabon
Political risk: M
Security risk: L
The unexpected death of long-standing president Omar Bongo in June, and the election in
August of his son Ali Ben Bongo as his successor dominated the political landscape in 2009.
While the immediate post-election period witnessed outbreaks of violence that targeted foreign,
and particularly French, interests, the unrest was short-lived, and the change of leadership does
not appear to have altered the fundamental fabric of Gabonese politics. However, disgruntlement
with the contested poll results and accusations of fraud from the opposition could see the
development of a more confrontational relationship between the government and opposition
supporters in 2010, and levels of demonstration and protests could increase.
The next year will reveal the extent to which Bongo is willing to shake things up after promising
ambitious reforms, efficiency and an end to corruption in his election campaign. We remain
sceptical about the potential for genuine change because by threatening long established
patronage and business networks Bongo would unsettle his core political support from the ruling
Gabonese Democratic Party (PDG). While the population will want to see change, Bongo’s
appointment of a cabinet that returned many PDG stalwarts to key positions points to business as
usual.
Nonetheless, some reforms and a government-driven anti-corruption campaign are likely in 2010
as the new president aims to discredit critics who say that he will perpetuate the elite-driven,
unaccountable governing style of his late father, and to increase both his legitimacy and that of
his cabinet after the contested polls. However, any anti-graft campaign is unlikely to touch any
of the ruling elite, and will therefore fall some way short of delivering. The government is
unlikely to take radical action against investors and operators as Bongo has already promised to
honour existing agreements with international partners. The international community’s and –
most importantly – France’s swift recognition of the contested poll results means that Bongo can
count on continued external support in 2010.
Gambia
Political risk: H
Security risk: L
President Yahya Jammeh’s unpredictable style of government will take centre stage in 2010 and
will lead to a further deterioration in the operating environment. We anticipate a year of erratic
presidential decisions extending to intervention in the judicial system and arbitrary changes to or
capricious application of the regulatory framework. Jammeh will simultaneously seek to tighten
his grip on political power, clamping down further on political and press freedoms ahead of the
presidential election in 2011. Opposition activity will increase in light of the impending poll, but
while opposition groups remain divided, regime change through elections remains highly
unlikely. Crime levels will remain low and security issues will be of limited concern to
expatriates and international operators. However, the arbitrary detention of local journalists and
opposition leaders will continue to attract international criticism and increase reputational
concerns for investors in the country.
Ghana
Political risk: L
Security risk: M
Although wrangling between the government and the main opposition New Patriotic Party (NPP)
will persist in 2010, political stability will not come under threat. The ruling National
Democratic Congress (NDC) has had to adopt more austere fiscal measures than those pledged
during its election campaign. However, while some policy slippages may occur, the NDC is
unlikely to deviate from recent liberal trends. The government’s commitment to a mixed bag of
policy instruments will bolster investor confidence, and support from the country’s development
partners will help to combat prevailing economic difficulties in 2010.
Corruption investigations into the previous administration have thrown the spotlight on the now
opposition NPP, and revelations of corrupt deals while in government will test its credibility.
Nonetheless, the NPP will remain highly critical of the government’s shortcomings and exploit
its strength in parliament to block legislation, forcing strong debate, negotiations and trade-offs
among political elites.
Ghana will edge closer to its first few million dollars in oil revenues when oil fields begin full
production at the end of 2010. However, the use of oil income will present the government with
socio-economic and political challenges. These pressures will be overwhelming if the
government continues to subsidise fuel as the currency depreciates and the crude oil price rises.
Fiscal austerity will generate some public discontent and labour disruption, which are likely to
lead to increased social tensions. Meanwhile, conflicts in Dagbon, Gushiegu and Bawku will
remain unresolved in the year ahead. Ethnic groups will clash periodically over land and
leadership, despite attempts by the government and civil-society groups to improve the situation.
Ghana’s growing profile as a stable sub-regional hub and attractive investment destination will
lead to an increase in commercial activity in the main urban centres, where crime may
experience a spike.
Guinea (Conakry)
Political risk: H
Security risk: H
The killing in September 2009 of at least 157 civilians by the security forces during an
opposition rally to protest against the transition plans of the ruling National Council for
Democracy and Development (CNDD) military junta will deepen the threat of political
instability in the months ahead. CNDD head Capt Moussa Dadis Camara is increasingly
embattled and will remain vulnerable to possible counter-coup attempts from within the CNDD
or wider military. Faced with mounting public dissent and international condemnation, he will be
preoccupied with defending his position and maintaining control of the transitional timetable.
The heavy-handedness of the security forces’ crackdown and calls for more protests will bolster
opposition to Camara’s plan to stand for election in January 2010. A presidential victory for any
candidate not approved by the army high command is highly unlikely. Further public antipathy
would increase Camara’s vulnerability and heighten the threat of an internal challenge,
potentially reducing the chances of a civilian transition before mid-2010 and deepening
uncertainty for business. An October 2009 deadline for legislative polls has already been
missed.
Radical elements may seize the opportunity for popular mobilisation, making disorder more
unpredictable, while growing resentment at the junta’s perceived corruption and mismanagement
of public services will also fuel unrest. The risk of social unrest causing operational disruption to
mining activities amid deteriorating socio-economic conditions will rise. Meanwhile, widespread
indiscipline, disillusion and criminality within the armed forces have contributed to a rise in
crime rates in both cities such as the capital Conakry and rural areas, and a lull in 2010 is
unlikely.
Political risks will continue to affect foreign investment in Guinea. The mining sector will still
bear the brunt of erratic policy decisions and contract reversals. Companies will have limited
room for manoeuvre, while an investor backlash against such decisions would only serve to
harden the junta’s stance. Serious policy reform is highly unlikely before elections, and a stable
contractual environment is unlikely.
Guinea-Bissau
Political risk: H
Security risk: M
The assassination of President João Bernardo ‘Nino’ Vieira (1980-99, 2005-09) and chief of
defence staff General Batista Tagme Na Wai in March 2009 underlined that the cycle of political
violence that has blocked democratic progress since independence is not over. The peaceful
election of ruling-party candidate Malam Bacai Sanha as president in July 2009 and the ruling
party’s new control of both the presidency and the National Assembly have raised hopes of
effective policy-making. However, any political transformation remains unlikely. The military
command will maintain its close grip on civilian politics, and though increased international
engagement may allow for small steps forward in security-sector reform, progress is likely to be
slow. Meanwhile, divisions within the powerful military will sustain the latent threat of further
coup attempts in 2010.
Kenya
Political risk: M
Security risk: M; H in north, areas bordering Sudan
Top-level politicking is likely to continue to consume the unwieldy power-sharing government

led by President Mwai Kibaki and Prime Minister Raila Odinga, undermining institutional
effectiveness and seriously setting back reform agendas. Political self-interest should ensure that
the coalition government is not strained to breaking point in the year ahead. However, moments
of brinkmanship can be expected, particularly as key figures and factions seek to position
themselves to succeed the 78-year-old president at the elections due in 2012. In this climate,
rumours of back-room negotiations and tentative electoral alliances between key regions are
likely to flourish.
We expect urgently needed reforms to be notable mainly for their absence. A lame-duck Kibaki
preparing for his retirement is unlikely to pursue reforms with any real vigour, while Odinga’s
commitment to the full raft of necessary restructuring is far from clear and is limited by political
obstructions. The prospect of constitutional reform and an accompanying referendum in 2010
remains uncertain. The absence of progress on the so-called ‘Agenda Four’ items agreed
following the post-election violence of 2008 will continue to fuel concerns over long-term
instability and attract the close scrutiny of donor countries. With the US having imposed its first
travel ban on an official in October 2009, donor nations can be expected to further increase
pressure for reform, while the threat of indictments from the International Criminal Court (ICC)
will hang over a handful of high-level instigators of the 2008 violence. In the absence of political
progress, concerns over the country’s fundamental political and social stability are only likely to
build ahead of 2012. Amid a failure to disarm militia groups and periodic reports of their
rearming, investor fears of another round of serious violence are likely in the build-up to the next
polls.
Despite an investment-friendly climate and reasonably prudent macro-economic policy in recent

years, an entrenched culture of corruption continues to undermine institutional transparency and
has seriously hampered the effective allocation of development finance, particularly in
marginalised constituencies. Serious infrastructure deficits and public-service provision bear
testimony to this legacy. However, although Kenya is performing below potential, its economy
remains the most diversified in the region and its status as a regional hub is likely to remain
unrivalled in the near future. A number of large-scale investment projects, particularly in energy
and transport infrastructure, and renewed interest in oil exploration will present business
opportunities, alongside established sectors such as telecoms, agribusiness and tourism.
For now, poor governance and lacklustre economic growth – dampened by successive domestic
and global crises – are likely to combine to fuel popular discontent, particularly among a
growing reservoir of impoverished urban youths. This is likely to aggravate crime, militia
activity and ethnic competition for scarce resources that draws on a legacy of unresolved land
and resource conflicts. In addition to domestic discontent, Kenya suffers from being situated in a
rough neighbourhood, where the spillover of insecurity from conflict-torn Somalia – in the form
of piracy, terrorist activity and small arms inflows – poses a persistent threat to the broader
security climate.
Lesotho
Political risk: M
Security risk: M
The collapse in July 2009 of internationally mediated talks intended to resolve the long-running
dispute over the allocation of seats in the National Assembly confirmed that there is little hope of
a resolution through dialogue. Prime Minister Bethuel Pakalitha Mosisili’s government appears
able to weather the storm in the immediate term, though opposition protests are likely to
periodically threaten stability, particularly around local elections scheduled for April 2010.
Cyclical incidents of political violence since independence underline that broad stability cannot
be guaranteed, and undemocratic attempts to resolve the dispute – including a further coup
attempt against the ruling Lesotho Congress for Democracy (LCD) – cannot be ruled out.
Meanwhile, preoccupation with internal politics will distract the government from addressing the
socio-economic challenges of unemployment, HIV/AIDS and corruption. Nonetheless, investors
can be reassured, in part, that South Africa would be likely to intervene in the event of serious
unrest, given its strategic interest in water and energy in the country.
Liberia
Political risk: M
Security risk: M; H in Monrovia, border with Cote d'Ivoire
President Ellen Johnson-Sirleaf’s goal of turning the post-conflict country around and improving
economic indicators, while at the same time fighting endemic corruption, has been made even
more difficult by global economic challenges. Despite significant investor interest in the
country’s natural resources, and in the construction and engineering sector, the downturn in
global commodity prices could reduce the impact of improvements in the domestic revenue-
collection system. Paired with ever-rising popular expectations, these issues will pose formidable
challenges for the government in 2010.
Johnson-Sirleaf’s dynamic approach will continue to drive good relations with Liberia’s
neighbours and external donors. However, escalating pressure on the domestic scene will make
her job increasingly difficult in 2010. The success of planned reforms will continue to depend on
whether or not she can secure sufficient backing within her diverse administration. She faces
opposition from influential individuals who do not want her to stand for another term at polls due
in 2011. These will exploit pending discussions in the legislature of a contentious and much
criticised Truth and Reconciliation Commission report that recommended Johnson-Sirleaf be
banned from holding public office because of her role in financing former warlord Charles
Taylor during Liberia’s civil war.
The security environment will remain fragile, particularly in larger urban centres and in the more
volatile border region with Côte d’Ivoire; an increase in opportunistic crime in the capital
Monrovia was reported during 2009. Popular disappointment over slow progress in the provision
of state services and increasing economic hardship will continue to trigger protests, with the
potential for incidental violence. The security forces look set to remain ineffective as the police
and army are still undergoing a slow restructuring and training process.
Madagascar
Political risk: H
Security risk: M
Despite international commitment to resolving the political crisis and recent small signs of
progress, a lasting solution is unlikely in the near term. Private agendas and personal grievances
will dominate political negotiations as ousted president Marc Ravalomanana and transitional
leader Andry Rajoelina continue to appear to be unable to work together. Rajoelina’s grip on
power will continue to slip, and the international community may be able to force the formation
of a new transitional government. However, any such government is unlikely to last, and
elections in 2010 appear unrealistic. Meanwhile, deteriorating socio-economic conditions will
lead to sporadic social unrest in the capital and rising levels of crime. Periodic protests and
outbursts of political violence will continue, though the crisis will not descend into a destructive
civil conflict. Nevertheless, political uncertainty will continue to deter foreign investors until a
stable government structure is in place.
Malawi
Political risk: M
Security risk: L; M in major urban centres
President Bingu wa Mutharika’s sizeable winning margin in the 2009 presidential election and
the solid parliamentary majority gained by his Democratic Progressive Party (DPP) have ended
the parliamentary stalemate that characterised much of his first term. The coming year will test
the extent of the president’s will to implement a coherent reform and anti-corruption agenda, and
whether he can avoid the high-handed authoritarianism his strong position would allow. Malawi
was one of the world’s fastest-growing economies in 2009 and is expected to see solid figures in
2010. However, the global financial crisis led to a severe shortage of foreign exchange in 2009,
which, along with the surprise removal of respected Finance Minister Goodall Gondwe, raised
questions about financial management that will need to be answered in 2010 if business and
donor confidence is to be maintained.
Mali
Political risk: L
Security risk: L; M in north-east including Gao and Timbuktu
The IMF and the World Bank will press President Amadou Toumani Touré to fulfil promises to
combat corruption and continue with potentially unpopular economic reforms. Reforms to the
election process and the judiciary are likely before the 2012 presidential election. A military
coup or army interference in politics remains unlikely. The presence of a former military ruler as
president will reassure the military, potentially defusing any lingering tensions within the armed
forces.
The government will be under pressure to strengthen ties with Libya and Algeria to fight
insecurity in the northern desert regions that have served as a base for the Algerian Islamist
extremist group al-Qaida in the Islamic Maghreb (QIM). The growing threat of banditry and
extremist activity may hinder the expansion of mining activity in the north, while socio-
economic unrest will periodically disrupt gold-mining operations in the south.
Mauritius
Political risk: L
Security risk: L
Mauritius is unlikely to lose its status as Africa’s best governed and most business-friendly
destination in 2010. However, a mid-year election may temporarily distract attention and
spending from measures to further improve probity and the broader regulatory framework, as
well as from an ambitious infrastructure upgrade programme. FDI looks set to remain reasonably
robust. Chinese investment grew strongly during 2009 and major new deals are in the offing for
2010. However, China’s aggressive encroachment is likely to elicit a strong reaction – in terms
of investment, political manoeuvring and security co-operation – from India. Waters around
Mauritius will remain vulnerable to piracy, though there is little reason to fear direct and targeted
security threats against the island – the government’s 2009 refusal to host a tribunal and
detention camp for Indian Ocean pirates defused one possible trigger for tensions.
Mozambique
Political risk: M
Security risk: M
As widely anticipated, the 2009 presidential, parliamentary and provincial elections returned the
ruling Frelimo and President Armando Guebuza to power. This will ensure a large degree of
political and policy continuity, though the question of the presidential succession will gradually
gain greater currency during Guebuza’s second and final term. While his administration is
unlikely to abandon efforts to attract investors, red tape and institutional inefficiency, influence-
peddling and corruption, and a massive infrastructure deficit will continue to complicate the
investment climate. Moreover, top-level political stability and the solid economic growth of
recent years belie a potential for intensifying social instability – characterised by periodic civil
unrest and rising criminality – amid stagnating poverty-alleviation efforts.
Namibia
Political risk: L
Security risk: L
An economic downturn in 2009 has not undermined the chances of the ruling South West Africa
People’s Organisation (SWAPO) and President Hifikepunye Pohamba being returned to power at
the 27-28 November parliamentary and presidential elections. SWAPO’s likely comfortable
election victory heralds political and policy continuity, but an increasingly embattled Pohamba
may need to brace himself for growing internal opposition. Diamond-mining suffered a
significant slump during the global downturn, prompting a production holiday and squeezing
state finances. Nonetheless, the government has responded with some counter-cyclical spending
in infrastructure and productive sectors, while other parts of the economy, especially uranium-
mining, remain promising. The continuing land-reform process, uncertainty over a planned
economic empowerment framework, latent labour tensions and environmental concerns may
create some operational challenges in an otherwise largely stable environment.
Niger
Political risk: H
Security risk: M; H in northern Agadez region and on borders with Chad, Libya and
Nigeria
Niger will face the prospect of increased international isolation in 2010, following the
controversial extension of President Mamadou Tandja’s second term in August 2009 by another
three years. While threats of sanctions from the regional Economic Community of West African
States (ECOWAS) and the international community will persist in the months ahead, these will
be unlikely to force Tandja’s departure. In the interim, he will move to co-opt opposition parties,
and consolidate his authority. The results of the October 2009 parliamentary elections will boost
the ruling National Movement for the Development Society (MNSD)’s dominance of the
political landscape.
A definitive end to ethnic-Tuareg unrest in the northern Agadez region is unlikely in 2010. The
prospects for future negotiations are poor, and the involvement of Libya and other regional
neighbours is unlikely to accelerate an agreement, as the government’s subversion of the
democratic process has weakened its leverage in negotiations with the Tuareg. Isolated attacks
on uranium-mining and oil-exploration activity in the north remain credible, fuelled in part by
the actions of renegade Tuareg rebels.
While no major policy reversals are likely in 2010, the impact of the global economic downturn
will only dissipate slowly, as will the accompanying threat of socio-economic discontent. For the
moment, the military has remained quiet, but Tandja will have to deploy considerable political
capital in 2010 to ensure that this key relationship remains on side. Thus, despite his success in
ratifying the August 2009 referendum, Tandja’s pursuit of a third term remains a high-risk
strategy likely to compromise the country’s regional relations and contribute to considerably
higher levels of political uncertainty and instability in the medium term.

Nigeria
Political risk: M
Security risk: M; H in Niger delta, Lagos
Several political and economic challenges lie ahead for sub-Saharan Africa’s second-largest
economy in 2010. President Umaru Musa Yaradua’s reform programme has already started to
flag, and policy stagnation will intensify from mid-2010 as campaigning begins for general
elections in 2011. The ruling People’s Democratic Party (PDP) remains in the strongest position
to win the presidential election. However, continued opposition by vested political interests to
substantial electoral reform will exacerbate divisions. This could lead to an attempt by the main
opposition parties to build cross-party coalitions in a bid to counter the PDP’s political
dominance.
Nigeria’s anticipated slow economic recovery will magnify the political costs of further belt-
tightening. While technocratic policy-makers will retain firm control over macro-economic
policy-making, state pressures for election-related spending boosts at the end of 2010 are likely
to test fiscal discipline. Yaradua will be forced to concede some ground to state governors
because their support will be crucial to his re-election bid. Reform and tighter control of the
financial and banking sector in 2010 will be necessary to regain shaky investor confidence,
following a crisis that saw the central bank bail out five failed banks.
The anti-graft Economic and Financial Crimes Commission (EFCC)’s willingness to probe a list
of politically connected bank debtors in 2009 was a notable departure from previously mediocre
anti-corruption efforts, and will drive further anti-corruption advances in the first half of 2010
before a pre-election lull. However, continued wrangling over oil and gas-sector reforms means
the Petroleum Industry Bill is unlikely to be passed before the end of 2010, fuelling operational
uncertainty. Even if passed, the bill is likely to be watered down. Growing interest from non-
Western – especially Chinese – investors amid a rally in global crude prices will intensify
competition for lucrative oil deals with the government, which will seek to shore up revenues to
fund its re-election campaign.
An amnesty plan that led to the surrender of key Niger delta militant leaders, fighters and arms in
2009 may go down as a notable achievement of Yaradua’s first term, albeit only a half-measure.
While a cessation of attacks by disarmed militant groups should potentially stabilise oil-
production levels in 2010, operators should not expect immediate improvements in the security
climate in the Niger delta. The growing independence of organised criminal groups is likely to
result in a spike in abductions, oil-theft and piracy incidents in the run-up to the elections, when
politicians seek new militia recruits for their campaigns.
An uprising by radical Islamist sect Boko Haram in northern Nigeria in mid-2009 underscored
the growing radicalisation of disaffected and unemployed youth, and renewed fears of religious
unrest. Latent ethnic tensions could be politicised as the elections approach. The security forces
may respond heavy-handedly, while the strain on policing will result in the usual cyclical spike
in election-related criminality.
The power-sector crisis will persist for the foreseeable future; reforms to date have had little
impact. This will translate into rising costs for business and remain the most crippling constraint
on the business environment. Levels of infrastructural development nationwide will remain
variable. Revenue-rich states such as Lagos can exploit their large tax bases to accelerate
infrastructure projects. This geographically specific expansion in the non-oil private sector will
attract greater numbers of internal economic migrants to commercial hubs, leaving less wealthy
states ever more dependent on the centre.
Rwanda
Political risk: L
Security risk: L; M on borders with Burundi, Congo (DRC)
The result of the presidential election due in August 2010 is a foregone conclusion, with
President Paul Kagame of the Rwandan Patriotic Front (RPF) assured of an overwhelming
victory. The government will continue to aggressively pursue its business-friendly reform
agenda, though implementation capacity and genuine understanding of the private sector will
continue to lag behind impressive regulatory efforts. The unexpected 2009 rapprochement with
neighbouring Congo (DRC) was based on a best-interest calculation by both sides – Rwanda was
particularly keen to deflect negative international coverage and refocus foreign attention on its
domestic socio-economic ambitions – and mutual mistrust remains deep. However, the accord is
likely to be consolidated through 2010, notwithstanding periodic strains and the efforts of
spoilers on both sides. Despite a small increase in crime, Rwanda is likely to remain the most
orderly country in sub-Saharan Africa in 2010.
São Tomé and Príncipe
Political risk: M
Security risk: L
São Tomé and Príncipe has stated that it will step up efforts to develop its nascent oil sector, as
well as promising a new round of oil tenders in 2010. We anticipate increased co-operation
between São Tomé and Angola on the back of an economic and social development loan
announced in October 2009. Angolan assistance is likely to give renewed momentum to the
licensing programme, but the process will remain highly politicised and is likely to be marred by
further allegations of nepotism and corruption. The potential for the final realisation of the
country’s oil ambitions will increase domestic political competition, particularly as
parliamentary elections approach in March 2010. President Fradique de Menezes should be able
to sustain control over what continues to be an unwieldy coalition. However, destabilising
reshuffles within government departments are likely. Endemic corruption, deficient
infrastructure and a complete lack of administrative capacity will continue to hinder foreign
investment.
Senegal
Political risk: M
Security risk: L; M in Casamance

The course of the year ahead depends largely on the reportedly ailing health of President
Abdoulaye Wade. The octogenarian’s apparent grooming of his son Karim to succeed him
experienced a setback at local polls in March 2009, when the ruling Senegalese Democratic
Party (PDS) suffered significant losses to the opposition coalition. Political competition will
intensify in the run-up to the presidential election in 2012, as a reinvigorated opposition attempts
to challenge PDS dominance. Opposition to the PDS will gather strength in 2010, but is likely to
come under serious pressure from the president’s increasing autocracy.
As a result of damage caused by government overspending, and high energy and food prices,
economic issues could threaten social stability. Although extensive concessional loans from
international organisations will remain an important source of support, budgetary slippages and
poor infrastructure will continue to impede growth. Any unpopular political moves by the
government could result in massive social unrest. Despite attempts to enact reforms by setting up
a one-stop investment shop to reduce bureaucracy and delays in setting up businesses, reform
will be slow, while corruption will become an increasing problem.
The greatest threat to Wade’s power and the country’s stability is a surge in social unrest. While
unrest is common at the university in the capital Dakar, nationwide riots such as those in
November 2007 against high food prices could become more frequent. For the time being, the
military will remain committed to maintaining peace in Senegal. However, although the military
has never been directly involved in politics, the emergence of a new generation of officers and
rising discontent mean that the government will have to work hard to keep it on side.
An upsurge in violence by the separatist Casamance Movement of Democratic Forces (MFDC)

in late 2009 in the southern Casamance region will test the government’s ability to prioritise the
crisis in 2010. The MFDC has increasingly resorted to banditry and attacks on local
communities. However, this will not undermine security in the rest of the country or cause wider
political destabilisation.
Seychelles
Political risk: I
Security risk: I
President James Michel will continue to oversee a prudent economic course through 2010,
seeking to shield the archipelago’s vulnerable economy. Economic management in 2009 has won
praise from international financial institutions, and further reforms will be made in 2010. Solid
reform progress is likely to lead to the cancellation of further external debt. Seychellois have
borne the straitened economic circumstances and austerity measures of the last year without
resorting to civil disturbance, and significant unrest remains unlikely in 2010. However, piracy
will continue to periodically pose a threat to shipping off the archipelago, as pirates expand their
operations further into the Indian Ocean from the Somali and Kenyan coasts. Nonetheless,
increased co-operation with the US and EU will bolster capacity to tackle the problem.
Sierra Leone
Political risk: M
Security risk: M; H in Freetown
President Ernest Bai Koroma’s government is likely to increase efforts to boost foreign investor
interest in the country’s vast natural resources and in the reconstruction of damaged
infrastructure. The recent offshore discovery of oil has already raised the country’s profile in the
international media and will be a vehicle for the government to promote investment opportunities
across sectors. Corruption persists at all levels of the administration and vested interests will
continue to hinder economic recovery, which relies heavily on donor support. Although the
security situation is generally stable, opportunistic crime will continue to increase in 2010,
particularly in the capital Freetown and other large urban centres. Bouts of political violence
preoccupied the government in 2009, but unrest in 2010 will be limited to localised political
events, such as local or by-elections.
Somalia
Political risk: E; H in Somaliland
Security risk: E; H in Somaliland
Hopes that the installation of Sheikh Sharif Ahmed as president in January 2009 represented a
turning point in the conflict in Somalia have quickly faded. Sharif’s expanded transitional
government has been marginalised by a resurgent Islamist opposition and now controls only a
handful of districts in the capital Mogadishu. The government’s authority will be further eroded
during 2010 and continued clashes throughout southern and central parts of the country are
likely. However, clan and sectarian differences will prevent the consolidation of a united Islamist
opposition capable of taking and holding power. Instead, we anticipate that further splits within
the Islamist movement will give way to a chaotic sectarian conflict in which numerous Islamist
groups, clan-aligned militias and government forces compete for territory. Meanwhile, we expect
a deterioration in the security environment in the self-declared independent state of Somaliland,
driven by Somaliland President Dahir Riyale’s continued efforts to obstruct the democratic
process.
South Africa
Political risk: L
Security risk: M; H in deprived urban areas
Lacklustre economic growth forecasts, a ballooning budget deficit and a chronic unemployment
problem aggravated by the global economic crisis will set a challenging agenda for President
Jacob Zuma in his second year in government. The composition of his cabinet – which includes a
variety of tried-and-tested policy-makers, as well as Zuma’s political lieutenants and unionists –
has contained some of the factional tensions within the tripartite alliance, comprising the ruling
African National Congress, the Congress of South African Trade Unions and the South African
Communist Party. But the question of its internal balance of power and the influence of trusted
figures such as Trevor Manuel, now minister for national planning, will continue to preoccupy
investors and media alike.
For the most part, we expect the government to stay true to its generally moderate, if ambivalent,
‘continuity and change’ formula, but this is unlikely to lay to rest calls for radical intervention
from leftist quarters. Of more immediate concern, internal tensions may undermine ministerial
co-ordination and policy-making coherence at a time when government finances are looking
increasingly precarious. Already with an eye on the next party policy conference in 2012,
divergent constituencies are likely to jostle for position. Such battles may crystallise around
contentious issues such as the mandate of the South African Reserve Bank, its inflation-targeting
policy and plans for a national health insurance system. Overall, the government agenda will
remain firmly focused on state-led development, and investor opportunities will be most readily
realised where they dovetail with this agenda.
Despite this challenging domestic picture, South Africa stands to attract worldwide attention
through the 2010 FIFA football (soccer) World Cup to take place across nine cities in June and
July. A first for the continent, the sporting event will inspire considerable public pride and its
management will be scrutinised for evidence of the ‘African Renaissance’ much vaunted by past
governments. However, the event is also likely to highlight some of the critical legacy challenges
confronting contemporary South Africa, including immense gaps in public transport. From an
investor perspective, long-term problems such as infrastructure deficits – including electricity
constraints and, increasingly, water supplies – pose a critical concern, alongside human capital
constraints and labour market rigidities. Nonetheless, the government’s R872bn ($110.3bn)
spending programme will provide a welcome stimulus through the downturn and should alleviate
such constraints in the long term, though concerns over the management of key parastatals are
unlikely to subside.
With painstaking efforts to create employment set back by the economic downturn and many
citizens dissatisfied with the pace of change, civil unrest may continue to increase, but will rarely
impinge on the formal economy, though labour disputes will continue to require careful
negotiation on the part of business. While the Zuma government has taken a welcome initial step
by acknowledging the daunting magnitude of the country’s crime problem, high levels of violent
crime will pose a constant challenge to public security and undermine competitiveness by
contributing to the cost of doing business.
Swaziland
Political risk: M
Security risk: M
The rule of absolute monarch King Mswati III continues unfettered and there is no sign that 2010
will bring democratic reform. Popular frustration with the slow pace of change continues to
mount, but legal avenues for protest remain limited. The government released opposition leader
Mario Masuku in September 2009 after he was acquitted of charges of terrorism and sedition, but
there is no indication that the monarchy will lift its ban on political parties. Reports that South
Africa’s influential Congress of South African Trade Unions sent a large delegation to visit
Masuku shortly before his release suggest potential for increased regional pressure on Mswati,
but any comprehensive sanctions are unlikely. Meanwhile, popular frustration will perpetuate the
latent threat of unrest in the main cities of Mbane and Manzini, while rural areas will continue to
struggle with the socio-economic problems of food shortages and HIV/AIDS.
Tanzania
Political risk: L; M in Zanzibar
Security risk: M
Political activity will focus firmly on presidential and legislative elections scheduled for October
2010. Policy-making and reform efforts are likely to grind to a halt as politicking takes
precedence over decision-making. President Jakaya Kikwete and his ruling Chama cha
Mapinduzi (CCM) party retain a political reach and machinery that opposition parties – largely
regionally based – will find difficult to rival. A second term for the suave president therefore
already seems assured, signalling both political and policy continuity. Nonetheless, opinion polls
suggest that the CCM’s popularity is declining – a dynamic that could begin to benefit smaller
parties such as the Chama cha Demokrasia na Maendeleo (CHADEMA).
While election cycles do not tend to threaten stability on the mainland, electoral tensions on the
restive Zanzibar archipelago may well overshadow the poll’s conduct. The 2005 ballot witnessed
less violence than controversial prior polls, but the CCM’s failure to reach any sort of
rapprochement with the Zanzibar regionalist Civic United Front (CUF) over the past two years
points to persistent discontent and tensions on the islands. Another ballot marred by irregularities
and violence would tarnish Tanzania’s otherwise robust reputation for political stability.
Governance and institutional capacity will remain a concern, and donor countries can be
expected to sustain pressure over corruption issues. Parliamentary oversight has strengthened
somewhat during Kikwete’s first term, but influence-peddling and opaque contracting processes
remain a challenge. While investor-friendly rhetoric remains strong, bureaucratic hurdles and
institutional inertia – together with significant infrastructure deficiencies – will continue to pose
significant obstacles to operations across most sectors. Despite promising growth in the energy
sector and state utility Tanesco’s ambitious five-year Capital Investment Programme, persistent
electricity deficits appear set to remain a significant growth constraint, as does deficient transport
infrastructure – especially ports and railways. The security climate is likely to remain more
benign than in most neighbouring countries, but crime will pose a continuing problem,
particularly for mining operators.
Togo
Political risk: H
Security risk: M
President Faure Gnassingbé in February 2010 will stand for a second term in office in a hotly
contested presidential election. Veteran opposition leader Gilchrist Olympio of the Union of
Forces for Change (UFC) is likely to be the main challenger, though the wider opposition
appears unlikely to unite behind him, with fragmentation and infighting likely to play into the
incumbent’s hands. Serious violence has accompanied recent presidential polls, and there will be
clear flashpoints this time in the capital Lomé, as well as in central and northern parts of the
country. Donor relations were only normalised in 2007, and a flagrantly flawed election process
would dent confidence. However, France’s strong regard for Gnassingbé is likely to set the tone
for the attitudes of other donors.

Uganda
Political risk: M
Security risk: M; H in northern and north-eastern areas and the border with Congo (DRC)
2010 is set to be a volatile year. Although President Yoweri Museveni is highly likely to win
another term in the 2011 presidential election, his continued presence as head of state and his
refusal to engage in succession discussions are increasingly provocative. The rioting that shook
the capital Kampala in September 2009 is likely to be repeated in 2010. Heavy-handed
suppression of protests and peaceful opposition activities will compromise Uganda’s ‘donor
darling’ image. However, serious destabilisation at this juncture remains very unlikely.
Commercial oil production is unlikely to start until after the election; a production scheme and
necessary infrastructure will need to be established if a dependable start date is to be arrived at.
Periodic clashes on the western border between Ugandan and Congolese troops will continue to
pose some concerns for operators in the oil regions around the shared Lake Albert, but
strengthening national-level diplomatic relations will prevent localised skirmishes from
escalating.
Zambia
Political risk: M
Security risk: L; M in Lusaka and parts of Copperbelt

President Rupiah Banda’s brief honeymoon period is a distant memory, and scepticism over the
judgement, transparency and competence of his team will persist through 2010. Banda is not
entirely a shoo-in for the candidacy of the ruling Movement for Multiparty Democracy (MMD)
in 2011’s presidential election, despite the party having mostly closed ranks behind him thus far,
and a challenge is likely to begin brewing this year. As we forecast last year, veteran firebrand
Michael Sata’s Patriotic Front and the United Party for National Development’s Hakainde
Hichilema formed an alliance in 2009. However, whether it will be able to project a sufficiently
coherent agenda externally or work out a mutually acceptable balance of interests are other
questions, and further realignments ahead of the elections are highly possible.
Government relations with civil society have become increasingly antagonistic through the latter
half of 2009. With the 2010 budget having included very little likely to alleviate socio-economic
pressures on ordinary Zambians, and further inflammatory corruption scandals likely to come to
light during the course of the year, instances of civil unrest are possible, but are highly unlikely
to be sustained or destabilising. Some pressure is likely to be alleviated given that a degree of
recovery in global copper prices will see the reversal of job losses in the politically crucial
Copperbelt region, and several large new investment projects in the energy and extractives
industries may get fully underway during the year. As ever, Zambia will remain resistant to any
direct destabilising effects from tumult in neighbouring Congo (DRC) and Zimbabwe.
Zimbabwe
Political risk: H
Security risk: H; M for Central Harare and Bulawayo
Zimbabwe in 2009 took tentative steps towards ending its acute political and economic crisis,
though the overall outlook remains precarious. Brokered by the Southern African Development
Community (SADC), the landmark creation of the power-sharing government has paved the way
for basic steps towards stabilisation, but the administration will remain hamstrung by serious
infighting and internal paralysis. The prospect of a total collapse of the arrangement is limited by
a lack of political alternatives. However, in a high-stakes environment – where a ‘securocrat’
elite fears for its future – instability will pose a continued threat, especially while the question of
the succession to President Robert Mugabe remains unresolved within his divided party.
A modest start has been made in stabilising fiscal management. The suspension of the Zimbabwe
dollar and introduction of a multi-currency basket has arrested runaway inflation, while a
scrapping of price freezes has eased crippling goods shortages. The March 2009 Short-Term
Economic Recovery Programme (STERP) and a balanced budget made several promising
pledges, but the government – still crippled by its dire fiscal situation – is almost certain to
struggle to follow through on a highly ambitious reform agenda in 2010. While gold-miners in
particular benefited from an abolition of the state’s monopoly on gold sales, the sector will want
to see concrete improvements to security of tenure, including the redrafting of the onerous Mines
and Minerals Amendment Bill, as well as investment in infrastructure, including ailing utilities.
Land reform and controversial land seizures, meanwhile, look set to remain a bone of contention.
The overarching challenge will stem from plans to rewrite and put to a referendum a constitution,
and from wider political and institutional reforms that are essential to creating an environment
conducive to fresh elections, the two-year timeframe of which may well be delayed. Meanwhile,
unreformed institutions, particularly at the local level, still leave significant room for investment
risks such as political interference and contract frustration.
Americas
When the financial crisis took a turn for the worse with Lehman Brothers’ collapse in October
2008, many analysts were quick to forecast economic and political mayhem in Latin America.
The pessimism seemed well founded: 25% of all financial crises since 1970 have taken place in
the region. Capital flight was a serious problem for much of the 1980s and historically high debt
levels made the region vulnerable to shifts in the economic mood – it was hard hit by the 1998
Asian crisis.
A year on, most analysts have turned out to be wrong. Of course, local economies were affected,
but the stereotype of a populism-prone, commodity-dependent region has been shattered. Many
Latin American countries have benefited from sustained reforms and greater political maturity.
But the region’s performance during the recession may generate complacency that allows
reforms to run out of steam. The new optimism might be as misplaced as earlier pessimism.
Confounding expectations
Latin America’s performance during the recession is partly because its governments have
become much savvier at managing their resources and adopting prudent macroeconomic policy.
Even in countries with a more anti-market bias – such as Argentina, Venezuela and Ecuador –
governments have been smarter than expected. Despite a sharp fall in oil prices, Venezuelan
President Hugo Chávez managed resource windfalls better than his critics expected and kept his
popularity afloat. In Argentina, predictions of renewed financial collapse have proved far-fetched
so far. While the methods are at times questionable – nationalisation of pension funds in
Argentina and of foreign assets in Venezuela – the populists have recognised the limits of some
of their anti-market policies. The long-term sustainability of these methods is also questionable:
high levels of state involvement and public spending risk leaving an overburdened economy for
the next administrations.
Progress is undeniable where moderate governments have been in power. Brazil, Chile, Uruguay,
Colombia and Peru have all suffered to varying degrees, but will continue to respond with a high
level of political stability and sound economic policy. With a few exceptions, the resolution cost
of financial crises for governments in the region has progressively diminished over the years,
suggesting that decision-makers have learnt the lessons of past catastrophes and improved their
policy frameworks.
Financial crises in Latin America since 1970 and their costs
Expectations of a shift towards populism have also been confounded. Electorates appear to have
greater trust in democratic institutions – or at least are learning to be sceptical of radical
promises. Populism has its successes, but the Kirchners’ dwindling popularity in Argentina
shows that it is no longer seen as a bargain: they are heading for a fall in 2011. However,
institutions are not strengthening as quickly as is desirable: Colombian President Álvaro Uribe is
struggling to resist the lure of a third term; Chávez, Ecuadorian President Rafael Correa and
Bolivian President Evo Morales remain addicted to constitutional referendums; and Nicaraguan
municipal elections were tainted by fraud allegations.
But the image of Latin America as riddled by coups and caudillos is no longer accurate. The
ousting of Honduran President Manuel Zelaya in June 2009 bucks a long-term trend of decline in
such overthrows. The radicals grab the headlines, but are the minority. For every Chávez, there
are numerous moderate counterparts: Luiz Inácio ‘Lula’ da Silva in Brazil, Michelle Bachelet in
Chile, Tabaré Vázquez in Uruguay, Felipe Calderón in Mexico. All are based around the centre-
left or centre-right of the political spectrum, and will continue to favour economic austerity and
welcome foreign investment. With the exceptions of Venezuela and Argentina, arbitrary state
intervention and political instability have generally been restricted to smaller economies, such as
Nicaragua, Bolivia, Guatemala and Honduras. And while the likes of Nicaragua are likely to
persist in this trend, others – notably Argentina – seem to be heading towards a more market-
friendly shift in the medium term.
Running out of steam
The region’s success to date in dealing with the crisis will influence the kind of threats that
investors face in the years ahead. In the past, multinationals have worried about nationalization
and creeping expropriation, but we believe the greatest political risk in the next few years will be
immobility. There is a risk that governments in Latin America will lose the motivation to persist
with much-needed reforms, such as fixing inefficient and distorted tax systems and reforming
inflexible labour markets. The difficulties Calderón has faced in his efforts to reform Pemex in
Mexico and Lula’s inability to deliver on the government’s promise of a tax overhaul reveal
some of the political failures overshadowed by the financial crisis. It is no longer a case of
proving to investors that policy can be competently implemented or that decision-makers care
about macroeconomic stability. As a maturing region, Latin America needs reforms that facilitate
private investment and make companies’ lives easier, ultimately ensuring sustainable economic
growth.
Despite successes in macro policy, the region still suffers from problems that hamper its
attractiveness to investors. The broadly successful handling of the financial crisis may generate
complacency, softening the political will to push for greater change. Tax and labour reforms,
streamlining of the public sector and other crucial overhauls require hard-won consensus in
parliaments and great efforts to win over public opinion – particularly in Latin America, where
multi-party systems with proportional representation are common. Corruption – both in the
private and public sector – also remains a significant concern, with the region’s three major
economies (Brazil, Argentina and Mexico) showing no improvement in international surveys
such as TI’s Corruption Perceptions Index (CPI). Without strong commitment, governments will
not be able to pass such reforms. These types of reform also require taking away entitlements
from those who benefit from current distortions. Europeans and Americans can attest to the
difficulties of implementing such measures when gains are widespread and costs concentrated
(hence lobbies’ potential for obstructing spending cuts and other kinds of restructuring).
The risk of immobility may not seem as drastic as expropriation or nationalisation, but if acute it
could stall growth potential in the medium-to-long term. In a worst-case scenario, this could
breed social discontent, causing future complications for private companies in the form of social
unrest.
Successful coups in Latin America since 1960

Running out of steam
The region’s success to date in dealing with the crisis will influence the kind of threats that
investors face in the years ahead. In the past, multinationals have worried about nationalization
and creeping expropriation, but we believe the greatest political risk in the next few years will be
immobility. There is a risk that governments in Latin America will lose the motivation to persist
with much-needed reforms, such as fixing inefficient and distorted tax systems and reforming
inflexible labour markets. The difficulties Calderón has faced in his efforts to reform Pemex in
Mexico and Lula’s inability to deliver on the government’s promise of a tax overhaul reveal
some of the political failures overshadowed by the financial crisis. It is no longer a case of
proving to investors that policy can be competently implemented or that decision-makers care
about macroeconomic stability. As a maturing region, Latin America needs reforms that facilitate
private investment and make companies’ lives easier, ultimately ensuring sustainable economic
growth.
Despite successes in macro policy, the region still suffers from problems that hamper its
attractiveness to investors. The broadly successful handling of the financial crisis may generate
complacency, softening the political will to push for greater change. Tax and labour reforms,
streamlining of the public sector and other crucial overhauls require hard-won consensus in
parliaments and great efforts to win over public opinion – particularly in Latin America, where
multi-party systems with proportional representation are common. Corruption – both in the
private and public sector – also remains a significant concern, with the region’s three major
economies (Brazil, Argentina and Mexico) showing no improvement in international surveys
such as TI’s Corruption Perceptions Index (CPI). Without strong commitment, governments will
not be able to pass such reforms. These types of reform also require taking away entitlements
from those who benefit from current distortions. Europeans and Americans can attest to the
difficulties of implementing such measures when gains are widespread and costs concentrated
(hence lobbies’ potential for obstructing spending cuts and other kinds of restructuring).
The risk of immobility may not seem as drastic as expropriation or nationalisation, but if acute it
could stall growth potential in the medium-to-long term. In a worst-case scenario, this could
breed social discontent, causing future complications for private companies in the form of social
unrest.
Spending and unions
Part of the standard government response to the financial crisis has been strong fiscal stimulus
measures, used to prop up social programmes and public-sector employment. Spending packages
aimed at boosting infrastructure investment have also been common, with Brazil, Argentina and
Colombia leading the way. However, as the recovery progresses, governments will find it hard to
cut these new entitlements from their beneficiaries, particularly given the strength of public-
sector lobbies around the region. Elections will be held in 2010 in Brazil, Colombia, Peru and
Costa Rica, and no incumbent will be willing to significantly reduce state assistance in this
context. Indeed, electoral spending might have the perverse effect of consolidating some of the
measures taken during the crisis, making it even harder to reduce assistance beyond next year.
Badly timing the withdrawal of government support could equally leave economies exposed at
the wrong moment, sowing the seeds of future unrest.
Within this new regional context, project-specific risk will become especially important for
companies. While ‘hard’ political risks such as expropriation are likely to continue to become
less acute in most states, ‘soft’ political risks – such as community activism and labour relations
– will almost certainly gain in importance. Companies’ relationships with labour unions, for
example, will have to be thoroughly monitored because these groups are gaining leverage. Even
where governments have broadly accepted market-friendly principles, unions such as the
Petroleum Workers’ Union in Mexico or the Main Central Union for Workers (CUT) in Brazil
are powerful. Community activists – whether indigenous groups, environmentalists or human
rights advocates – will also become increasingly organised and co-ordinated, and cause business
interruption when they see fit.
The US factor
The Latin American region’s growing commercial links to non-traditional markets, especially
China, are another reason why much of the region could handle the downturn once the US
economy plummeted. Mexico, hugely dependent on its northern neighbour, was a clear
exception.
The shift was partly a result of being ignored by the George W Bush administration. Although
most leaders welcomed the arrival of President Barack Obama, he will not substantially alter his
predecessor’s policy. Rhetoric aside, Latin America remains a low priority on Obama’s foreign
policy agenda and he is unlikely to engage comprehensively with the hemisphere.
In 2010 the status quo is likely to prevail in north-south relations. The US continues to focus its
attention on conflicts in the Middle East and on its relationship with Russia and Asia. Trade
pacts are likely to remain in limbo and the withdrawal of US agricultural subsidies that would
open up the market for Latin American commodities seems an unlikely prospect. Despite hints of
concern over growing Chinese involvement in the region, the US administration is unlikely to
take concrete action to counter the trend.
One specific case where US policy could have a significant impact is Cuba, a state that has
always followed a course of its own. A lifting of the economic embargo imposed on the island
could have significant positive economic repercussions, though its political effect is less clear.
Raúl Castro has kept a firm grip on power since taking over from his brother Fidel and has
shown an expected degree of pragmatism, combining a heavily authoritarian stance with a slow,
gradual opening of the economy – a trend we expect to continue.
Security: lagging behind
One area where the region is lacking is the failure of improved wealth distribution and economic
growth to translate into greater security. In many cases, companies continue to face the same
kind of threats that they faced five or ten years ago, and significant improvements are unlikely.
With the clear exception of Colombia, where the security environment has significantly
improved during Uribe’s tenure, security conditions in most Latin American countries have
remained broadly unchanged, or deteriorated. Mexico has grabbed the headlines, with battles
between drug gangs and government forces and the continuing rise in kidnapping. Even though
the press exaggerates the impact on businesses (and the wider threat to the state), the
government’s lack of success in fighting organised crime is troubling. In Central America,
Guatemala and Honduras present an even worse scenario, with the additional risk of becoming
failed states in the medium-to-long term. Crime continues to plague Brazil’s urban centres, while
once-tranquil Buenos Aires has seen a rise in both common and organised crime. Perhaps the
worst deterioration of all has happened in Venezuela, a country that ten years ago was relatively
safe, but that now tops the charts in terms of crime rates.
There is little prospect of improvement over the course of 2010. Governments have not been able
to implement the structural changes needed and an effective long-term strategy would entail
costly public policies that lack the short-term benefits that might endear them to politicians. In
some countries, insecurity has become so ingrained that it is no longer a political issue at election
time: there is no value in addressing it. Security has barely been mentioned in early phases of
campaigning for Brazil’s 2010 presidential election. Neither the ruling Workers’ Party (PT) nor
its main adversary, the Brazilian Social Democratic Party (PSDB), seem to believe that they can
extract political benefits by campaigning on the issue. Even though this is somewhat specific to
the Brazilian context, it nevertheless highlights what can happen in other countries once the
problem goes unaddressed for too long.
While Latin America does deserve some praise for weathering the storm so well, the road ahead
will be anything but easy for both governments and investors. The relatively successful handling
of the financial crisis was a turning point for the region, but one that will bring new challenges,
especially the implementation of microeconomic reforms. Governments have yet to show the
political will that such reforms demand, and are unlikely to do so in the year ahead. In our view,
while opportunities in several sectors – for example oil and gas, telecommunications and the
banking industry – will inevitably arise in the context of an economic recovery, progress will be
slower than many expect. Investors will have to be careful in 2010 not to be caught again by a
herd mentality, this time an optimistic one.
Argentina
Political risk: M
Security risk: L; M in Buenos Aires, tri-border area
After years with a stranglehold on power, the government lost its majority in both houses in the
June 2009 mid-term elections. The new landscape will inevitably force President Cristina
Kirchner and her husband and predecessor Néstor into making more concessions to the
opposition, but they are likely to maintain their heterodox economic platform. Arbitrary
decision-making and contractual instability are likely to persist, though nationalisation or
expropriation of foreign businesses are less likely. Bouts of political instability might emerge as
a less submissive Congress asserts itself, but a widespread political or economic crisis is
unlikely.
The need to raise finance by returning to capital markets might provoke a slow rapprochement
with international organisations such as the IMF. Similarly, negotiations with hold-out creditors
from the 2005 debt-restructuring are likely to restart in 2010. However, progress will be slow;
the Kirchners will not want to appear weak to their core constituency of working-class
supporters. FDI is likely to remain well below potential because of short-term political
uncertainty. Investors will wait before making major investment decisions, as it appears
increasingly likely that there will be a shift in power – towards a more centrist government – in
2011.
Following the boom of 2003-07, a slowing economy has alleviated concerns over energy
supplies, but investment in the sector is chronically inadequate and will remain so as long as
political uncertainty reigns. Reluctance to invest is a direct result of past meddling, through
Néstor’s price controls and tariff freezes. Even if these interventionist measures are gradually
eliminated, private companies will be reluctant to make longer-term commitments before there is
a shift in government. There is a high level of red tape and bureaucracy, and the country
continues to have one of the worst reputations for corruption, even among its Latin American
counterparts. Corruption occurs at all levels; accusations against high-profile government
officials are likely to rise in the next year as the judiciary has shown timid but growing signs of
independence.
Although statistics are unreliable, crime appears to have increased, particularly in major urban
centres including Buenos Aires. The growth of armed muggings is likely to persist, given the
economic slowdown and the lack of a well-formulated policy to tackle the problem. Short-
duration ‘express’ kidnapping is also a concern. Crime rates in Buenos Aires remain well below
Latin American cities such as Rio de Janeiro (Brazil), São Paulo (Brazil) or Caracas (Venezuela),
but the city is no longer seen as in the same league as safer cities such as Santiago (Chile) or
Montevideo (Uruguay).
Bolivia
Political risk: H
Security risk: M
Following the expected re-election of President Evo Morales on 6 December, political life in
Bolivia during 2010 is unlikely to see serious instability. While Morales will continue to enjoy
significant popular support, unresolved issues will pressure his administration. These include
demands for greater regional autonomy in the east of the country and from indigenous
communities anxious to implement specific constitutional provisions regarding land ownership,
control of natural resources and justice procurement. These issues are likely to create tensions
within Morales’ Movement to Socialism (MAS), factions of which will continue to resort to
street politics to press their specific demands.
We do not expect the business environment to deteriorate markedly during a second Morales
administration. While he will maintain a nationalist stance and hostile rhetoric against capitalism
and foreign investors – particularly ahead of municipal elections in January – his government
will continue efforts to attract limited participation by private capital in strategic sectors through
joint ventures with the state-owned hydrocarbons and mining companies, respectively YPFB and
Comibol. Utilities companies are particularly likely to see an increase in government control,
including contract renegotiations. Political considerations will continue to determine policy-
making, which means contractual uncertainty will remain a central feature in Bolivia.
Security problems will remain below the regional average, though organised crime will continue
to rise, particularly drug-trafficking. Bolivia’s continued exclusion from the US Andean Trade
Promotion and Drug Eradication Act (ATPDEA) will see joblessness increase and US aid to
combat drug-trafficking fall. Moreover, the administration’s failure to tackle entrenched
corruption in the law-enforcement and justice-procurement agencies will perpetuate a culture of
impunity.

Brazil
Political risk: M
Security risk: M
An apparent rapid rebound from the global financial crisis has consolidated President Luiz Inácio
‘Lula’ da Silva’s support, which remains unprecedentedly high entering his last year in office.
However, Lula has been unable to transfer his popularity to his favoured successor, cabinet chief
Dilma Rousseff. Rousseff continues to trail the opposition Brazilian Social Democratic Party
(PSDB)’s candidate, São Paulo state governor José Serra, in voter intentions. But despite a wide
gap at present, we believe the October 2010 presidential race will be fiercely contested, with a
probable second-round run-off. Serra must still see off another strong PSDB rival, Minas Gerais
state governor Aécio Neves, while Rousseff is likely to gain as her public profile is raised over
the course of campaigning.
Irrespective of who secures the presidency, the business environment is likely to remain
generally stable, with few policy changes. The country’s resilience to the economic crisis,
coupled with a stable market-friendly environment, means that FDI levels are likely to remain
high, particularly if an expected rebound in the global economy materialises next year. The
government’s recent proposal for a revamp of the oil regulatory framework – following massive
offshore finds in late 2007 – surprised the market by being more state-centric than originally
expected, but the decision to maintain previous contracts is likely to ensure strong foreign
interest in the sector. Campaigning rhetoric in the run-up to the 2010 elections might raise
concerns over excessive intervention, but the government will be careful to maintain incentives
for private investment in the final draft of a new regulatory framework.
As is traditional in an election year, public spending will increase, though this is unlikely to
jeopardise the fiscal situation or have a major impact on the country’s image as a trustworthy
debtor. Nonetheless, operational challenges remain: implementation of the government’s
flagship Growth Acceleration Programme (PAC) has fallen short of the more optimistic
assessments. Despite economic growth and robust political stability, Brazil has not improved its
image in terms of corporate governance and continues to rate poorly in international assessments
of corruption perceptions. Navigating the complicated bureaucratic system remains a challenge
for businesses. The Landless Workers’ Movement (MST) remains active in several parts of the
interior and might step up action to gain media attention in the run-up to the elections.
The security situation has remained fairly stagnant and we do not foresee drastic alterations in
the medium-to-long term. Opportunistic and violent crime in urban centres will remain the
primary concern for businesses; pickpocketing and mugging are a pressing issue even in
financial districts, while wealthier areas – though more protected – are not immune to crime.
‘Express’ kidnapping is also a concern. Although there is a significant organised crime, its
impact on businesses is mostly indirect. True improvements in the security situation will only be
possible through heavy investments in well-co-ordinated public policy, but political incentives
for such measures taking place at present are low.
Canada
Political risk: I
Security risk: L
Despite continued efforts by the opposition Liberal Party to unseat Prime Minister Stephen
Harper, the Conservative Party administration is likely to remain in office during 2010.
However, its minority status means that the government will continue to need cross-party support
to pass legislation. Maintaining stability and re-energising the economy will remain the
government’s priorities.
Concern over terrorist activity will be particularly heightened in February when the Winter
Olympics are held in Vancouver. Canada will continue to face a low but credible risk of attack
by Islamist extremists because of its foreign policy, especially its support for US-led operations
in Afghanistan and Iraq. The country’s liberal political system and limited border security mean
that home-grown extremist groups will remain focused on supporting and funding transnational
terrorist activities. Crime rates, while relatively low, will continue to rise in major urban areas.
Chile
Political risk: L
Security risk: L
The political scene will be dominated by the December 2009 presidential election, which is
likely to go to a second round of voting in January. Sebastian Piñera of the opposition Alliance
for Chile coalition remains favourite to become the first right-wing president since the end of
Gen Augusto Pinochet’s dictatorship in 1989. However, the race has been shaken by the entrance
of a third serious candidate, Marco Enríquez-Ominami, a dissident former member of the
Socialist Party (PS), one of the parties that make up the ruling Concertación coalition. Chilean
elections are usually sober affairs conducted between the Alliance and the Concertación.
Whether he wins or not, Enríquez-Ominami’s campaign threatens a serious shake-up in Chilean
politics by exposing the extent of the divisions within the Concertación. A coalition break-up
appears inevitable at some point in the near future.
Nonetheless, the overall affect on stability, for foreign investors in particular, is likely to be
limited. Chile will remain an attractive destination for foreign investment, with all leading
political figures and parties in broad consensus on this issue.
From a security perspective Chile remains one of the safest destinations in Latin America, if not
the safest. Serious crime against foreign business personnel or assets is extremely rare, and drug-
related organised crime has been unable to establish a strong foothold in the country. However,
concerns are growing over militant activism by the indigenous Mapuche community in southern
Chile. While a recent ‘declaration of war’ by one Mapuche organisation can be taken with a
pinch of salt, more clashes between activists and the police, as well as land invasions and
occasional violent attacks against private landowners and business interests, are likely in the year
ahead.
Colombia
Political risk: M
Security risk: M; H in rural areas
The May 2010 presidential election, and to a lesser extent the March legislative elections, are the
key events of Colombia’s political year. It appears increasingly likely that President Álvaro
Uribe will attempt to change the constitution to pursue a third consecutive term in office. Should
he fail, the race to succeed him is wide open; no obvious candidate is making ground from either
the government or the opposition. Both a third term for Uribe or a new president will see an
emphasis on the successful policies of the past few years: a military crackdown on the
Revolutionary Armed Forces of Colombia (FARC) leftist guerrilla group and economic reforms
aimed at attracting increased foreign investment. Nonetheless, a key rationale for Uribe pursuing
another four years in office is his fear that a new president would not have the same drive and
authority to deliver the results he has produced in his eight years as president.
The FARC remains a potent security threat despite the military’s successes, particularly in rural
areas. However, its targeting patterns have largely shifted to symbols of government authority or
vulnerable infrastructure such as bridges, oil pipelines and electricity pylons; more attacks can be
expected in the run-up to the 2010 elections. Foreigners remain a target for kidnap-for-ransom,
though the increased military presence across all parts of the country means that the problem is
far less serious than it once was. In contrast, as the FARC threat dwindles in many areas, the
government may have to turn more attention to tackling urban crime, largely driven by battles for
control of the drugs trade, particularly in cities such as Medellín and Calí. Nonetheless, most
violent crime in urban centres remains confined to areas that foreign personnel are unlikely to
visit or where foreign assets are unlikely to be based. There remains no serious prospect of war
with neighbouring Venezuela or Ecuador, despite political hostility between the countries’
leaders and suspected links between the two, especially Venezuela, and the FARC.
Costa Rica
Political risk: L
Security risk: L; M on Nicaraguan border

Campaign rhetoric ahead of the February 2010 presidential election may create the impression of
polarisation, but the country’s institutional strength guarantees that political stability will be
maintained. Former justice minister Laura Chinchilla of the National Liberation Party (PLN) is
favourite to secure the presidency and is likely to largely retain President Oscar Arias’s policies.
Despite the government’s drive to promote foreign investment, infrastructure upgrades have not
kept pace with investor expectations. However, improvements are expected in the medium-to-
long term. Environmental awareness is high, promoted by the government because eco-tourism
is an important source of revenue – the mining sector has been the main target of NGOs and
local community groups.
Crime levels, though increasing, remain among the lowest in Latin America. Petty crime poses a
risk to business personnel, including the violent mugging of foreign tourists and burglary, which
is increasingly common in upmarket areas of the capital San José. Security risks are higher near
the border with Nicaragua.
Cuba
Political risk: M
Security risk: L
There remains no sign of the Cuban Communist Party (PCC), led by President Raúl Castro,
relinquishing its one-party control of the country, despite piecemeal economic reforms pursued
during 2009. The reforms have been pushed largely out of necessity, with the state in desperate
need to ease its financial burden in the wake of the global economic crisis and a catastrophic
spate of hurricanes in the autumn of 2008. Despite the economy’s problems, calls for political
change remain extremely muted, with the local dissident movement under-resourced, divided
and repressed by the government at the first sign of trouble.
Foreign investment will remain restricted to strategic sectors such as mining, tourism and
offshore oil and gas. Minor improvements in relations with the US can be expected, particularly
on practical matters such as coastguard duties, combating the drugs trade and mail services
between the two countries. Nonetheless, a wider rapprochement remains highly unlikely –
particularly the lifting of the US trade embargo – until there are signs of significant political and
economic change on the island. Crime rates in Cuba will remain low, with the PCC and the
military keeping a close watch on the population; serious crime is rarely an issue for foreigners.
Dominican Republic
Political risk: M
Security risk: L; M in Santo Domingo and Santiago
President Leonel Fernández remains popular and will continue to pursue market-friendly policies
to lure foreign investment to the country; tourism, energy and mining are key areas the
government is keen to develop. Nonetheless, electricity provision is hopeless, with frequent
blackouts; significant improvements are unlikely in the coming 12 months. The political scene
will otherwise be dominated by candidates jostling for position ahead of the 2011 presidential
election; Fernández is constitutionally barred from standing.
Social unrest is likely to rise in the next year as discontent grows over inconsistent electricity
supplies and the impact of the economic crisis, though protests will largely be confined to poorer
urban areas and occasional roadblocks. Crime is a growing concern in the capital Santo
Domingo, though foreign businesses are rarely affected. Moreover, an increase in drug-
trafficking through the island – in transit from South America to the US – is having a debilitating
effect on the security forces, with growing corruption and collusion with organised crime.
Ecuador
Political risk: H
Security risk: L; M in Quito, Guayaquil, Manta; H in Colombian border areas
Political instability will persist in the next year, with President Rafael Correa pursuing a leftist
agenda deemed too radical by some and too moderate by others. Although the prospect of a
serious fiscal crisis has eased with the increase in oil prices in the second half of 2009, Correa no
longer has the same level of financial resources to pursue his ‘citizens’ revolution’, aimed at
restructuring the country’s political and economic models. Constant conflict with diverse social
groups, such as indigenous communities, teachers, regional authorities and environmental
groups, are also likely to drain the president’s political capital and further constrain his room for
policy manoeuvre.
Nonetheless, Correa is likely to remain popular with a healthy proportion of Ecuadorians, and his
overthrow – the fate of at least three presidents in recent years – is as unlikely as it would be
unwelcome. However, the government remains broadly opposed to significant foreign
investment, and harassment of companies working in the oil sector in particular is likely to
continue. Mining investment may be backed by the government, but will face opposition from
indigenous groups and environmental activists.
A perceived increase in crime rates preoccupies a majority of the population, though crime has
yet to translate into a significant problem for foreign personnel, with the exception of ‘express’
kidnapping in the commercial hub Guayaquil. Correa’s government is investing heavily in
modernising the police, though this is unlikely to bring significant results in the short term.
Reports are growing of organised crime gangs increasingly using Ecuador as a transit route for
narcotics. However, drug-trafficking does not pose a major security threat within Ecuador;
targeting of foreign companies seems unlikely during 2010.
El Salvador
Political risk: M
Security risk: M
Having taken office in June 2009, President Mauricio Funes of the leftist Farabundo Martí
National Liberation Front (FMLN) is likely to see his honeymoon period end during 2010.
Despite El Salvador’s close commercial links to the US, its economy is unlikely to recover at the
same pace. With only marginal growth expected, more radical FMLN factions will intensify
pressure on Funes to deliver on his promises, particularly regarding poverty alleviation and job
creation. Funes will face a delicate balancing act as conservative parties – including the main
opposition Nationalist Republican Alliance (ARENA) – use their majority in Congress to protect
privileged economic sectors that leftists will want to target for tax hikes. However, we believe
Funes will try to maintain a moderate stance and not undermine the business environment.
The security situation will remain largely unchanged, with the police and judiciary remaining
underfunded. Limited resources will thwart government efforts to address underlying social
causes of crime, such as poverty, inequality, youth unemployment and failings in the education
system. Unable to deliver employment or development opportunities to lure youths away from
gangs (maras), crime and violence will continue to rise.
Guatemala
Political risk: M
Security risk: M; H in Guatemala City, Mexican border area
Security will remain the key issue facing President Álvaro Colom’s government in 2010. The
country is increasingly at the mercy of Mexican drug cartels displaced to Guatemala by the
Mexican government’s offensive against them. The increased presence of organised crime has
exacerbated already high levels of corruption within the police and judiciary, as well as
expanding the supply of firearms, leading to growing levels of violent crime. Although Colom’s
centre-left government has survived right-wing attempts to destabilise it, the administration has
only limited authority over the legislature and efforts to pursue its reform agenda, including a
much-needed fiscal reform to increase tax revenues, may be unsuccessful. The country will
remain largely open to foreign investment, though security problems and widespread corruption
will continue to act as a deterrent.

Guyana
Political risk: L
Security risk: M
Despite concerns over the government’s reaction to the financial crisis, President Bharrat
Jagdeo’s administration has reinforced the country’s image as a market-friendly destination by
largely maintaining orthodox economic policies and securing political stability. This trend is
likely to persist, and Jagdeo will continue enjoying high levels of popularity.
However, operational concerns – such as labour union activity, corruption in the state
bureaucracy and deficient infrastructure in interior areas – mean FDI will remain below
potential. The security situation will remain relatively static, with mugging, pickpocketing,
fraudulent money-changing and bag-snatching prominent as the most common forms of street
crime. Organised crime, though present, has little direct impact on foreign businesses.
Haiti
Political risk: H
Security risk: H
Although cautious improvements have been registered on the political and security fronts in the
past couple of years, progress in Haiti remains fragile and the country is never far from a serious
crisis. More of the same can be expected in 2010. President René Préval will continue to pursue
political consensus and take tentative steps to further open up the economy to foreign
investment, including the possible privatisation of state-owned companies, and reform the
judiciary and customs services. However, he may find it increasingly difficult to retain control of
the political scene as manoeuvring begins in earnest for the 2011 presidential election. Much will
rest on the continued support of the UN Stabilisation Mission in Haiti (Minustah) to maintain
security. Kidnapping and other violent crimes are no longer at epidemic levels, but will remain
an important security concern, particularly in the capital Port-au-Prince.
Honduras
Political risk: H
Security risk: M
The coming year will be marked by continued fall-out from the political crisis detonated by the
ousting of President Manuel Zelaya in June 2009. Elvin Santos of Zelaya’s Liberal Party (PLH)
has the edge on the opposition National Party (PNH)’s Porfirio ‘Pepe’ Lobo ahead of the
presidential election scheduled for November 2009. However, the contest may not be enough to
restore legitimacy to a new government, as hoped by interim leader Roberto Micheletti. The
crisis has exposed wide divisions in Honduran society: Zelaya’s opponents claim that he was
trying to impose a radical leftist agenda, including presidential re-election and a new
constitution. However, his supporters are likely to become increasingly vocal in their demands
for social reform, regardless of who wins the election. There is a strong likelihood of increased
social unrest and protests, heightening political instability.
Such instability is likely to hamper efforts to improve the security environment. Honduras is
Central America’s most violent country. Kidnapping is increasing in the commercial hub San
Pedro Sula. Nonetheless, violent crime will largely remain confined to lower-income urban
neighbourhoods. Drug gangs are establishing a presence in rural areas, but will not pose a
significant direct threat to legitimate business operations.
Jamaica
Political risk: L
Security risk: M; H in West Kingston and Spanish Town
Prime Minister Bruce Golding and his Jamaica Labour Party (JLP) will face another challenging
year as they struggle to haul Jamaica out of a severe recession. Government spending cuts,
together with public concern over high crime rates, will erode the government’s popularity, but
will not affect overall political stability. Internal divisions within the opposition People’s
National Party (PNP) will continue to blunt the effectiveness of opposition attacks on the
Golding administration. The economy will be slow to emerge from recession, and any growth in
2010 is likely to be anaemic. However, difficult economic conditions do not threaten to derail the
government’s commitment to attracting investment in key sectors such as tourism and bauxite-
mining. With Jamaica continuing to labour under a formidable public debt burden, an agreement
with the IMF will reduce the risk of default.
Violent crime will continue to represent the main security threat. Efforts to produce a tangible
improvement in the security environment will be undermined by continued gang warfare, fuelled
by high unemployment, the government’s failure to eradicate clientelist enclaves run by armed
gangs (known locally as ‘garrisons’), and persistent drug-trafficking. Moreover, police
corruption and brutality will continue to undermine efforts to tackle crime.
Mexico
Political risk: M
Security risk: M; H in US border area
The recession and its consequences will be the dominant political issue during 2010. President
Felipe Calderón’s National Action Party (PAN) government will focus on implementing
measures aimed at ameliorating the effects of the downturn. The opposition will capitalise on
growing unemployment and underemployment, coupled with worsening poverty and inequality,
to attack the government. However, we expect the main opposition Institutional Revolutionary
Party (PRI) to adopt a relatively co-operative stance in Congress. It will seek effective solutions
to reignite the economy, including unpopular reforms for which the PAN – which lacks a
majority and therefore depends on PRI votes to pass legislation – will foot the political bill.
We expect the administration to push for some limited reforms to state oil company Pemex and
the energy sector. The PRI is likely to back changes to competition regulation and
telecommunications. However, we expect labour regulation to remain largely unchanged; the
PRI will not push its luck with the unions that have traditionally been a bastion of its support.
Consequently, productivity levels will remain low – one of the key shortcomings of the country’s
business environment. The leftist Party of the Democratic Revolution (PRD) will attack any
PAN- or PRI-sponsored market-friendly reforms, with Andrés Manuel López Obrador remaining
the PRD’s most vocal critic of the administration. Nonetheless, he is unlikely to recover the
levels of support he enjoyed when he contested the presidency in 2006, and serious instability is
unlikely to emerge during 2010.
Entrenched corruption will remain a key problem. Although we expect the administration to
continue its hardline security drive against organised crime, corruption will undermine the
effectiveness of such efforts. The enduring demand for narcotics and the profitability of the
illegal drugs trade will continue to fuel violence, particularly in northern states that border the
US, and Michoacán and Guerrero in the south. Although the illegal narcotics trade is unlikely to
target legitimate business operations, its effects will further erode the security environment.
Elsewhere, opportunistic crime will remain the principal security threat, with a significant risk of
violence in major urban areas. Corruption and organised crime will not become direct threats to
the government, but retain the potential to undermine Calderón’s authority and his ability to
govern effectively.
Relations with the US will remain crucial, centred on anti-narcotics co-operation in the shape of
the Mérida Initiative. Although Obama made renegotiation of the North American Free-Trade
Agreement (NAFTA) a key campaign promise, he is unlikely to seek this during 2010 because it
would be likely to have a negative effect on both economies as they start emerging from
recession.
Nicaragua
Political risk: H
Security risk: L; M in Managua, North Atlantic Autonomous Region (RAAN)
The controversy over fraud accusations against the ruling Sandinista National Liberation Front
(FSLN) in the November 2008 municipal elections has sparked the withdrawal of international
aid and severely affected the country’s image as a destination of foreign investment. President
Daniel Ortega has shown few signs of backing down from his provocative stance, and 2010 will
follow the pattern seen since mid- 2008, with the government stepping up rhetoric and
occasionally meddling in private-sector affairs. Although in the past Ortega’s threats to
nationalise industries have essentially been little more than rhetoric, the risk cannot be ruled out
– low popularity levels mean that the government may resort to populist measures in a desperate
attempt to retain power.
Opportunistic crime will remain a concern in major urban centres. Growing signs that the
government may push for a constitutional amendment to allow presidential re-election will
increase the risk of occasional social unrest, but a deterioration into widespread political violence
is less likely. Chronic operational difficulties will persist, particularly regarding shortcomings to
electricity supplies and transport – the recent withdrawal of aid funds may undermine
infrastructure projects in rural areas.
Panama
Political risk: L
Security risk: M; H in Darién province on Colombian border
Despite the opposition’s victory in the May 2009 presidential election, President Ricardo
Martinelli of the Democratic Change (CD) party is likely to maintain the bulk of his predecessor
Martín Torrijos’s market-friendly policies. Martinelli’s background as a successful businessman
and his centre-right leanings means that his administration may even increase liberalisation in
some areas of the economy.
The country faces increasing pressure from others in the region – notably Colombia, Ecuador
and Mexico – to change its fiscal policies and establish a tougher monitoring regime for capital
flows. There are serious concerns that Panama is being used as a fiscal haven for companies and
individuals, undermining efforts to increase tax collection and combat money-laundering.
Domestic progress will be slow, but other countries may act unilaterally to address their
grievances, which could affect cross-border trade and the remittance of profits.
Opportunistic street crime, including car theft, carjacking, assault and armed robbery, is common
and likely to persist. The incidence is significantly higher in urban areas, such as the capital
Panama City and Colón. Crime connected to drug-trafficking and money-laundering has become
increasingly violent, but targets only those directly involved in these activities.
Paraguay
Political risk: M
Security risk: L; M in eastern border, tri-border areas
President Fernando Lugo has largely disappointed during his first year in power, after high
expectations as the first leftist president in the country’s history. The lack of a majority in
Congress has made governability an issue and this trend is likely to persist. Although Lugo
scored an important point by securing a deal with Brazil to allow more flexibility in selling
electricity from the jointly-operated Itaipú hydroelectric dam, any resultant political capital is
likely to expire quickly. Lugo will continue to face the dilemma of catering to two opposing
interest groups: the rural poor who backed his campaign and demand land redistribution; and
agribusiness companies and producers, the drivers of economic activity.
The country’s reputation as a haven for corruption will continue to deter foreign investment.
Other obstacles, such a cumbersome bureaucratic environment and a politicised judicial system,
will also persist. Crime rates are generally low, except in the tri-border area with Argentina and
Brazil around Ciudad del Este (Alto Paraná department), where smuggling and drug-trafficking
are rife.

Peru
Political risk: M
Security risk: M; H in Upper Huallaga, Apurímac and Ene valleys
President Alan García’s approval ratings have failed to creep above the 30% mark, but political
stability remains largely assured. The country has weathered the global economic crisis relatively
well, and the government continues to pursue policies conducive to attracting foreign investment,
particularly in the critical mining and energy sectors. Nonetheless, the enduring perception that
strong economic growth in recent years has failed to filter down quickly enough to most
Peruvians will fuel opposition to the administration, particularly in the form of social unrest,
though this will not be enough to force a change in the government’s policy direction.
Social unrest does not pose a significant security threat to foreign business interests.
Nonetheless, mining companies are particularly likely to face the combined threat of local
communities protesting for greater social investment or against mining entirely – backed by
environmental groups – and labour unions demanding better pay and working conditions.
The Shining Path (SL) is likely to feature heavily in headlines in 2010, though these should not
be taken as a widespread resurgence of the leftist guerrilla group. The SL will remain restricted
to operations in coca-growing areas such as the Upper Huallaga valley, and the Ene and
Apurímac river valleys (known commonly as the VRAE), where it is increasingly dedicating
itself to drug-trafficking activities rather than any political agenda. The group will not actively
target foreign business operations outside these areas.
Suriname
Political risk: L
Security risk: L
Much like neighbouring Guyana, President Ronald Venetiaan has maintained market-friendly
policies and, despite the financial crisis, has reassured investors that the government will remain
open to foreign investment. However, a lack of state funds has left little room for manoeuvre for
the government to face up to economic difficulties. Moreover, operational obstacles, such as the
large informal economy and corruption, are likely to persist.
Opportunistic crime in the capital Paramaribo is the main security concern. Violent crime on the
border with Guyana remains an issue, but rarely affects foreign businesses directly. The risks of
terrorism or political violence remain low.
Trinidad and Tobago
Political risk: L
Security risk: M; L in Tobago
The People’s National Movement (PNM) government, led by Prime Minister Patrick Manning,
can expect a gradually improving economic situation to provide a modest boost to its popularity
following a difficult 2009. Public frustration with high crime rates, corruption and the uneven
effects of economic development will continue, but political stability will be maintained. The
PNM’s parliamentary majority will enable it to push through most of its legislative agenda, aided
by internal disputes within the opposition United National Congress (UNC), whose leader
Basdeo Panday is likely to remain a divisive figure as long as he refuses to contemplate
retirement. The Manning government will maintain its positive stance towards foreign
investment, particularly in the energy sector, which will remain the backbone of the economy,
despite diversification initiatives. However, economic recovery will remain dependent on
external demand and global energy prices.
The main security problem will remain high crime rates – including serious crime such as
kidnap-for-ransom in the capital Port-of-Spain. While not threatening stability, these will
undermine the business environment and remain a concern for investors. The risk posed by
Islamist terrorism will remain low, with the home-grown Jamaat al-Muslimeen organisation
highly unlikely to revert to terrorist attacks following its evolution into an organised crime gang.
United States
Political risk: L
Security risk: L; M in deprived urban areas
The US faces severe challenges in the year ahead. Despite recovering from the depths of the
financial crisis and recession, it faces prolonged slow growth and high unemployment.
Simultaneously, a changing global balance of power will constrain US freedom of action across
a range of economic, political and security dimensions.
In his first year, President Barack Obama has devoted himself to four huge domestic issues –
saving the financial system, reforming health care, passing a climate policy and prosecuting the
war in Afghanistan. Spreading his political capital so thinly will undermine his administration’s
agenda for the rest of his term. Persistent divisiveness between the ruling Democratic party and
the opposition Republican party – likely to intensify next year as mid-term Congressional
elections approach – has inhibited legislative efficiency and contributed to heightened
perceptions of political risk. However, the very ponderousness of the US system tends to thwart
abrupt, disruptive policy changes and it will remain a safe and attractive location for
international investment for the foreseeable future.
US foreign policy remains a key source of geopolitical risk. Even as the war in Iraq winds down,
the US presence in Afghanistan will continue to incite Islamist extremism. Transnational
terrorism remains a significant threat to US interests at home and abroad. US and international
efforts to counter nuclear proliferation will continue to provoke tensions with Iran and North
Korea, though increased dialogue and strategic co-operation with Russia and China could help
prevent a dramatic breakdown.
Crime will remain largely confined to deprived urban areas but could increase as the
employment situation deteriorates. There is also heightened concern over domestic right-wing
extremism.
Uruguay
Political risk: L
Security risk: L
The presidential election scheduled for late October 2009 will be fiercely contested. The ruling
Progressive Encounter-Broad Front (EP-FA) coalition candidate José Mujica is the marginal
favourite, though the opposition National Party (PN)’s candidate Luis Alberto Lacalle is well
positioned in the polls. Should Mujica win, despite his past as a guerrilla leader and concerns that
he would turn to radical leftist policies, we believe he is likely continue on President Tabaré
Vázquez’s largely moderate path – contractual stability and a positive business environment will
be maintained. Nonetheless, some changes, such as reform to banking secrecy laws, should be
expected in the medium term.
The resignation of unpopular interior minister Daisy Tourné in early 2009 has alleviated some of
the criticism related to the security situation. Despite inflated perceptions of insecurity, the
country remains one of the safest in the region. Businesses should have little concern other than
protecting personnel from opportunistic crime in the capital Montevideo.
Venezuela
Political risk: H
Security risk: M; H in Caracas, major urban centres, Colombian border states and Bolivar
state.
Oil revenues will allow President Hugo Chávez to maintain his firm grip on power in 2010,
resulting in continued arbitrary measures towards private investors. With National Assembly
elections looming in December 2010, the president’s efforts will be focused towards ensuring
that his United Socialist Party of Venezuela (PSUV) retains a healthy majority in the legislature.
However, even a token opposition presence will be more than he has had to face in the last five
years following the opposition’s misjudged boycott of the last elections. As a result, government
priorities will be focused on channelling resources into short-term measures aimed at retaining
popular support.
Further attempts to crack down on perceived bastions of the opposition, such as the media and
the private sector – including foreign investors – will form part of Chávez’ strategy, with foreign
operations the possible target of further nationalisations or expropriations. With the opposition
still divided and largely incapable of presenting a credible alternative to Chávez, it is likely that
the government will again perform strongly in December, despite growing public concern over
high crime levels, widespread corruption and persistent power problems.
Crime rates will continue to rise, with the government showing no sign of being capable of
tackling the problem. The politicisation of the police and armed forces will persist, undermining
their institutional capacity and public confidence in their abilities. Although the vast majority of
violent crime will remain confined to poor urban neighbourhoods, particularly in and around the
capital Caracas, foreign personnel face a credible risk to falling victim to such problems. Kidnap-
for-ransom and ‘express’ kidnapping are also increasingly serious concerns in major urban
centres, with Caracas again likely to be at the forefront.
The government will continue to turn a blind eye to, and in some cases actively support, the
activities of the Revolutionary Armed Forces of Colombia (FARC) guerrilla group in Colombia-
Venezuela border regions. However, this does not generally pose a direct security risk to
legitimate business operations, while verbal sparring between Chávez and his Colombian
counterpart will not deteriorate into armed conflict.
Asia
Asia regional overview
Asia came through the worst of the recent global financial and economic turmoil better than most
people expected, to end the year as the brightest spot on a very gloomy map of the world
economy. The region’s rebound will strengthen in 2010, reinforcing Asia’s stand-out status as
the leading destination for businesses and investors in search of growth. India, and above all
China, will remain the key to this outlook, growing at rates above 6% and 8% respectively.
The economic performance and relative political stability of Asia’s leading economies will
sustain resurgent excitement about the ‘Asian century’ as it enters its second decade. Underlying
this cliché is a very real long-term trend, visible in the business, economic, political and security
spheres, and amplified by the financial crisis. The year ahead will bring more manifestations of
Asia’s rise, and above all China’s, but the accompanying hype threatens to mask the fact that, as
well as growth and opportunity, there are also plenty of political, economic, security and
business risks ahead for Asia in 2010.
Growth and risk
In the second half of 2008, the atmosphere of near-panic about the global economy caused most
pundits to rush into excessively gloomy predictions about Asia’s 2009 prospects. In the second
half of 2009, with the mood dominated by Asia’s striking resilience compared with other
regions, the temptation instead is towards excessive optimism.
Overall, the outlook is certainly relatively bright, and not only because of China and India.
Japan, still Asia’s largest economy, will remain anaemic, but should manage to shake off further
recession. Indonesia will continue to impress on both the economic and political fronts, and the
‘Asian tigers’ (South Korea, Taiwan, Hong Kong and Singapore), Thailand and Malaysia are all
set to rebound from sharp recessions in 2009 to post significant positive growth in 2010. Among
smaller economies, countries like Vietnam and Bangladesh continued to grow rapidly despite the
crisis and are expected to expand at rates well over 5% in 2010, while countries as diverse as
Mongolia and Papua New Guinea may be moving towards greater realisation of long-recognised
resource potential.
Stimulant addiction
This outlook is the cause of justifiable optimism, but is only part of the 2010 story. Asia’s
resilience has been a reminder that healthy developing economies, especially in the region, have
strong underlying growth beyond exports, but it is certainly not evidence of some sudden new
self-reliance. Export demand and capital supply from developed Western economies are still
major factors for most, especially East Asian, economies. Asia’s resilience is mainly explained
not by an explosion of demand and trade within the region, but by the more straightforward
factors we highlighted in RiskMap 2009: relatively sound financial systems and balance sheets,
little exposure to ‘toxic assets’ going into the crisis, and governments willing and able to launch
swift and aggressive stimulus responses.
But sooner or later, that stimulus will have to be phased out. It remains far from clear that private
investment and consumption will soon recover to support rapid growth without large-scale
stimulus. Millions of Asians have lost their jobs, exports will make no rapid return to pre-crisis
levels, and most economies are plagued by over-capacity. So, while GDP growth rates are
picking up strongly, job creation, and private investment and consumption could prove more
elusive. Asia’s policy-makers are well aware of the risks to recovery, but face serious dilemmas.
Fear of another slump will bring great caution in tightening fiscal and monetary policies, but too
much caution could see inflation problems return. Countries such as China could see a return of
worrying asset-price inflation, while consumer price inflation may rise in India, Pakistan and
Vietnam, where concerns over food prices are never far away. Continued aggressive stimulus
spending could also put pressure on the healthy balance sheets and financial systems that made
Asia resilient to the crisis in the first place.
Political pressures
Most countries are likely to manage these dilemmas reasonably well and achieve solid growth as
expected. However, If the US and EU recoveries falter or further financial shocks occur, Asia’s
rebound could look less assured by late 2010. China is the only Asian economy that really offers
a substantial demand buffer and it is more vital than ever before to the performance of its
neighbours. But China is itself a prime example of some of the challenges facing regional
governments. It must rebalance its economy to derive more growth from private domestic
sources rather than government spending and exports, and must reduce industrial over-capacity
and undertake major financial reforms; all these tasks entail major social and political costs.
In China and elsewhere, rather than celebrating their recovery, leaders will be feeling strong
domestic political pressures to address short-term concerns about supporting growth and
employment. The widely recognised long-term need for rebalancing and reform will often come
second, and protectionist tendencies will be a persistent risk. Yet the region will prove a mixed
bag of reform and resistance, and some countries will manage to implement some liberalising
steps in an attempt to boost growth. Examples of this in 2009 have included South Korea’s free-
trade agreement (FTA) with the EU and Malaysia’s services sector liberalisation. Such moves
will create further opportunities for foreign investors in 2010, including in the key markets of
China, India and Indonesia. The prospect of growth in local markets, and relatively cash-rich
Asian players (not least governments) looking for bargains in developed markets, will also mean
the region remains a key player in mergers and acquisitions activity in 2010.
In most major economies, relative political stability remains an important pillar of continuing
strong economic prospects. The emergence of governments with strengthened mandates in India
and Indonesia in 2009 has paved the way for a period of greater political stability and policy
consistency, while in Japan the Democratic Party of Japan (DPJ)’s election victory after decades
of almost unbroken Liberal Democratic Party (LDP) rule could bring new impetus for reform.
But at the other end of the scale, a few countries face far more fundamental and severe
challenges than managing incremental economic policy adjustments and reforms.
Notably, in Pakistan – a key stability concern for the coming year – the urgency of finding
solutions to more serious problems will be particularly acute, given the fragility of the economy,
and the potential implications for an equally brittle political and security environment. The
outlook for President Asif Ali Zardari is uncertain given his isolation and unpopularity; the
opposition will continue to position itself to benefit from further blows to government credibility,
but an overt military takeover is not expected in the near term.
Testing transitions
Indeed, if 2009 was the year of stable political transitions among Asia’s major democracies
(India, Japan and Indonesia), then 2010 brings the prospect of less secure change among some of
the region’s more troubled and intransigent states. Burma (Myanmar) and Afghanistan will be
undergoing unstable political transitions, with parliamentary elections in both states likely to be
marred by allegations of voter intimidation, electoral manipulation and, certainly in the latter
case, violence. The Philippines and Sri Lanka are also set for political turbulence in the coming
year: the current administration in Manila must be replaced (with presidential, parliamentary and
local elections scheduled to take place in May), while the incumbent government in Colombo
faces parliamentary elections by April, and possibly a presidential election thereafter.
Meanwhile, the political scene in Malaysia and Bangladesh will remain precarious amid the
increasingly heated and confrontational relationships between ruling and opposition groups, with
the latter actively attempting to undermine the former through coalition defections and popular
unrest. In Bangladesh, this friction will put persistent pressure on efforts to consolidate the
country’s return to democracy in 2009, and cast doubt on its ability to fulfil its considerable
economic potential. In Malaysia, with the main opposition leader preoccupied with a legal battle,
Prime Minister Najib Razak may feel strong enough to call an early election in late 2010, but this
could bring a fierce and unpredictable contest. Elsewhere, Nepal will struggle to meet a deadline
to draft a new constitution by May as disputes continue between Maoist insurgents-turned-
politicians and the ruling multi-party coalition, putting the peace process under way since 2006
under strain.
Finally, while 2010 may very well pass with both men still firmly on the scene, the deteriorating
health of North Korean leader Kim Jong-il and Thailand’s king will be a considerable source of
political uncertainty – and potential instability – for their respective countries. Kim Jong-il has
recovered for now from serious health problems, but were he to become unable to lead, the risks
of destabilisation would greatly increase, while succession planning is a highly tense and
uncertain process. Similarly, rumours about succession and the king’s health will persist in
Thailand in 2010, generating jitters over economic and political security and the prospect of
another military coup. While the military is satisfied with indirect influence for now, it would
almost certainly step in should supporters of deposed former premier Thaksin Shinawatra seek to
exploit instability in a succession scenario.
Persistent insurgencies, intractable conflicts
Advances by extremists in Afghanistan and Pakistan will continue to alarm in 2010, with
implications reaching far beyond the borders of each state. Authorities in Pakistan face a battle to
contain Islamist extremists in safe havens in the tribal areas of the north-west and to prevent a
further intensification of their hold on parts of Sindh and Punjab, as well as Baluchistan. The
state is not under threat, but militants will continue to challenge its authority and trouble the US
administration that has made stabilising this region a top priority. In Afghanistan, a larger
presence of foreign troops will not silence insurgent groups. Operating from a position of
strength, they have no incentive to take part in negotiations. But militant safe havens on the
Afghanistan-Pakistan border have a limited direct impact on insurgencies elsewhere in Asia,
despite their role as sites and exporters of training, expertise, planning, motivation and
recruitment to militants with a multitude of backgrounds and objectives.
While there is evidence of some communication between, for example, the regional extremist
Jemaah Islamiyah (JI) in Indonesia, Muslim separatists in southern Thailand and the Philippines,
and al-Qaida, militant and insurgent activity will remain in most cases local in motivation and
execution. Fears that the separatist insurgency in Thailand could morph into an Islamist jihad are
dwarfed by the reality that in the near term the campaign will remain first and foremost a
struggle for self-representation, with a limited impact on the national business environment. All
the same, the potency of a brand of Islamist extremism with widespread appeal means the spectre
of terrorist attack continues to hang over key cities across the region. While it is striking that
India has escaped a major terrorist incident since the Mumbai attacks of November 2008,
carnage returned to the Indonesian capital in mid-2009 with the first terrorist strike in the country
since 2005. Both remain vulnerable to being hit again in the immediate term.
Confidence in state-led counter-terrorism initiatives across the region is limited. In Indonesia, the
authorities have, with a flurry of action since the Jakarta hotel bombings of July 2009, begun to
re-earn the plaudits won in recent years for effective efforts to defeat the numerous splinter cells
and offshoots of JI prior to the strikes. But such successes belie a longer-term challenge to stay
on top of well-entrenched terrorist networks that, as the Jakarta attacks showed, have in some
areas far greater support than was initially understood.
Improvements in Indian security infrastructure can only partially account for the absence of a
major terrorist attack on Indian soil in 2009. Hosting the Commonwealth Games in Delhi in 2010
will be a key test for India’s authorities, under pressure to improve problems related to
intelligence-sharing and rapid response capacity. And while increasing radicalisation among its
millions of Muslims poses a genuine threat to stability, an extreme leftist insurgency also
threatens to deepen and widen.
The fluidity of militant identities will complicate government efforts to counter terrorism.
Difficulties are illustrated by claims of responsibility for attacks from little-known or obscure
groups such as the Indian Mujahideen/Deccan Mujahideen in India or the Baluchistan Liberation
United Front (BLUF) in Pakistan, or by the provision of a safe haven by one group for another,
as in the case of the Moro fronts and the Abu Sayyaf group in the southern Philippines. There
too, the communist New People’s Army faces disassembly from the edges, but remains a threat
in rural areas beyond state control. The Sri Lankan government will hope that its military defeat
of the separatist guerrilla Liberation Tigers of Tamil Eelam (LTTE) sets a precedent for states
battling insurgent groups. But the all-out military effort was costly in lives and funds, and has
produced unsatisfactory results in that its treatment of Tamils has created the conditions for
further conflict. The struggle for self-rule is likely to continue in some form.
The Asian century turns ten
Amid all these problems and risks, growth and opportunities will persist and the fundamental
challenges for foreign business leaders in Asia remain the same. They face intense pressure to
stay ahead of trends, adjust to and profit from the region’s rise, and compete in very different
operating environments, while upholding global corporate standards to manage potentially
severe risks. As the ‘Asian century’ turns ten, most local markets are no longer so alien, and
many leading foreign businesses are already well established. But for new entrants and veteran
Asia players alike, the balancing act required for long-term success in the increasingly complex,
competitive markets is getting more, not less, difficult. Distinguishing between hype and reality,
risk and opportunity will continue to demand strong understanding and attention.
Afghanistan
Political risk: E
Security risk: H; E in south, east
With parliamentary and district council elections due in 2010, political turbulence is set to
continue. The presidential election of August-November 2009 left scars in the form of deepened
opposition to the national government and widespread anger at the presence of foreign troops
and organisations. Organisers of the 2010 polls will be under pressure to ensure a credible vote
that can rebuild respect among Afghans for the political process. A reasonable turnout, effective
security measures and the success of efforts to minimise perceptions that external forces are
dictating developments will be critical to the success of the elections.
Emerging from a flawed electoral process, President Hamid Karzai will operate with a limited
mandate and limited capacity to accelerate progress on political development, poverty
alleviation, security and investment. The enduring influence of regional power-holders will
shape cabinet appointments and policy-making. While there will be encouragement within
Afghanistan for infrastructure development and the exploitation of natural resources, weak
institutions and poor security will continue to pose a threat to such projects and to foreign
investor appetite for engagement in the country. There is little prospect of the security situation
improving.
Higher numbers of foreign troops may be able to stabilise small parts of provinces in which they
are concentrated, such as Helmand and Kandahar, but their activities will also risk displacing
violence. The authorities will struggle to prevent the spread of anti-government militancy, and
the next year may be characterised as much by the setting of withdrawal dates by foreign forces
as by pledges of more troops. There will be a strong focus on training Afghan security forces,
with an attendant risk that the rush to recruit could erode standards. Talk of negotiations with
moderate Taleban elements will surface periodically, but militants will have no incentive to
respond favourably as long as they operate from a position of strength. The security situation will
test US President Barack Obama and US relations in the region, particularly with Pakistan,
where intensified counter-terrorist activity could have negative implications for Afghanistan.
Australia
Political risk: I
Security risk: L
One of the very few Western, developed countries to avoid a full-blown recession in 2009 in the
global economic downturn, Australia is poised to follow through in 2010 with very modest
growth. Having responded with a large stimulus budget – targeting household consumption and
big infrastructure projects – the Australian Labor Party (ALP) government will in 2010 face the
dilemma of curtailing spending to avoid inflationary pressures. Fears that running the budget into
successive deficits for the first time in nearly a decade would destroy its thin credibility on
economic management among the business community and the electorate have proved
unfounded. Rather, the ALP has outmanoeuvred the opposition Liberal Party on the economy
and exploited its paralysing divisions over how to vote on a controversial carbon emissions
trading scheme. While the government can run until early 2011, Prime Minister Kevin Rudd is
likely to take advantage of the opposition’s disarray to call an election in mid-to-late 2010 – a
poll that his party would be likely to win, though with a slightly reduced majority.
Bangladesh
Political risk: M
Security risk: M; H in Chittagong Hill Tracts
Having reverted to democratic rule in January 2009, Bangladesh has returned to business as
usual on the political front, with familiar patterns likely to prevail in 2010. The long-standing
competition between the ruling Awami League (AL) and the opposition Bangladesh National
Party (BNP) will remain at the fore. While the government has an overwhelming majority in
parliament, the BNP and Jamaat-e-Islami (JI) retain significant levels of grassroots support, and
have the capacity to restart the political gridlock that plagued the country ahead of the
suspension of democratic rule in January 2007.
Political tensions are likely to build during 2010 as the trials of individuals involved in the
February 2009 paramilitary Bangladeshi Rifles (BDR) mutiny and accused of siding with the
Pakistani military in Bangladesh’s 1971 war of independence gain momentum. Both trials are
likely to expose fissures between ruling and opposition parties, and the civilian government and
military. While this will pose threats to stability, there is likely to be little appetite to unseat the
government following the recent period of military rule. However, renewed political instability
could create a vacuum in which Islamist extremist groups, such as the Jamaat’ul Mujahideen
Bangladesh (JMB) and Harkatul Jihad al Islami (HuJI), regain influence, in turn potentially
straining relations with India.
The global economic downturn has not had a significant adverse impact, but the country will be
vulnerable in 2010 to second-round effects of a prolonged recession, such as declining
remittances and textile exports. Additionally, resurgent global commodity prices threaten to
renew inflationary pressures and concerns over a ‘silent famine’. The government pledged
several reforms in its latest budget, including expanding the tax base and streamlining tax
administration; an agricultural credit programme; and a public-private partnership (PPP) scheme
to attract $28bn in infrastructure investment by 2014 to achieve growth of 8% by 2013 and 10%
by 2017. Its efforts in these respects are likely to be hindered in 2010 by the threat of natural
disasters, renewed general strikes and social unrest, and infrastructure bottlenecks, notably in the
power sector.
Bhutan
Political risk: L
Security risk: L
Moves towards the establishment of both a counter-terrorism unit and a financial intelligence
unit in 2009 pointed to the emergence of greater risks in Bhutan. The former was a response to
the continuation of small-scale bombings that are often attributed to Nepal-based Maoist
militants. The latter was established to focus on money-laundering, corruption and suspicious
financial activities. Despite these moves, the operating environment remains largely unchanged.
A transition from absolute monarchy to constitutional monarchy is proceeding peacefully, albeit
slowly and incrementally. The king continues to exercise considerable influence. Managing the
aftermath of the 2009 earthquake – estimated to have caused damage worth millions of dollars –
will continue to test the authorities. Relations with neighbouring states will be a further
challenge: Nepal continues to host thousands of ethnic-Nepali refugees from Bhutan, while the
country remains reliant on India in economic and defence terms.
Burma (Myanmar)
Political risk: H
Security risk: L; H on borders with China, Bangladesh, Thailand
Security across the country is set to tighten in early 2010 as the ruling State Peace and
Development Council (SPDC) prepares for long-anticipated general elections due to be held in
2010. The polls will be a largely bogus undertaking, heavily choreographed to ensure the
SPDC’s transition from military junta to civilian government, and opposition political groups
will continue to be excluded from the process. While the same generals will remain in charge,
clamping down brutally on any public opposition, the transition to civilian government holds the
prospect of setting in motion longer-term change and will help to ease the negative impact on
decision-making in the current administration caused by the military’s all-pervasive role. There
is also a remote possibility that, after the transition, a military-backed government will loosen its
posture towards domestic opponents and engage foreign governments, notably the US.
Regardless, Burma will remain a very difficult place to do business, fraught with serious
corruption and government interference at all levels. As such, the economy will remain firmly in
the control of regime cronies, and the main sources of income will be from lucrative oil and gas
deals struck with Thailand, China and India.
Cambodia
Political risk: M
Security risk: M
Prime Minister Hun Sen’s position is unlikely to weaken in 2010. Opposition parties were
decimated at the 2008 election and remain marginalised by the threat of litigation under the
outdated penal code. The main opposition Sam Rainsy Party (SRP) is one of the most outspoken
domestic critics of the government, but poses little challenge to the dominant Cambodian
People’s Party (CPP). No successor to Hun Sen exists within the CPP, and his demise in 2010
would seriously destabilise the country, though such an outcome is highly unlikely. The
economy is not expected to grow in 2009 after the recent period of dramatic inflation and food
insecurity, combined with the negative impacts of the global downturn and domestic real-estate
speculation. Recovery will be slow in 2010, but agricultural and garment exports, tourism
revenue and donor assistance should keep the economy going. However, investment in large-
scale construction projects may take longer to rally. Cambodia’s maritime oil and gas income
prospects would improve were diplomatic relations with Thailand to ease following recent
tensions over border delimitation issues. The government will continue to pursue liberal-market
policies, but corruption will remain endemic.
China
Political risk: M; L in Hong Kong
Security risk: L; M in non-central districts of cities in Guangdong Province; remote border

areas; and Xinjiang’s south-western prefectures and regional capital, Urumqi
The main task facing Chinese leaders in 2010 will be consolidating economic recovery. GDP
growth will probably remain very rapid, in excess of 8%, but China’s downturn in late 2008 and
early 2009 was more than just an externally driven blip before resumption of double-digit
growth. Beijing knows that it has to rebalance the economy, and this will mean measures that
should reduce trade frictions as well as increase opportunities for foreign businesses. For
example, it must engineer stronger private domestic demand (including by liberalising the under-
developed services sector and increasing welfare spending) and take on further financial-sector
reforms. Ultimately, substantial currency appreciation and a fundamental shift in monetary
policy will be required. Another key challenge is further industrial consolidation and
restructuring to reduce over-capacity.
However, all these tasks involve potentially high domestic political obstacles and costs. China’s
leaders have not yet had to make ‘leaps in the dark’ as great as their predecessors who took
China into the WTO in 2001; 2010 will be a test of whether the current leadership is willing and
able to take the bold steps that appear increasingly necessary. Failure to do so is unlikely to
derail recovery in 2010, but the longer such tasks are delayed, the more the risks to the economy
will grow. Meanwhile, the more immediate need to maintain rapid growth, support struggling
exporters and create jobs will sustain calls for more stimulus measures, but this brings other
risks: the flood of liquidity seen in 2009 has raised fresh questions over bank health and the risk
of asset price bubbles.
Even with the next leadership transition not due until 2012, these economic policy dilemmas will
play into existing factional differences, but will be broadly contained. Leaders facing internal
criticism are often more prone to nationalist and populist pressures of the kind that may have
contributed in 2009 to incidents such as the arrests of four Rio Tinto employees in Shanghai on
charges including commercial bribery. However, it is unlikely that such episodes will become
more frequent in 2010. High-level corruption crackdowns will continue to periodically expose
senior local officials and tycoons, and foreign companies are becoming more likely to face
scrutiny, but the wider operating environment has not deteriorated despite high-profile cases in
2009.
The social and economic pressures that have long produced many thousands of serious social
unrest incidents around China each year will continue unabated in 2010, with disputes relating to
land and labour issues remaining prominent. However, these localised incidents still show little
sign of posing any wider threat to social or political stability, which are not seriously in question.
Further ethnic unrest in Xinjiang is possible, but will probably remain rare and has no significant
implications for the rest of the country. Abroad, China will be increasingly willing to use its
growing influence on the international stage. This will be seen mainly in limited, selective use of
its economic leverage, and trade frictions will persist. Spats with neighbours such as India and in
the South China Sea could bring incidents that raise diplomatic tensions, but, overall,
maintaining stable external relations – especially with the US – will remain the primary foreign
policy goal.
East Timor
Political risk: M
Security risk: M
The security situation in East Timor continues to improve, and the UN plans to begin
withdrawing police and military support from February 2010, though the draw-down will be
gradual to avoid a similar vacuum to that which led to violence in 2003. Despite its satisfactory
performance to date, Prime Minister Xanana Gusmao’s coalition government will continue to
face criticism over the slow pace of reform and its weak mandate. Post-conflict issues will take
years to resolve, especially amid President Jose Ramos Horta’s continuing refusal to allow the
pursuit of war-crimes charges against the perpetrators of violence during the struggle for
independence from Indonesia. While donor assistance will continue to flow, the economy will be
primarily sustained by income from the Petroleum Fund, which should exceed $5bn in 2010. A
dispute with Australia over where to process hydrocarbons sourced from the Greater Sunrise
natural gas fields is unlikely to be resolved in East Timor’s favour, and looks set to prove
contentious in 2010. Although East Timor’s relationship with Indonesia will improve,
Australia’s role will remain controversial.
Fiji
Political risk: H
Security risk: M
Fiscal and monetary policy in 2009 was just effective enough to negotiate the economic
downturn, but negative annual growth is expected. Promised elections to return Fiji to
democracy have been postponed until 2014 (with a new constitution due in 2013), and this will
be a point of contention in 2010 tied to increasing international isolation. The military leadership
of interim Prime Minister Commodore Frank ‘Voreqe’ Bainimarama is expected to endure in
2010. The interim government has silenced its most vocal critics through strong-arm tactics, and
the prospects for short-term social unrest have diminished. However, if the economy fails to pick
up, the prospect of upheaval would increase, particularly if upward inflationary pressure returns,
unemployment continues to rise and public-servant salaries go unpaid.
Forecasts of further poor weather conditions and the uncertain political situation darken the
economic outlook in 2010. Tourism revenue remains the most viable path to recovery (sugar,
bottled water and gold exports have fallen), but a rally will depend on a stable and secure
environment. Bainimarama will keep the money flowing to the military, whose officers and
rank-and-file have benefited since the coup from choice public-sector jobs and substantial pay
increases. If the economy plumbs new depths, the military and interim administration could yet
turn on Bainimarama.
India
Political risk: M
Security risk: M; H in Assam, Kashmir, Manipur, Nagaland, Tripura; Bihar, Jharkhand,

Chhattisgarh, southern districts of Orissa, northern areas of Andhra Pradesh, western
districts of West Bengal and eastern districts of Maharashtra
The re-election and strengthened mandate of the Indian National Congress (Congress)-led United
Progressive Alliance (UPA) coalition in the May 2009 parliamentary elections paves the way for
a period of relative political stability and policy consistency in 2010. However, the government
will continue to suffer a split personality caused by its twin market reform and pro-poor agendas.
The resultant tensions will be exacerbated by pressures from coalition partners and opposition
parties. Although weakened at the national level, they will continue to exert authority at state
level on sensitive issues such as the pace and process of land acquisition, disinvestment
(privatisation) and raising FDI limits in certain ‘sensitive’ sectors (such as insurance, banking,
retail and defence).
Economic growth will remain robust, with the economy escaping the worst of the global
downturn. However, latent risks will continue to threaten growth prospects: a poor harvest in
2009, coupled with the resurgence in global commodity prices, could drive up food prices and
fuel inflationary pressures in 2010. The government will be constrained in its efforts to ease
these pressures by a growing fiscal deficit. It will attempt to boost state revenue with initiatives
including the introduction of a national goods and services tax to replace a plethora of indirect
state and central taxes; accelerating disinvestment of public-sector utilities; and reforming the
pricing of petroleum products. But efforts to implement these reforms will come up against
political obstacles.
India will continue to suffer from several long-standing security risks, ranging from extreme-
leftist insurgents ((Naxalites, also known as Maoists) in central and eastern states to separatists in
the north-east and Jammu and Kashmir, and sporadic communal (religious), ethnic and caste
unrest. The proliferation of the Naxalite problem will be a particular concern in 2010. While the
insurgency will remain a largely rural phenomenon, attacks are growing increasingly bold and
pose a direct threat to extractive industries. India in 2009 avoided any high-profile terrorist
attack, reminiscent of those in Mumbai in November 2008. However, relations with Pakistan
remain precarious and, with the surge in militant infiltration across the Line of Control (LoC) in
Kashmir, tensions between the two could be reignited, especially in the event of a high-profile
terrorist attack on Indian soil or against Indian interests.
Relations with the US will remain cordial, if somewhat distant, as the Obama administration
remains preoccupied with Pakistan and Afghanistan. Relations with China continue to deepen at
the economic level, and to see greater interdependence at the political level on issues of mutual
interest (such as climate change). However, mutual mistrust will continue to strain the
relationship amid sporadic tensions over disputed borders, military modernisation initiatives and
encroachment into each others’ perceived ‘spheres of influence’.
Indonesia
Political risk: M
Security risk: M; H in Papua, Central Sulawesi, Maluku
Indonesia’s smooth legislative and presidential polls in 2009, which returned President Susilo
Bambang Yudhoyono for a second and final term, have the country on course for continued
economic and political reform in 2010 and beyond. The elections reiterated that the country is on
track to further capitalise on its enormous natural resource wealth; the vote for Yudhoyono was a
vote of support for his first administration’s anti-corruption efforts and steady economic and
fiscal reforms. The new government will work to reduce inefficiency in the public service,
rampant corruption and conflicts of interest, and improve Indonesia’s reputation with foreign
investors. The cabinet is a balance of political and technocratic appointments, and is likely to
give closer attention to fiscal reform and addressing issues undermining moves to harness natural
resources, such as conflicts between forestry and mining.
Yudhoyono faces the pressure of huge expectations placed on his shoulders by locals and foreign
investors alike. The president can be expected to launch most of his reform agenda in 2010
(particularly bureaucratic reform), given that it will take at least one-to-two years to enact. He
will be mindful that by late 2011 attention within parliament – and even his own party – will
have turned towards his successor and the 2014 presidential race. Moreover, the new cabinet is
likely to suffer from the same problems of inertia, inter-party rivalry and backroom dealing as
did its predecessor, and only some of the president’s reform agenda will make it through
parliament intact. The cabinet’s success in avoiding such pitfalls and reaching consensus will
hinge on the leadership of Yudhoyono and Vice-President Boediono.
At the same time as the government launches new reform initiatives in 2010, it will be rigorously
reviewing internal security and counter-terrorism laws in light of the July 2009 hotel bombings
in the capital Jakarta. The security forces’ reputation was badly damaged by those attacks, but
subsequent successes – notably the tracking and killing of Noordin Top, the region’s most
wanted terrorist – have restored some confidence. The president in response has floated the
involvement of the military in counter-terrorism work, a move rejected by civil-society groups
pointing to the military’s reputation, tarnished in the Suharto years. The attacks revealed the
continuing terrorist threat facing Indonesia and will remain fresh in the memory in 2010,
providing impetus for renewed counter-terrorist efforts and co-operation with governments in the
region. Further incidents in the near term may even see the introduction of summary arrest
powers.
Japan
Political risk: L
Security risk: L
The Democratic Party of Japan (DPJ) graduated from long-time opposition to ruling party with
flying colours in 2009, ending the political deadlock that had prevailed for the preceding two
years and offering the prospect of more productive governance in 2010. With control of both
houses of the Diet and a large majority in the more powerful lower house, it has energetically set
about implementing its agenda and will continue to do so in 2010, particularly keen to
demonstrate its effectiveness ahead of July’s upper-house polls. While electoral calculations will
spur activity, they will also limit its scope: the DPJ’s vigour should not be mistaken for
commitment to potentially unpopular structural reforms needed to raise longer-term growth
potential. Indeed, the DPJ will reverse some of the reforms instigated by former prime minister
Junichiro Koizumi, notably the high-profile privatisation of Japan Post, citing the harmful effects
of excessive ‘market fundamentalism’.
After the economy contracted by more than 5% in 2009, a likely return to modest positive
growth will be welcome. However, the DPJ may have to moderate pledges to cut spending to
ensure this growth, postponing efforts to improve the longer-term fiscal outlook. The DPJ is
unlikely to face severe political pressure in 2010, with the opposition Liberal Democratic Party
(LDP) set to spend much of the year regrouping. DPJ internal stability and relations with small
coalition partners should prove manageable, but will face tests as reforms of the powerful
bureaucracy are undertaken. If recovery falters or the new cabinet proves as prone to gaffes and
controversy as some of its LDP predecessors, the government’s public popularity could slide.
Only if it negotiates this period and performs strongly in the July polls will more ambitious
economic policy initiatives become feasible.
The DPJ will take tentative steps to reduce dependence on the US in favour of a more
independent, active and Asia-oriented foreign policy. A more assertive and circumspect
approach to relations with the US will cause greater uncertainty and friction than for many years,
but should not be viewed as signalling dramatic shifts. The US-Japan alliance will remain the
cornerstone of Japan’s security policy for many years to come. Periodic spats with China and
South Korea, and threats from North Korea will underline this reality, but will not lead to
conflict. Domestic security risks will also remain low; a modest upward trend in crime will
continue, but from an extremely low base.
Laos
Political risk: M
Security risk: M
The communist Lao People’s Revolutionary Party (LPRP) continues to pursue minor reforms,
opening up decision-making to critical review by citizens. President Choummaly Sayasone and
Prime Minister Bouason Bouphavanh will maintain their positions unchallenged by ranking
party members in 2010. The economy is expected to record positive growth in 2009 and 2010,
but will remain exposed to global fluctuations, mainly low commodity prices, and continued
slow FDI rates. Revenue shortfalls in 2009 will carry over in an increased fiscal deficit in 2010,
but Laos has a good debt-repayment record and the impact should be manageable, though
staging the December 2009 South-east Asian Games will add to debt pressures. Hydroelectric
energy is likely to contribute significantly to growth in 2010 and the mining sector is set to
improve as commodity prices climb. Laos will remain largely free of major internal and external
security threats, with the threat posed by the Hmong insurgency significantly reduced. The
process of repatriation of Hmong refugees in Thailand to Laos is on course to extend into 2010,
but is unlikely to strain the bilateral relationship. The government will continue to put down any
minor expressions of dissent.
Malaysia
Political risk: L
Security risk: L
Political and economic decision-making in 2010 will be dominated by the next general election.
The polls is due in 2013, but is likely to be held sooner – perhaps as soon as late 2010 – once
Prime Minister Najib Razak has secured a personal mandate and the economy has righted itself.
Anwar Ibrahim’s opposition Pakatan Rakyat (People’s Pact, PR) coalition will attempt to keep
up the pressure on Najib. The year will see continued discord among component parties of both
the ruling Barisan Nasional (National Front, BN) coalition and the PR. These parties, generally
constituted along Malay, Chinese or Indian lines, are struggling to adapt to the demands of a
younger generation seeking a voice. Old and unpopular patronage systems will be challenged,
offering some hope that greater transparency may eventually be attained in the public sector.
Najib has been carefully freeing the economy from decades-old New Economic Policy (NEP)
requirements. This trajectory will continue incrementally in 2010, though some core NEP
policies will be retained to pacify more radical ethnic-Malay elements. An expected return to
economic growth should boost Najib’s standing, though the pace of the recovery will largely
remain beyond his government’s control. Stimulus spending underpins forecasts of a return to
positive growth from 2010, while several key economic indicators – including a still-substantial
current-account surplus, relatively secure financial system and banking sector, and solid foreign-
exchange reserves – are comparatively sound.
The violent separatist insurgency in Thailand’s southern provinces appears contained and is
unlikely to spill over into Malaysia. Malaysia is likely in 2010 to play a greater negotiating role
in resolving conflicts in both Thailand and the Philippines’ restive Mindanao region.
Domestically, tensions over calls to dismantle the colonial-era Internal Security Act (ISA) are a
potential flashpoint, while friction between Malays, Indians and Chinese will remain a potential
trigger for inter-ethnic violence.
Maldives
Political risk: L
Security risk: L
The Maldives will continue to struggle to consolidate its transition to democracy under President
Mohamed Nasheed. The country in 2008 implemented a new constitution and in 2009 held its
first multi-party presidential and parliamentary elections. Bickering between the ruling
Maldivian Democratic Party (MDP) and opposition Dhivehi Rayyithunge Party (DRP) over
issues such as privileges and protection for former president Maumoon Abdul Gayoom threatens
to fuel political gridlock and delay the process of resolving outstanding issues such as the
devolution of powers to local authorities. These tensions will be exacerbated by challenges such
as the risk of prolonged global recession further weakening the lucrative tourism sector; the need
to curb the fiscal deficit; and dealing with growing levels of crime, drug addiction and social
unrest brought on by over-crowding in the capital, poor infrastructure in the outlying atolls and a
lack of economic opportunities. These developments could act as a catalyst for the growth of
militant Salafi Islam over the longer term.
Mongolia
Political risk: M
Security risk: M
With a deal finally reached on the flagship Oyu Tolgoi mining project, 2009 brought a genuine
breakthrough for Mongolia. The coalition government’s ability to maintain sufficient cohesion
and effectiveness to get the necessary legislation through parliament is a promising achievement
on the political front, after years of conspicuous failure. Although operation is years away,
employment and economic benefits from Oyu Tolgoi’s development may ease public and
political hostility towards foreign investment, facilitating further improvements in the investment
environment. If this positive momentum can be sustained with continued supportive political
conditions, the country could finally start to realise some of its potential through increased
investor interest in 2010.
However, the bullish atmosphere following the Oyu Tolgoi deal risks obscuring the fact that
some fundamental features of the investment and operating environment, such as regulatory and
legal systems and corruption, will remain very challenging. Stability of governments and policy
has long been unpredictable, and improving credentials in these regards will have to be proved
over a longer period to consolidate and build on the progress made in 2009. The recent
resignation of the prime minister and the prospect of further tension between the two main
parties (one dominates parliament, the other holds the presidency) are a reminder that this is not
assured. Recovering mining revenues and increased foreign investment will bolster recovery
from the economic downturn, but the government will need to continue efforts to show greater
fiscal responsibility.
Nepal
Political risk: H
Security risk: M; H for south
Political instability will continue to undermine the operating environment in 2010, four years
after a peace agreement ended a ten-year Maoist insurgency. Now operating in the political
mainstream, the Unified Communist Party of Nepal (Maoist) (UCPN (M)) will not return to the
battlefield, but its leaders are entrenched in a battle with opponents in the Constituent Assembly
(the de facto parliament), former fighters are locked in UN camps and supporters are wondering
what they will gain from political engagement. As a result, destabilising confrontation is possible
in 2010. Maoists have the capacity to stage protests that could have a significant political and
economic impact. Mistrust between Maoist leaders and their counterparts from the Nepali
Congress and the Communist Party of Nepal-Unified-Marxist-Leninist (CPN-UML) will remain
a key obstacle to political development. Internal succession issues will bedevil party
management and threaten to cause long-established groups to splinter. Smaller parties
representing the interests of people from the southern Terai region will have the potential to
operate as the makers or breakers of governments.
Grievances relating to perceived discrimination and political representation will continue to fuel
violence in the south, and will demand attention from the drafters of a new constitution that is
due to be completed by May 2010. It is difficult to see how this target can be met given the
extent to which the key political players remain divided on emotive and critical issues, such as
integration of former Maoist rebels into the armed forces, appropriate voting and political
processes, and questions of national identity. Progress on constitution-drafting will be nudged
along by donors in the West and watched closely by neighbours India and China, which will
remain anxious to ensure that developments in Nepal support their own national interests. But
their ability to influence events will be undermined by weaknesses in state capacity, something
that is also a major impediment to economic development, not least because it reduces the
prospect of effective policy-making and implementation on infrastructure challenges such as
transport problems and power outages. Global financial difficulties have had a limited impact on
the economy, but any prolonged downturn that crushes remittance inflows could be extremely
damaging.
New Zealand
Political risk: I
Security risk: L
The global downturn hindered the efforts of the new National Party-led coalition government of
Prime Minister John Key to stimulate the economy and advance a pro-business, economic
liberalist agenda. Key intends to open up the government’s insurance monopoly in the near term
as well as possibly offer corporate tax concessions to foreign investors in the financial services
sector. The government is likely to play it safe with policy to avoid undermining its prospects for
elections in 2011. Despite the downturn, Key’s government oversaw growth in the second
quarter of 2009, after five consecutive contractions, but low tax revenues and the legacy of
earlier policy decisions allowed the budget deficit to deepen and debt to expand. Despite political
stability and sensible monetary and fiscal policies, growth is expected to be modest in 2010.
North Korea
Political risk: E
Security risk: L
North Korean leader Kim Jong-il’s poor health brought forward succession planning in 2009,
and his youngest son, Kim Jong-un, appeared to have been anointed within the elite, only for
succession talk to be quashed later in the year. Kim Jong-il was well enough to remain in control
of the regime during 2009, but both his health and the prospects for succession will remain major
sources of uncertainty in 2010. Neither the youthful Jong-un nor any other figure has the
authority to play the same role as Kim Jong-il, whose death or incapacitation would significantly
increase the risk of regime instability (particularly if it comes before Jong-un can build a power-
base, which will take years).
Meanwhile, there will be little relief in 2010 from the familiar state of perpetual domestic
economic crisis, and confrontation with South Korea and the US. Meaningful talks with the US
resumed in late 2009 and a return to multilateral nuclear negotiations is likely in 2010, but with
little prospect of overcoming obstacles that have defied repeated attempts to settle nuclear and
wider diplomatic issues since the early 1990s. Those hoping that China can offer a quick fix to
the nuclear crisis will continue to be disappointed, but alarmist predictions will prove equally
wayward: neither internal developments nor the ups and downs of external relations are likely to
bring military conflict beyond threats, tests and occasional border incidents.
Pakistan
Political risk: H
Security risk: H; E in FATA and Afghan border areas
Contrary to much speculation, we do not foresee Pakistan being on the verge of collapse in 2010,
though it will face serious challenges. The outlook for President Asif Ali Zardari is decidedly
uncertain. He has failed to sustain the levels of support that brought him and the Pakistan
People’s Party (PPP) to power after the death of his wife, former prime minister Benazir Bhutto,
in 2008. He lacks his wife’s appeal among PPP supporters and is dangerously isolated by poor
relations with the opposition, military and judiciary. Lurking on the sidelines is the opposition
Pakistan Muslim League-Nawaz (PML-N). The party will maintain a low profile, but could cast
aside this strategy at an opportune moment, such as if the country sees a slide into further
violence or economic meltdown.
Overt military intervention remains unlikely in the short term. The army has reputational issues
following the Musharraf era, and would risk US ire and the wrath of the reforming judiciary
were it to seize power. However, the army could look to opposition leaders to act on its behalf.
Apart from the National Reconciliation Ordinance (NRO), other contentious issues could force
opponents of the PPP-led government to move against it. These include policy towards the
activist chief justice and his reform agenda; debate over moves to reform the constitution and
weaken the presidency; and management of relations with the US.
Relations between the military and civilian government have soured amid fresh conditions
imposed on US aid. Accusations of ‘selling out’ national interests to the US can deal a fatal
below to leaders, leaving Zardari on thin ice despite securing a long-awaited influx of funds from
Washington. While there is evidence that Pakistanis are aware that extremism poses a serious
threat and are generally supportive of military operations to tackle militants, they remain deeply
cynical about the US and opposed to co-operating with US counter-terrorism activities such as
drone strikes.
The military will continue to exercise significant control over security and foreign policy, but
tough action against militants will only be effective if sustained and combined with measures to
tackle sources of radicalisation. There is a danger that deals struck with militant and tribal
commanders to ease the progress of military operations and meet short-term objectives will have
destabilising implications over the longer term. High numbers of casualties, particularly if
combined with continuous militant attacks, may start to dent public support for military counter-
terrorism initiatives, forcing some refocusing of policy towards peace talks and negotiations.
The economy remains extremely fragile. Islamabad will continue efforts to secure funding from
overseas, but its efforts will continue to bear limited fruit. The government may struggle to meet
the conditions required to receive more IMF funding and, while US aid is not in doubt (despite
the conditions attached), other donors will be reluctant to send funds. Inflation and
unemployment will remain key concerns, as will the potential for protests amid frustration over
economic and energy problems. There is little prospect of the government fulfilling promises to
alleviate power shortages.
Papua New Guinea
Political risk: M
Security risk: H
A multi-billion-dollar liquefied natural gas (LNG) development involving multiple foreign
investors is set to begin in late 2009, but the government is still some way from being prepared
for the anticipated major inflows of capital (to kick-start the project) and foreign workers. Stalled
or incomplete stakeholder compensation deals threaten to cause continuing tensions, and
corruption is expected to spike as subcontractors and politicians seek personal gain. The
government and bureaucracy lack the administrative and policy-making capacity to handle such
a massive project, potentially leading to problems in 2010.
The government of Sir Michael Somare should be able to fend off the anticipated no-confidence
motions expected to dominate national politics in 2010. Succession issues will come into play
once Somare has secured his political legacy and the LNG project comes online. While
government instability is unlikely to derail the project, it will add to the country’s security woes,
which will almost certainly intensify as a direct result of high social and economic expectations
generated by the project, and its expected failure to deliver any benefits to poorer citizens living
outside the project area.
Philippines
Political risk: M
Security risk: M; H in south
The general election planned for May and the resultant upheaval at all levels of government will
dominate 2010. Policy-making activity is likely to grind to a halt by February as all levels of
government join official campaigning. Current front-runners for the presidency include Benigno
‘Noynoy’ Aquino III under the Liberal Party banner, Gilberto ‘Gibo’ Teodoro under the Lakas-
Kampi-CMD party, Manny Villar of the Nacionalista Party and Francis ‘Chiz’ Escudero. The
nation’s first computerised elections are unlikely to run smoothly and the losers will undoubtedly
challenge the results.
Corruption in government is the most likely explanation for a massive budget blow-out in 2009,
but the global downturn contributed by reducing revenue from personal and corporate tax and
customs receipts. Stimulus spending is expected to contribute to positive growth in 2009. The
next administration will inherit fiscal debt, but should avoid defaulting on loan repayments
thanks to good prospects for a return to modest growth in 2010. Remittances will remain a
lifeline for the economy. Security concerns will continue to hinder the mining sector, while full
privatisation of state-owned power-generators will take up to four more years.
The Armed Forces of the Philippines (AFP)’s goal of defeating the communist New People’s
Army (NPA) by the end of President Gloria Macapagal-Arroyo’s term will not be accomplished
and peace talks will continue towards an uncertain outcome. The NPA will remain the most
serious security threat. Despite the late 2008 breakdown in the peace process with the Moro
Islamic Liberation Front (MILF) and subsequent violence by breakaway Moro commanders,
peace talks are expected to resume in 2010. The MILF central command will aim to maintain a
cessation of insurgent activity, but breakaway groups will probably continue their criminal
activities. AFP offensives, supported by embedded US military forces, against the Islamist
extremist Abu Sayyaf in south-western Mindanao are expected to continue. AFP activity will
keep the threat contained within Mindanao, but will provoke retaliatory action from affected
groups across the region.
Singapore
Political risk: I
Security risk: L
While Singapore in 2009 suffered its worst economic contraction since independence in 1965,
the investment and business environments show few outward signs of a downturn. Leveraging its
clean regulatory credentials and the People’s Action Party (PAP)-led government’s agility in
redirecting public investment to new growth sectors, Singapore is poised to return to positive
growth – of up to 4% – in 2010. Nonetheless, the downturn has pushed to the fore a continuing
point of public contention, namely the ever-increasing role of foreign workers in the economy.
Thousands of lay-offs across a number of sectors raised tensions over the average higher
earnings of expatriates and the tighter employment market for Singaporeans. As with all issues
with the potential to stir social or even racial tensions, the government has embarked on
extensive discussion, providing enough space for the airing of public discontent. On regional
relations, Singapore is set to capitalise even further in 2010 on stronger ties with its immediate
neighbours thanks to the more engaging leadership styles of Malaysian Prime Minister Najib
Razak and Indonesian President Susilo Bambang Yudhoyono.
Solomon Islands
Political risk: M
Security risk: M
With parliamentary elections planned for April 2010, the year ahead will be a test of how far the
country has come since the inter-communal violence that ended in 2003. Apart from urban crime
in the capital Honiara, directly attributable to high rates of unemployment, the Regional
Assistance Mission to the Solomon Islands (RAMSI) has helped to restore security. Despite
rumours of no-confidence motions, political stability within Prime Minister Derek Sikua’s
government held throughout 2009, a trend set to continue in 2010. The expected passage of
legislation on political-party integrity (similar to that in Papua New Guinea) before the election
should improve the prospect of a stable post-election government. The economy is not forecast
to grow in 2009, though with movement expected in minerals extraction and exploration activity
– needed to replace unsustainable log exports – growth should return in 2010 under the more
stable government. With RAMSI unlikely to withdraw in the near term, security threats are
expected to remain manageable.
South Korea
Political risk: L
Security risk: L
The prospect of substantial improvements in South Korea’s economic competitiveness and

investment environment under the relatively pro-business President Lee Myung-bak had been
swept away by mid-2009, with his first year in office marred by anti-government protests,
farcical parliamentary stand-offs and plunging approval ratings. The impact of the global
economic downturn quickly rendered fanciful his talk of 7% economic growth; his government
instead spent 2009 struggling to avoid negative GDP growth for the year. However, South
Korea’s economy contracted less sharply than those of its ‘Asian tiger’ peers, despite dire
predictions about its financial system. Lee’s agenda has been cut down to more modest size, but
he has a fighting chance of making headway in 2010. Forecasts of 3%-5% GDP growth in 2010
reflect decent prospects of extending the recent recovery, but the political scene will help
determine whether this promise is fulfilled.
Even though his ruling Grand National Party (GNP) commands a legislative majority, Lee’s
government has pushed through economic stimulus measures despite, not because of, parliament.
The president’s abysmal approval ratings staged a comeback alongside the economy in late 2009,
and, if he can sustain this, 2010 could bring delivery on some of his economic reform promises.
Key tests will include the parliamentary fate of controversial labour legislation (labour issues
remain a leading concern for businesses) and the EU-Korea free-trade agreement signed in 2009
(a barometer for prospects for market liberalisation). However, potential pitfalls are numerous:
Lee faces continuing factional tensions within his party, and, in the event of controversies or
missteps by his government, fickle public sentiment would aid an opposition prone to challenge
the GNP via street protests rather than parliamentary processes. Export vulnerability and high
levels of household debt mean that both consumer and business confidence will remain shaky
well into 2010.
As always, North Korea will remain the leading external concern, but there is little sign of major
departures from established patterns. Periodic belligerence and threats will remain highly
unlikely to bring serious military conflict, while resolution of nuclear and wider diplomatic
issues remains a remote hope despite the likely resumption of significant negotiations. North
Korean leader Kim Jong-il’s poor health has brought the added uncertainty of a stop-start, highly
opaque succession-planning process in the North, but is unlikely to radically alter North-South
relations in 2010.
Sri Lanka
Political risk: M
Security risk: M; H in north, north-east
The security situation will remain precarious despite the end of formal hostilities with the
separatist guerrilla Liberation Tigers of Tamil Eelam (LTTE). The group lost its conventional
military capabilities, territory and senior leadership, but residual elements are capable of
launching attacks given the significant quantities of arms in circulation. The LTTE also retains
fund-raising mechanisms, disciplined structure and strong support abroad. Ethnic tensions may
revive in the absence of genuine political reconciliation with the Tamil minority, and the slow
process of rehabilitating former combatants and resettling displaced persons held in government-
run camps in Tamil-majority Northern Province.
The sustainability of the government’s victory over the LTTE and its ability to translate victory
into lasting peace will depend on the extent to which it is able to address the grievances of ethnic
Tamils by creating inclusive governance structures and economic development in Northern
Province. This will rest in large part on the credibility of elections to the Northern Provincial
Council, which may be held in 2010, that will aim to devolve power to the former LTTE
stronghold.
President Mahinda Rajapakse and his Sri Lanka Freedom Party (SLFP)-led United People’s
Freedom Alliance (UPFA) government will be looking to consolidate its position in
parliamentary elections that must be held by April 2010. These may be followed by an early
presidential poll (due by November 2011). Despite Rajapakse’s popularity and opposition
disarray, the UPFA faces eroding support as voters turn their attention to economic issues.
Rajapakse’s reduced reliance on hard-line parties will be a boon for the government’s ability to
implement reforms to the bureaucracy and tax system. However, it will fuel concerns over an
emerging civilian dictatorship, especially in the unlikely event that the UPFA is able to secure a
two-thirds majority in the next parliament and thus the power to change the constitution.
Government efforts to restrain the influence of the military and curtail military spending to
address fiscal pressures could lead to tensions.
An IMF loan has provided much-needed economic assistance to facilitate post-conflict

reconstruction and support foreign exchange reserves, and has been supplemented by continued
support from non-traditional donor countries, such as Iran, China, India and Libya. However,
concerns will persist over the government’s ability to meet IMF targets on curtailing the fiscal
deficit, and maintaining a flexible exchange rate policy and adequate foreign exchange reserves.
A prolonged downturn could weaken tea and textile exports and remittances, which remain at the
core of foreign exchange earnings.

Taiwan
Political risk: L
Security risk: L
President Ma Ying-jeou and his Kuomintang (KMT) government are likely to retain political
ascendancy over the opposition Democratic Progressive Party (DPP), despite low public
approval ratings after a testing 2009. ALthough it will probably enter 2010 with its comfortable
parliamentary majority intact after elections in late 2009, Ma’s government has yet to turn this
majority into impressive legislative performance amid long-standing internal rivalries. However,
it implemented fiscal stimulus measures that helped to set the stage for modest recovery after a
recession that could see GDP contract by more than 4% in 2009. The upturn in the second half of
2009 should be maintained into 2010 thanks to improved external demand from the US, Europe
and China. Taiwan’s rebound could be impressive, forecast in late 2009 at 3%-4%, but will be
vulnerable to swings in external conditions.
The government in 2010 will continue its efforts to expand economic co-operation with China
and sustain the general warming of bilateral relations since Ma took office. Resolution of the
fundamental differences between Beijing and Taipei remains a distant hope, but cross-Strait
relations will remain more stable than under DPP governments in 2000-08. While this is a
welcome positive factor for the general economic and investment environment, concrete
economic gains from cross-Strait initiatives will be modest.
Moreover, co-operation with Beijing will continue to test the limits of public comfort with
concessions and closer ties. Particularly if concerns in this regard coincide with other grievances
or controversies to rally Ma’s opponents, street politics could make a return in 2010. However,
this is unlikely to be as large-scale or as disruptive as the protests sometimes seen under the
previous government. The DPP and other opposition groups could again demonstrate the
capacity to organise anti-government rallies, but the party has still not recovered from its 2008
electoral mauling and the subsequent public defrocking of former DPP president Chen Shui-
bian.
Thailand
Political risk: M
Security risk: M; H in Narathiwat, Yala, Pattani
As attention focuses on the looming royal succession, Thailand will enter 2010 facing greater
political and security uncertainty. The king’s health and longevity have become matters of state
security in recent years. Mutual antagonism between protest groups set up to oppose or support
former prime minister Thaksin Shinawatra will continue to arouse fears of an all-out
confrontation, and even potential civil war, once the king’s calming authority is no longer
present. Another doomsday scenario with some credibility is that, should the king pass away
suddenly in the next year, tensions between the military (long the monarchy’s stalwart defender)
and police (which moved closer to Thaksin under his premiership) will spill over into the public
domain and lead to confrontation. Such all-out conflagration in 2010 is unlikely, but isolated
violence, particularly following any change in the royal family, cannot be ruled out.
The king’s death will certainly bring an extended period of mourning, which in theory should
allow the military and supporters of the monarchy time to work behind the scenes to prevent
Thaksin supporters from taking advantage of weakness among Bangkok political elites.
Thailand’s economy will remain vulnerable to rumours about politics; a local brokerage
mischievously reported the king’s sudden death in October 2009, causing the stock exchange to
fall by 5.3% in one day. Such volatility will recur in 2010.
Intractable violence in the south will continue at its current intensity in 2010, claiming as it has
in previous years around a thousand lives through small improvised explosive devices (IEDs),
drive-by shootings and criminal violence. Changes in insurgents’ tactics and an expansion of the
insurgency outside the three southernmost provinces will remain possible, though there are few
signs that 2010 will see any such major shift. More alarming and notable will be the continued
steady sectarianisation of the violence between Buddhists and Muslims.
Vietnam
Political risk: M
Security risk: L
The Communist Party of Vietnam (CPV) will hold its next five-yearly National Party Congress
in early 2011. Consequently, much of 2010 will be consumed by internal CPV politicking as
Central Committee hopefuls vie for top posts and key bureaucratic appointments in the next term
of government. Mauled by high inflation in 2008 and then sharp falls in investment in 2009, the
economy’s rollercoaster ride reflects very poorly on Prime Minister Nguyen Tan Dung and his
supporters’ economic liberalisation reforms. Dung has to a degree recovered and has the support
needed to push ahead with reforms in the financial sector in 2010. Nonetheless, policy inertia
resulting from party manoeuvring ahead of the congress will bring an increase in corruption and
undermine efforts to address key investment weaknesses, notably poor infrastructure.
Negotiations with China over territorial rights in the South China Sea will stall in 2010 as CPV
conservatives emphasise inter-party ties with Beijing, setting back Vietnam’s prospects of
exploiting hydrocarbon resources and advancing other negotiation efforts within the Association
of South-East Asian Nations (ASEAN).
Europe
Europe and the CIS regional overview
As the world shifts back into positive growth and a number of significant economies follow suit
– France and Germany saw their recessions end in mid-2009 – it appears that recovery is ahead.
Governments across the region have used bailouts, stimulus packages and other measures to
maintain a semblance of normality, and the extent of this state intervention will be a key issue for
2010.
West put to the test
Western Europe’s post-crisis economy is unlikely to differ greatly from its pre-crisis economy in
terms of state involvement. Talk of ‘new economic paradigms’ is largely superficial, used by
politicians to suggest that they represent change at a time when the status quo is bad. The region
will not desert the pattern of liberal market economics with varying degrees of social support that
has developed over the last 30 years.
But whether they like it or not – and most do not – a number of governments have been left with
significant chunks of equity in key sectors, notably banking. In all but the most extreme cases
(Iceland and Ireland), we believe that governments will make little use of these stakes, and in
many cases downplay their significance entirely. Even examples with a newly heavy state
presence like the British banking sector are unlikely to see the government insist on day-to-day
policy direction. Hints and persuasion will have a greater role than the government’s
representative in the boardroom, if there is one.
In countries with struggling centre-left administrations, such as Spain and the UK, the opposition
is talking up concern over the size and persistence of public debt forecasts. The British
Conservatives, set to come to power in May/June 2010, are particularly keen both to pay down
this debt and to reduce the state’s role in the economy. They will seek to divest government
holdings as soon as is practical, and will brush off concerns that holding on for longer or taking a
more active role in banks’ futures might represent better value.
Elsewhere, satisfaction at the supposed failure of the ‘Anglo-Saxon economic model’ is of scant
consolation when the likes of Fortis, Dexia and Hypo Real Estate have had to be taken into
partial or total state ownership. These institutions will work hard to move out of government
ownership in the early years of the recovery, and governments will be broadly happy to let them.
State involvement will be muted, understated and as short-lived as possible.
The exception will be the hardest-hit countries, where the question is not so much about the
state’s role in the economy, but about the economy’s role in the state. Iceland, with its total bank
bailout, and Ireland, with its ‘bad bank’, have no choice but to have greater state involvement.
Because of its balance sheet – and increasing disenchantment with the IMF – Iceland will have to
go it alone for some time, even if it secures EU membership by 2013, and this means the state
will remain involved. Ireland needs property prices to rise across the board by 10% from current
levels within ten years to come close to breaking even on its bad bank plan. Both countries face a
long – and interventionist – haul.
CEE-ing it through
In Central and Eastern Europe (CEE), governments intervened rather less than further west,
largely because they could not afford to. Their pre-crisis fiscal positions were generally weaker,
particularly in the cases of Hungary and Romania. Lower credit ratings and higher risk profiles
relative to Western European countries (that were also issuing huge quantities of debt) reduced
access to capital markets. The region survived without large-scale bank bailouts, though
governments tried to support banks through regulatory measures.
The increase in the state’s economic share has been more a result of a shrinking private sector
than increased intervention. The long-awaited expansion in small and medium-sized enterprises
seen in the second half of the 2000s came to a juddering halt, with an unprecedented number of
bankruptcies and defaults. But the state’s role in the economy is as strong as ever. Few
governments have used the crisis as an opportunity to restructure their oversized and inefficient
public sectors, which remain a chronic burden in countries such as Croatia, Hungary or even
Poland. Secondly, in most CEE countries domestic business groups have strong state links –
often through control of the local public administration – and are able to obtain undue benefits
and preferential contracts. The state is there to stay, and will continue to affect business
operations both directly and indirectly, though less than in places further east.
Baltic blues
Latvia may have attracted most headlines, but all three Baltic states have been hit hard. Buoyed
by years of double-digit growth, their economies developed structural imbalances that translated
into severe recessions once the crisis hit. But despite dire economic and fiscal conditions,
governments have gritted their teeth and maintained their currency pegs to the euro in the hope
of joining the eurozone as soon as possible. The involvement of the IMF and/or the EU –
traditionally forces for privatisation rather than nationalisation – in their recovery plans will limit
the potential for state intervention, while ensuring that fiscal policies will be carefully managed
and regulated.
The Baltic states have already shown that they are willing to risk unpopularity by favouring
austerity over a loosening of fiscal policy, but 2010 will test their commitment. Latvia, whose
government toppled in February amid social discontent over anti-crisis measures, again faces a
period of political instability after the largest party in the governing coalition reneged on
promises to raise taxes, threatening the IMF bail out. In Estonia, the government is struggling to
cut spending to reduce the budget deficit in line with eurozone requirements, with aggressive
cuts pushing public support towards leftist parties with less enthusiasm for stringent fiscal policy.
Lithuania appears best off, with a popular president seemingly able to keep the country’s focus
on the euro prize.
Russia and Ukraine
Despite being one of the hardest hit of the G20, Russia has maintained basic economic and
political stability by drawing on its large reserve funds, aided by the recession’s short duration.
But the crisis has thrown into greater relief long-standing structural weaknesses: a high
dependency on energy exports, widespread corruption and unreliable rule of law. The greatest
shortcoming – and key to all the others – is the state’s dominant role in politics and the economy,
which allows bureaucrats, politicians, courts and the security services to operate with minimal
accountability.
The use of the oil reserve fund to support business and society through the recession has only
increased reliance on this paternalistic system. This will continue into 2010, though funds may
run out at some point during the year, with the peak oil prices that fed the reserve long gone; the
government has provided for tax increases and international borrowing when this happens.
The business environment will remain characterised by the familiar problems mentioned above,
but without pre-crisis growth rates to sugar the pill. State-loyal oligarchs will continue to
dominate the economy. The state has not used the crisis as a pretext to continue expanding its
presence in lucrative sectors – notably energy and mining – but equally it has not pushed market
principles. Much of the anti-crisis strategy has involved subsidising poor performers (such as
car-maker AvtoVAZ) in an attempt to contain unemployment and prevent social problems: the
government has favoured social stability over the more radical option of allowing inefficient
enterprises to go under to encourage longer-term competitiveness.
The Ukrainian state’s fundamental weakness is more an issue than its economic activities.
Constitutional reforms enacted after the Orange Revolution created ambiguity between the roles
and powers of the presidency and the government. Combined with internecine factional
struggles, this reduced the country to a state of political paralysis throughout 2009, hindering any
systematic response to the recession. It even prompted serious talk in the EU and Russia of the
Ukrainian state handing management of its gas transit network to an EU-Russia consortium, a
rare example of a European state potentially disempowered by the crisis.
There is potential for the presidential election due in January 2010 to unblock the system, reset
relations with Russia and enable a co-ordinated approach to tackling the steep decline that
brought Ukraine to the brink of sovereign default in 2009. The outcome remains in the balance,
causing further delays to essential reforms as the government turns to short-term pre-election
populism. A tight, disputed result would prolong the gridlock and hamper economic recovery.
Centralising or ceding control
Governments and state entities across Central Asia and the South Caucasus intervened to
stabilise their economies, either through loosening monetary policy, increasing benefits and
public-sector wages, or devaluing currency. However, particularly in hydrocarbons-rich
countries, the crisis also resulted in an acceleration and deepening of the state’s reassertion of
power in key sectors. As countries emerge from the crisis, this trend is unlikely to reverse.
In Kazakhstan, high oil prices in the pre-crisis years enabled the state to claw back influence in
the oil and gas sector by increasing the role of national champion KazMunayGaz (KMG). While
the government has drawn back from a plan to impose a massive duty on oil exports, for fear of
investors closing off production on cost grounds, the trend of maximising revenue from natural
resources will persist. Foreign companies will be forced to accept a large role for KMG in all
future projects; other natural-resource sectors, such as mining, will see similar developments.
The government has made no secret of the fact that state involvement is part of its long-term
industrial development policy.
A similar trend is likely in Azerbaijan, with the government taking an increasingly bold line with
investors, and political and economic power continuing to concentrate in fewer and fewer hands.
As in Kazakhstan, the role of state oil and gas champion SOCAR is gradually expanding, while
even nominally private companies are owned by politically connected individuals, resulting in a
highly uncompetitive investment climate.
The crisis has had little discernible impact on state-business relations in Turkmenistan. Official
recognition that foreign investment was necessary to develop the country’s technically
challenging hydrocarbons fields came as early as 2007, though the state will continue to favour
government-to-government contracts, complicating conditions for private companies. Similarly,
in Uzbekistan much foreign investment comes from state-owned entities, while private
companies have long resented aggressive and intrusive state practices.
For smaller countries with few resources, the downturn reinforced government reliance on
external support. Armenia, Kyrgyzstan and Tajikistan all received large inflows of foreign
multilateral and bilateral assistance: the Chinese and Russian states have acquired key roles in
the economy as a result. In Georgia, the war with Russia will continue to overshadow the
financial crisis in terms of impact on business. Georgia has largely weathered the economic
storm thanks to a $4.5bn donor assistance package that will enable the authorities to retain their
emphasis on ‘small government’. Problems of implementation will persist, partly stemming from
the sheer number of regulatory and legal changes that have been approved in a relatively short
space of time.
The EU – still in search of a role
The EU has made ambitious noises throughout the crisis, seeing the chance for a role in shaping
the future European economy. But nobody seems sure what that role will be. The G20 has
largely supplanted it in terms of multilateral ‘thought leadership’, and much of the energy that
could have been devoted to generating consensus on issues such as banking reform or
remuneration has gone into ensuring ratification of the Lisbon Treaty.
With markets and fiscal positions far removed from the relative stability of the mid-2000s, the
EU’s functions of competition regulator and fiscal overseer are in a quandary. The Stability and
Growth Pact’s budget deficit limit of 3.0% of GDP has long been the cornerstone of Europe’s
fiscal architecture, but has been quietly, if temporarily, forgotten as tax revenues have fallen and
stimulus packages have kicked in.
German state aid to troubled car-maker Opel and its new owner, parts-maker Magna, will test
EU effectiveness. The government plans to support Magna’s operation with up to €4.5bn, on
condition that German jobs are first in line to be protected from likely wide-ranging cuts. If re-
elected German Chancellor Angela Merkel sends such a package to the EU for consideration, the
new competition commissioner will face a tough baptism: either reject German demands and risk
alienating the largest member state, or fudge a solution and potentially alienate several others. As
ever, the EU will be far too busy with its internal battles to go looking for new wars to fight.
Albania
Political risk: M
Security risk: L; M in north
The re-election of Prime Minister Sali Berisha’s Democratic Party (PD) in July 2009 has ensured
some degree of political stability and policy continuity in the short term, though having lost its
legislative majority the PD now has to govern in coalition with a smaller left-of-centre party.
However, in the longer term, the PD’s continuity in government raises concerns about the
country’s overall democratic credentials, given that the party is expected to strengthen its control
over state institutions in the coming years. This would translate into reduced government
transparency and accountability, and poorer democratic standards. Signs of these were already
visible during the PD’s previous mandate, with its open interference with the judiciary, possible
election-rigging and lack of transparency on the state of the economy.
The business environment is therefore unlikely to improve significantly over the next year,
despite the PD’s promises to step up reforms and open Albania up to investors. The country
suffers from endemic corruption at even the highest levels of politics; an inexperienced and
politicised administration; and poor infrastructure, though some gradual improvements are
expected in the latter over the next year.
The security situation for business operations will remain largely benign. However, law
enforcement will remain slightly weaker in the mountainous northern areas.
Armenia
Political risk: M
Security risk: M; H in Azerbaijani border areas
Building on progress made in 2009, President Serzh Sarkisyan will continue a policy of
rapprochement towards Turkey, in the face of significant criticism from nationalist and other
opposition parties. Diplomatic relations with Turkey are likely to resume in 2010, particularly
because we expect Armenia and Azerbaijan to make modest progress towards reaching
agreement on a limited framework peace deal over the disputed region of Nagorno-Karabakh
(though this is not formally a precondition for the normalisation of relations). Even though a
ceasefire with Azerbaijan has largely held since 1994, both peace processes will have positive
implications for regional security. Moreover, strong international support for the rapprochement
with Azerbaijan and Turkey will limit the effectiveness of opposition protests. Such
demonstrations have the potential to be vocal and sustained, though we anticipate that the
authorities will clamp down harshly if public unrest escalates.
International assistance will help to pull the economy out of recession in 2010, following a
contraction in growth of 10% or more in 2009, and inflows of diaspora remittances will recover
as the global economic rebound gathers pace. However, close links between the political and
business elite will continue to hamper the conduct of business in Armenia, with vested interests
hindering attempts to reduce corrupt practices.
Austria
Political risk: L
Security risk: L
While the current ‘Red-Black’ grand coalition government formed by the Social Democrats
(SPÖ) and the centre-right People’s Party (ÖVP) is more stable than its previous incarnations, it
remains as potentially fragile as one might expect of an alliance of traditional enemies. While
Austria has weathered the global economic crisis relatively well compared with its neighbours,
Chancellor Werner Faymann (SPÖ) and his deputy and finance minister, ÖVP leader Joszef
Pröll, will continue to take opposing views on the management of the economy. However, these
are unlikely to bring down the government. The far-right Freedom Party (FPÖ) will continue its
resurgence, gaining votes in local and regional elections at the expense of both the SPÖ and the
ÖVP, though a rapprochement between the FPÖ and the ÖVP will gather pace, possibly paving
the way for co-operation at national level in the future.
Austria remains less susceptible to a major Islamist extremist incident than most nations in
Western Europe. There will continue to be few domestic security threats.
Azerbaijan
Political risk: M
Security risk: M; H in Azerbaijani border areas, Nagorno-Karabakh
President Ilham Aliyev and his supporters took steps to consolidate his grip on power in 2009,
engineering a referendum in March that removed the two-term limit on the presidency. This
enables Aliyev to stand again in 2013, paving the way for him to remain president for life.
Parliamentary elections in 2010 are likely to further reaffirm the political dominance of Aliyev’s
ruling New Azerbaijan Party (NAP). Tactical divisions and personality clashes among opposition
leaders will hamper their election campaign. However, opposition youth activists are likely to
attract growing support, particularly in the capital Baku, among a public angry at the lack of
political and economic freedom. Azerbaijan will continue to affirm its interest in supplying gas
to Europe, but will only commit supplies to projects such as the mooted Nabucco pipeline once
construction is guaranteed and it has secured favourable transit terms with Turkey. However,
even without Nabucco, Azerbaijan is likely to increase gas exports to Europe through existing
infrastructure by concluding bilateral deals.
Prospects for some form of limited framework peace deal with Armenia over the secessionist
region of Nagorno-Karabakh in 2010 have improved, and there may be progress in the
withdrawal of ethnic-Armenian troops from most of the territory surrounding the disputed
region. However, intractable differences over certain territories and refugees’ right of return will
remain serious points of contention. Moreover, if Turkey pushes forward with its rapprochement
with Armenia in the absence of a deal over Nagorno-Karabakh, relations between Azerbaijan and
Turkey would come under severe strain, probably derailing westward gas transport projects and
heightening security risks in the region. A further security concern may be the incursion of
Islamist militants into northern regions adjacent to the Russian republic of Dagestan. These
groups will view the country principally as a safe haven, rather than a target for their activities,
though the growing attraction of militant ideals for Azerbaijan’s disillusioned and impoverished
youth remains a longer-term concern.
Belarus
Political risk: H
Security risk: M
Trade and budget deficits will put state finances under significant pressure and weaken Belarus’s
negotiating position with Russia in 2010. Bilateral relations are likely to remain tense with
regard to the gas trade and Russian non-tariff restrictions on Belarusian imports. After bitter
conflicts, President Alexander Lukashenko will probably have to make some political and
economic concessions to Russia, such as recognising Georgia’s separatist regions of Abkhazia
and South Ossetia as independent states, or allowing Russian companies to acquire Belarusian oil
refineries or additional gas network assets. Nonetheless, gas transit interruptions are unlikely.
Co-operation with the IMF may also come under strain because of the government’s likely
resistance to required structural economic reforms. This could call into question the fifth and last
tranche of a $3.63bn IMF loan, which is expected to be disbursed in February 2010.
More generally, the limits of Lukashenko’s very timid political liberalisation and overture to the
West will become increasingly apparent in 2010. The regime will probably crack down on
dissent ahead of the presidential election scheduled for 2011. Arbitrary political interference in
business will remain a credible risk amid continued authoritarian politics, while any strategic
deal may be subject to the risk of information theft by the security services.
Belgium
Political risk: L
Security risk: L
Prime Minister Herman Van Rompuy has managed to steady the ship after the fractious tenure of
his predecessor, Yves Leterme (March-December 2008). While the issue of the future
relationship between Belgium’s constituent parts and its national government is unlikely to ever
go away, Van Rompuy has succeeded in conveying to the squabbling parties in his coalition that
it is not the only matter demanding their attention. Van Rompuy is being mentioned as a
potential compromise candidate for the new role of president of the EU Council once the Lisbon
Treaty is ratified, and his departure would trigger a new round of similar disputes. The
federal/regional dispute occasionally presents uncertainties for business, and this is particularly
likely if there are significant changes to competencies, though experience of the period since the
2007 general election suggests that these will be several years in the making.
Belgium’s location at the heart of Western Europe, and the presence of international institutions
such as the EU and NATO, mean that it will continue to be a credible target for an attack by
Islamist extremists.
Bosnia and Herzegovina
Political risk: M
Security risk: L
Central and entity-level politics have become increasingly volatile over the past year, and
uncertainty is likely to continue into 2010, when political parties will further strengthen their
nationalist rhetoric with an eye to the parliamentary and presidential elections due in October.
Such political instability will prevent any meaningful reforms that could make governance more
effective, improve business conditions and allow for the withdrawal of the international
protectorate or the speeding up of the EU accession process. The business environment will
therefore continue to pose significant challenges, stemming partly from the confusing
bureaucracy and overlap between federal, state and local administrations, but also from
widespread corruption, weak law-enforcement and poor business practices.
The security situation is likely to remain largely stable in 2010. However, occasional nationalist
flare-ups at football (soccer) games or public rallies may lead to some localised scuffles,
especially given increased sensitivities among local ethnic communities because of the
continuing trial of controversial war-crimes suspect Radovan Karadzic in The Hague
(Netherlands).
Bulgaria
Political risk: M
Security risk: L
The outlook for the business environment has improved considerably since the centre-right
Citizens for the European Development of Bulgaria (GERB), led by the former mayor of the
capital Sofia, Boyko Borissov, won elections in July 2008. Borissov‘s minority cabinet includes
several respected professionals in key posts, and enjoys the support of several smaller rightist
parties. The government is likely to remain stable over the next year and to continue on a reform
path aimed at stabilising the economy in the wake of the recent global crisis, and improving
business conditions and government transparency.
Although prospects for business are generally good in 2010, the operating environment will
remain prone to corruption, favouring a handful of well-connected local businesspeople with
preferential treatment in their dealings with the state, especially at local level. Despite its
reformist enthusiasm, the government is unlikely to be able to significantly curb such systemic
problems in the short term. However, some progress might be recorded with regard to fighting
crime and improving law enforcement, as Borissov has proved keen to reform the police and
increase its efficiency. This may help to curb a trend of kidnaps of local businesspeople (or their
family members), as well as reducing the number of contract killings and violent feuds between
organised crime groups. Nevertheless, such groups will continue to impinge on the business
environment because their simultaneous involvement in legal businesses poses potential
reputational risks for foreign investors.
Croatia
Political risk: L
Security risk: L
Despite Ivo Sanader’s surprise resignation in July 2009, his appointment of close ally Jadranka
Kosor as his successor ensured stability and policy continuity. Judging by her resolute approach
during her first few months in office, and the country’s difficult economic position, Kosor is
likely to be able to retain power until the next elections in 2011. However, unlike Sanader – who
enjoyed almost absolute support from his party – Kosor’s leadership and reformist enthusiasm
appear to be contested by various more conservative groups within the party. Consequently, she
may be able to implement swift fire-fighting measures aimed at stabilising the economy over the
next year, but is likely to find it difficult to impose more significant structural reforms of the
judiciary or the oversized state administration – especially because the power of the ruling party
has rested for years on the control it enjoys over such institutions. Progress with EU accession
will therefore remain slow and the business environment will continue to suffer on the back of
high-level corruption at central and local level, state interference in the economy via various
state-owned companies, slow and inefficient courts, and a cumbersome bureaucracy.
The security environment for foreign investors is likely to remain largely benign. However, the
involvement of some organised crime elements in legal businesses may pose significant
reputational risks to businesses operating in the country.
Cyprus
Political risk: L; M in TRNC
Security risk: L
Despite deep and genuine political will on the part of both leaders, the reunification talks at
presidential level have made little progress and seem set to end in failure in 2010. This will have
implications far beyond the island’s shores, with Turkey’s candidacy for EU membership being
vulnerable if no progress is made on the issue. The failure of the talks will weaken President
Dimitris Christofias, but will not threaten his overall position. Just as the prospect of
reunification led to an economic boost as speculators moved in early anticipating potential gains,
so the end of talks is likely to have a negative economic impact.
The presidential election in the Turkish Republic of Northern Cyprus (TRNC), scheduled for
April 2010, may be the final nail in the coffin for reunification talks, with incumbent Mehmet Ali
Talat likely to be defeated by Prime Minister Dervis Eroglu or another hardline candidate from
Eroglu’s National Unity Party (UBP). The continued isolation of the TRNC that would result
would see increased advocacy of a two-state solution, an idea that is already popular in the
TRNC, and may gain increased support (albeit from a very low base) among Greek Cypriots.
Cyprus’s role as an international staging-post between Europe and the Middle East, as well as the
British military presence, suggest a possible terrorism risk. However, this has not been in
evidence in recent years, and is in any case not on the level of that in most Western European
nations.
Czech Republic
Political risk: L
Security risk: L
The Czech Republic has suffered from prolonged political uncertainty since parliamentary
elections in 2006. A fragile centre-right coalition collapsed in March, leaving the country under
the rule of a technocrat interim government supported by the two largest parties, which is likely
to remain in power until parliamentary elections in May 2010. Any substantial reforms remain
unlikely before the polls, given that political parties will be preoccupied by the election
campaign and will reject any plans by the caretaker government to push through austerity
measures to steer the country out of recession to avoid angering the electorate.
The general elections are unlikely to significantly improve political stability. The near-even
ideological split in the electorate, the recent rise of several small parties and high levels of
popular disaffection with politics will all combine to make it difficult for either main party to
form a clear majority government. This is likely to cause several months of further political
stalemate while negotiations over government formation take place. The most likely eventual
result is a grand coalition between the two largest parties, which may increase political stability,
but is unlikely to address the need for deep structural reforms. While the business environment is
unlikely to deteriorate significantly under such a government, high-level and petty corruption, an
inefficient judicial system and bureaucratic red tape will continue to periodically affect business
operations.
At the same time, the security environment is unlikely to change. Although the government has
pledged to send more troops to Afghanistan and host elements of the US administration’s
revamped European missile defence system, the country will continue to have a low profile and
remains an unlikely target for terrorist attacks. Demonstrations by far-right groups have become
more frequent and violent, but are unlikely to target foreigners or foreign businesses directly.
Denmark
Political risk: I
Security risk: I; L in Copenhagen
Lars Løkke Rasmussen’s government will remain stable, despite its minority status. Rasmussen
is keen to end the Danish opt-outs from various EU provisions, most notably that concerning
membership of the euro currency, though he is only likely to make serious moves in this
direction once political conditions in Denmark are more favourable than they currently appear.
The debate on the future adoption of the euro is likely to gather pace during 2010, but while
public support is greater now than earlier this decade, it is not yet sufficient to satisfy
Rasmussen’s wish that a yes vote should seem likely before a referendum is organised.
The legacy of the ‘cartoon controversy’ of 2005-06 remains evident, with the issue still arousing
anger among Islamist extremists, and a terrorist attack will continue to be a credible risk,
especially in the capital Copenhagen. Violence between rival criminal groups – including the
notorious motorcycle gangs and several gangs of immigrant origin – increased in 2009 and
seems set to be a feature in certain areas of Copenhagen and other large cities in 2010, though
legitimate business should not be threatened. Equally, one of the periodic spikes in
anarchist/anti-capitalist unrest is likely as a legacy of the COP15 climate change conference in
December 2009, though this will not jeopardise security.

Estonia
Political risk: L
Security risk: L
Prime Minister Andrus Ansip's government is beginning to show signs of strain. Although the
coalition is ideologically more coherent than its predecessor, internal conflict could nevertheless
cause it to collapse before the next parliamentary election in 2011.
Estonia continues to have the most transparent business environment of all post-Soviet states.
Corruption persists in some quarters, but has a modest overall impact on business operations.
Although the national economy entered a recession in 2008, the country's continuing status as the
most attractive Baltic investment destination will ensure that the budget deficit continues to
diminish in 2009 and that targets for adopting the euro are adhered to – though adoption is
unlikely before 2011. Despite a current-account deficit, external finance inflows persist because
of the country's close involvement with the global telecommunications and electronics industries,
mainly in relation to subcontracting from Scandinavian companies. However, other regional
economic pressures could challenge this position.
Organised criminal gangs generally do not pose a direct threat to legitimate business; however,
there is a low risk that a criminal group might make an extortion demand against a local or
foreign company.
Finland
Political risk: I
Security risk: I
Prime Minister Matti Vanhanen’s coalition government is likely to remain in power throughout
2010, with few challenges to political stability. The economy has survived the financial crisis
relatively well. However, pressure to make spending cuts will emerge as the recovery gathers
pace, which could trigger industrial action. Finland has few significant security threats; a terrorist
attack poses a particularly low risk.
France
Political risk: L
Security risk: L
With both the parliamentary and presidential election cycles at mid-term, President Nicolas
Sarkozy is well positioned to take a clear, strong line on the economy as the recovery progresses.
Being the first major European economy to emerge from recession will also help in this regard.
Sarkozy will attempt to resume his programme of liberalising reforms in 2010, but will face the
usual opposition from trade unions and traditionalist elements keen to prevent any perceived
erosion of the French ‘social model’. However, this opposition will lack focus, with the Socialist
Party remaining weak and divided, and unable to land an effective blow on Sarkozy. There is a
low risk of renewed large-scale suburban rioting similar to that in late 2005.
Islamist extremist groups have repeatedly threatened France in recent years, though the security
services have proven competent in disrupting terrorist cells. Corsican separatist terrorists have
faded in significance since the mid-2000s, and now appear to lack the capability and intent to
pose a significant threat to business on the island or in mainland France. Arrests of operatives
from Basque separatist group ETA are likely to continue, with the group covering an
increasingly wide area of the country as a result of the increased threat of detection in its south-
western heartland.
Georgia
Political risk: M; H in Abkhazia, South Ossetia, Pankisi Gorge beyond Akhmeta
Security risk: M; H in Abkhazia, South Ossetia, Pankisi Gorge beyond Akhmeta
Confounding many observers’ predictions, President Mikheil Saakashvili looks set to see out his
term in office (due to end in 2013). He has successfully ridden out the challenges to his rule
posed by the conflict with Russia in August 2008, sustained opposition protests in the first half
of 2009 and the economic downturn. Nevertheless, the country will continue to face political and
economic challenges. The holding of the first ever direct election for the mayor of the capital
Tbilisi in late May 2010 is likely to be hotly contested, with the pro-Saakashvili incumbent
Georgi Ugulava facing a credible challenge from the opposition. The opposition will seek to
capitalise on public disillusionment with the poor rate of Saakashvili’s progress in implementing
democratic reforms, and on complaints that high-level corruption and interest-group loyalties
continue to impede business. Criticism of the weak protection of property rights and the onerous
tax-penalty system will also resonate with voters. However, while support for the opposition is
strongest in Tbilisi, the inability of its component groups to agree on a joint candidate could play
into Ugulava’s hands.
International donor support will remain an important source of financing for government
infrastructure projects, including upgrades to transport networks. Western investment into
Georgia should also pick up in 2010; lingering security concerns in the aftermath of the war, and
the opposition protests in April-July contributed to the disruption of inflows in 2009, with the
latter fostering unease among investors about government stability. Depending on the outcome
of the Tbilisi election, the issue could re-emerge as a source of concern.
Tension with Russia over the separatist regions of Abkhazia and South Ossetia will remain
elevated. Internationally mediated talks intended to reduce the potential for further conflict will
produce little of substance, while efforts to break the stalemate in Georgia-Russia relations are
unlikely to bear fruit. Although we do not envisage a resumption of full-scale conflict in 2010,
low-level provocations in the border areas between various state and non-state forces will
continue to be a source of instability.
Germany
Political risk: L
Security risk: L
The results achieved by Chancellor Angela Merkel’s conservative Christian Democratic Union
(CDU) and the liberal Free Democratic Party (FDP) in general elections in September 2009
enabled them to form a majority coalition without much difficulty. This was good news in that it
avoided prolonged negotiations over coalition formation at a time when the economy was still
suffering from the effects of the global financial and economic crisis. The new centre-right
coalition is likely to remain stable for the duration of its mandate. It is also likely to benefit
investors in the short term, having promised to enact various business-friendly reforms in the
coming years, such as reducing taxes and freezing employers’ social-security payments. The
government is likely to push through some of these reforms in 2010, in an effort to kick-start the
economy and encourage growth. However, in the longer term these policies may result in a
successor government having to implement painful austerity measures to comply with a
constitutional condition to reduce the federal budget deficit to 0.36% of GDP by 2016.
The security situation is likely to remain stable in 2010. The number of incidents related to left-
and right-wing extremist groups has diminished recently, though the level of violence involved
has intensified. Nevertheless, such attacks normally pose only incidental risks to foreign
businesses. The risk of a terrorist attack remains credible but low, despite the new government’s
decision to maintain the country’s military involvement in Afghanistan. Several recorded
terrorist warnings were released on the internet ahead of the general elections calling for attacks
on German interests at home and abroad, but no clear indication of any specific plots emerged.
The law-enforcement authorities have proved relatively efficient in uncovering plots and keeping
potential suspects under observation.
Greece
Political risk: L
Security risk: L; M in Athens, Thessaloniki
Newly elected in October 2009 and with a workable majority, Prime Minister Georgios
Papandreou will reverse the trend of the previous administration by attempting to stimulate the
economy through deficit spending. However, the weakness of the country’s fiscal position will
ensure that he is not able to introduce the massive spending increases in 2010 that many had
feared. He will also take a closer interest in foreign affairs than his predecessor Costas
Karamanlis, attempting to save the Cyprus reunification process and holding a more nuanced (if
still firm) line in the dispute over the future name of the Former Yugoslav Republic of
Macedonia.
The election of a centre-left government will not cause the ultra-leftist and anarchist violence
that has affected the country since the outbreak of major unrest in December 2008 to abate; the
problem will continue throughout 2010. Groups such as Revolutionary Struggle, Sect of
Revolutionaries and the Conspiracy of Fire Nuclei will continue to stage occasional attacks,
primarily targeting state institutions or symbols of wealth. These will be designed to cause
damage and generate publicity rather than cause injury, though some will be of sufficient
magnitude to present an incidental physical threat. Smaller-scale attacks on similar targets and on
commercial premises will also continue, though they will not be intended to cause injury. Greece
will continue to be an unlikely target for Islamist extremist terrorists.
Hungary
Political risk: L
Security risk: L
The ‘crisis government’ led by former economy minister Gordon Bajnai that has been in place
since the surprise resignation of the previous administration in March 2009 has managed to adopt
several austerity measures to stabilise the financial and economic situation in the short term.
However, the opposition right-leaning Fidesz party looks set to win a clear victory in
parliamentary elections due in April 2010, and is expected to be able to form a stable majority
government. The party has committed to implementing numerous populist measures, including
tax cuts and spending increases, and has pledged to rewrite the technocrat government’s austere
2010 budget. Such moves may jeopardise fiscal stability and further diminish the likelihood of
more significant structural reforms that would help to ensure a sustainable long-term economic
recovery. However, the party’s more extreme nationalist and protectionist threats are unlikely to
evolve into policies directed against foreigners or foreign companies. Nevertheless, we expect
the government’s overall attitude towards foreign investment to be less positive than that of the
interim government. The business environment will continue to be hampered by high levels of
taxation, poor competitiveness compared with neighbouring countries, corruption in local and
central government, meagre public investment and excessive bureaucracy.
The security environment will remain generally stable, though it has worsened slightly in recent
years, with an increase in the number of robberies and break-ins targeting banks, petrol stations
and various commercial outlets. Similarly, right-wing extremism and incidents of political
violence have increased in 2009, including occasional vandalism during protests, arson attacks
and intimidation campaigns against the Roma community and attacks against leading politicians’
houses or cars. However, foreign businesses have not been targeted.
Iceland
Political risk: L
Security risk: I
The recovery from the 2008 economic crisis will continue to dominate events in 2010. The rate
of economic decline will slow, but positive growth is unlikely to resume until 2011. The IMF’s
recovery plan will continue to prove controversial, though Johanna Sigurdardóttir’s government
is unlikely to reject it entirely for fear of further damaging international markets’ confidence in
the country. Negotiations on EU membership will ensure that Iceland does not rock the boat with
international organisations. These talks will also prove a key topic of public debate, and the
campaigns for and against membership are likely to gather pace ahead of an expected
referendum in 2011. There are no significant security risks.

Ireland
Political risk: L
Security risk: L
The financial crisis has hit Ireland particularly hard, and unlike many of his European
counterparts, Prime Minister Brian Cowen cannot yet afford to look ahead to the recovery. The
government’s 2010 budget will be among the harshest ever introduced in the country, and the
spending cuts and tax rises that have already been trailed will increase public opposition.
Industrial unrest is almost certain, particularly in the public sector, with public services such as
healthcare and education set to bear the brunt of spending cuts. The Green Party is likely to
withdraw from the governing coalition at some point, possibly early on, during 2010, forcing
general elections in which Cowen’s Fianna Fáil party is likely to be ousted from power after 13
years. However, the prospective Fine Gael-Labour coalition will have very little room for
manoeuvre on the economy.
Islamist extremist terrorists are unlikely to target Ireland. Dissident republican groups have
increased their operations in Northern Ireland in recent months, many of which are planned and
organised in Ireland. However, they are unlikely to represent a threat to security south of the
border.
Italy
Political risk: L
Security risk: L; M in southern regions

Personal and political scandal will continue to beset Prime Minister Silvio Berlusconi, but he is
likely to remain in office for his full term unless or until one of the legal proceedings against him
results in a conviction. His centre-right coalition government is relatively strong, despite
occasional outbursts from the Northern League, and the political opposition is too weak to
effectively exploit his difficulties. The economy is set to return to positive growth in 2010, but
will continue to lag behind most neighbouring countries, as it has done for much of the present
decade. The continued process of economic liberalisation will remain unpopular with trade
unions and with certain nationalist elements, and further strikes in public services are likely.
Islamist extremist terrorism remains a credible risk, and the authorities are likely to carry out a
number of arrests and summary deportations of suspects during 2010. Anarchist groups are likely
to continue sending small-scale letter bombs to state targets, though a major resurgence on the
part of leftist terrorist group the Red Brigades (BR) appears unlikely.
Kazakhstan
Political risk: M
Security risk: L
Kazakhstan’s chairmanship of the Organisation for Security and Co-operation in Europe (OSCE)
in 2010 promised much in terms of political liberalisation, but is likely to deliver little.
Speculation that parliamentary elections would be held in 2009 to ensure the presence of at least
one opposition party in the Majilis (lower house) proved unfounded. Meanwhile, proposals to
designate Nursultan Nazarbayev president for life, thereby enabling him to remain in office
without even needing to go through the formal process of an election, appeared to be gaining
ground in late 2009, highlighting the gap between the authorities’ democratisation rhetoric and
practice. Health permitting, Nazarbayev will remain firmly in charge in 2010, having
concentrated in 2008-09 on moving loyalists and family members into senior positions, thereby
consolidating his hold on the state hierarchy. These reshuffles were accompanied by a high-
profile campaign against corruption, which Nazarbayev has used to remove potential sources of
opposition from the political landscape.
Kazakhstan has used the economic crisis to reassert the state’s influence over the economy,
notably through strengthening the role and remit of the state asset holding company, Samruk-
Kazyna. This now has stakes in several of the country’s commercial banks and has increased its
presence in key natural resources industries, ensuring a continued important role into 2010 and
beyond. Higher oil prices in 2010 will benefit foreign currency reserves, and should enable
spending on infrastructure projects to resume. However, the financial crisis has forced the
government to rethink some of its tax plans for 2010, including postponing a cut in the corporate
tax rate. A reimposition of the tax on crude oil exports is also likely, though this will not apply to
companies operating under production-sharing agreements (PSAs). The commercial relationship
with Russia will continue to prosper, partly because of government sponsorship, but also as a
result of embedded relationships between business oligarchs in both states. Economic relations
with China will develop, particularly in the energy sector, where Chinese state companies have
been gradually increasing their presence. Western investors will continue to be welcomed,
though the government’s decision to abandon the PSA model from 2009 for new investment will
make for a more uncertain business environment.
Nazarbayev will continue to follow his hitherto successful foreign policy precept of balancing
between different regional powers, while increasing the country’s room for manoeuvre and
influence within its immediate neighbourhood. A key element of the approach will be
Nazarbayev’s ‘Road to Europe’ initiative, which, though ultimately aiming for membership of
the EU Neighbourhood Policy, will cement Nazarbayev’s own political legacy. The domestic
security situation is likely to remain benign, with the main risk emanating from unrest spilling
over from neighbouring states. Domestic organised criminal groups are present, particularly in
the petrol (gas)-retail trade, but are unlikely to interfere with most foreign business operations.
Kosovo
Political risk: M
Security risk: M
Continuing the trend seen in 2009, Kosovo is likely to remain generally stable in 2010 from both
a political and security perspective. However, short-term stability will not automatically translate
into long-term opportunities and certainties for businesses operating on the ground. The country
remains an international protectorate and its security is largely guaranteed by international
troops. Politics remain largely personalised and may trigger more instability as elections
scheduled for 2011 approach. Meanwhile, the new state is still not economically viable, being
dependent on foreign aid and imports. The business environment remains under threat from
rampant corruption, unclear bureaucratic procedures, weak infrastructure and legal confusion,
and little progress on reforms is likely in the coming year given the government’s lacklustre
track record to date and the distractions of the approaching polls.
The overall security environment is likely to remain largely benign for business, though further
sporadic inter-ethnic clashes or clashes with security forces remain likely in the Serb-inhabited
northern regions, especially the ethnically divided town of Mitrovica. Rare grenade attacks on
the headquarters of various international bodies are also possible, but they usually occur at night
and are not intended to cause casualties.
Kyrgyzstan
Political risk: M
Security risk: H
President Kurmanbek Bakiyev won re-election in July 2009, easily seeing off a challenge by
Almazbek Atambayev, who stood as the joint candidate of the opposition United People’s
Movement grouping. Prospects for a more transparent political environment during Bakiyev’s
second term of office are poor; intra-elite rivalries and the close links between political and
business figures will continue to hamper the conduct of business. The dividing lines between
opposition and government will be blurred as the president seeks to co-opt erstwhile opponents
into his administration to minimise the risk to his position. Shortages of electricity and foodstuffs
will continue to test social stability, though the divided opposition will be unable to capitalise on
public disenchantment with the government, thereby reducing the risk of destabilising social
unrest.
While building on growing ties with the US, Kyrgyzstan will continue to pursue a close security
and commercial relationship with Russia, including the likely establishment of a second Russian
military base on its territory. This will further complicate Kyrgyzstan’s already difficult
relationship with Uzbekistan, which strongly opposes attempts by its neighbours to strengthen
security relations with Russia for fear of weakening its aspirations towards regional hegemony.
Ethnic tensions, the rise of militant Islamist groups and the presence of organised crime will
ensure continued volatility on the border with Uzbekistan.
Latvia
Political risk: M
Security risk: L
Latvia is one of the countries worst affected by the global financial and economic crisis. The
government collapsed in February 2009 amid massive rioting in opposition to the government’s
austerity measures, and the new administration has struggled to reduce the budget deficit in line
with the terms of its IMF- and EU-backed emergency loan. The government remains committed
to cutting spending to meet the terms of the agreement, but politicking ahead of the 2010
parliamentary elections will generate tensions between coalition members and threaten the
government’s ability to satisfy these requirements. Despite concerns over a possible currency
devaluation, this remains unlikely over the coming year. Any devaluation would be likely to be
controlled or entail a loosening of the country’s 1% peg to the euro, which would minimise its
impact.
The operating and security environments are likely to remain unchanged. Corruption, lack of
transparency and excessive red tape will continue to hinder the business environment. Organised
crime groups remain active, though foreign businesses face only a limited risk of being targeted
for extortion or violence.
Lithuania
Political risk: L
Security risk: L
Although the global financial crisis has devastated Lithuania’s economy, the country has not
suffered from similar political repercussions to neighbouring Latvia. The government has
introduced unpopular austerity measures, but has thus far maintained its popularity, though intra-
coalition disagreements have threatened to trigger its dissolution on several occasions. Should
such tensions persist in 2010, there is a chance that Prime Minister Andrius Kubilius would be
forced to continue as the head of a minority government. Early elections remain highly unlikely.
Given the recession, little progress is likely in addressing the need for structural reforms.
Corruption, and an inefficient and occasionally biased judiciary will continue to undermine the
operating environment. However, organised crime groups are likely to continue their decline,
and the country’s low international profile means that it is unlikely to become a target for
terrorist attacks, despite its presence in Afghanistan.
Luxembourg
Political risk: I
Security risk: I
Prime Minister Jean-Claude Juncker of the Christian Socialist People’s Party will remain in post,
having secured re-election in 2009, though is sure to be mentioned as a compromise candidate
for the new role of president of the EU Council, and has stated he would serve if asked. Even if
he departs, the quiet continuity of policy seen during his tenure would be likely to continue under
his probable eventual successor, Luc Frieden. Despite its status as a major financial centre and
the risk of terrorist attack in surrounding countries, security risks will remain low.

Macedonia
Political risk: M
Security risk: M
The government will remain prone to occasional bickering and disagreements between the
ethnic-Macedonian ruling party and its ethnic-Albanian partner, but is likely to remain stable
over the coming year and will continue to push for gradual reforms that would bring it closer to
EU accession. The persistent diplomatic dispute with Greece over the country’s name will
remain the key point of contention between the coalition partners. Failure by Macedonian parties
to agree to a solution on the dispute that would unblock its bid for EU accession may trigger a
government crisis. However, although this could deepen disagreements between the two ethnic
communities, it would be unlikely to result in any major security issues.
The business environment will continue to improve, albeit slowly. However, obstacles will
persist, such as widespread corruption, weak law-enforcement and poor administrative capacity,
especially at local level. The security environment is likely to remain largely stable, though
occasional protests in the capital Skopje may result in scuffles with police, while the security
forces may engage in shoot-outs in the north-western mountain areas, where organised crime
groups tend to operate.
Malta
Political risk: L
Security risk: I
The Nationalist Party of Prime Minister Lawrence Gonzi will remain in power, despite its wafer-
thin parliamentary majority. Malta’s membership of the euro and its relatively diverse economy
for a small island nation have helped it to weather the global recession relatively well, and Gonzi
will continue his efforts to secure greater assistance from the EU and UN in combating illegal
immigration from Africa. This will remain the hottest political issue, though protests by far-right
groups or by immigrants and their supporters rarely result in violence. There are few security
risks.
Moldova
Political risk: M; H in Transnistria
Security risk: L; M in Transnistria
The change of government after the July 2009 parliamentary elections opened up the opportunity
to undertake liberal reforms and reduce corruption. However, the ousted Communist Party may
return to power in 2010, in early elections likely to be precipitated by parliament’s failure to
elect a president. The young, liberal, pro-Western ruling coalition lacks experience in
government and faces the challenge of proving itself very quickly while burdened with a large
public deficit. This provides for policy uncertainty and the risk of government instability in 2010.
The country is likely to continue to feel the effect of the economic crisis in European countries
through the reduced level of remittances from emigrant workers. The new government has
pledged to implement a series of cuts in red tape that should facilitate trade and improve business
conditions. However, any more fundamental reform that they may manage to introduce will not
produce manifest benefits on infrastructure, corruption and the rule of law until after 2010.
Meanwhile, the poor prospects for resolving the separatist conflict with the breakaway region of
Transnistria will continue to complicate the political, operational and security situation in that
region.

Montenegro
Political risk: M
Security risk: L
The political and security environments are expected to remain stable in 2010, but business
conditions will continue to be difficult and longer-term prospects are uncertain. The Democratic
Party of Socialists (DPS), led by Prime Minister Milo Djukanovic, will continue to retain tight
control over state institutions and the local economy as it has done since 1991, prolonging the
lack of transparency in government operations. The business environment will continue to
present few investment opportunities, and will remain underdeveloped and dependent on the will
and interests of local and central politicians. Although Djukanovic’s government is likely to
remain stable in 2010, the outcome of any key DPS figures attempting to seek the leadership and
unseat Djukanovic in the future is uncertain. Such a move could lead to severe splits within
society and even trigger a destabilisation in the security environment. However, the security
situation will remain stable in 2010, posing few risks to businesses operations.
Netherlands
Political risk: L
Security risk: L
While the grand coalition government led by Jan Peter Balkenende is timid and at times
ineffectual, it is likely to remain in place throughout 2010. The two main parties, the Christian
Democratic Appeal (CDA) and the Labour party (PvdA), are both performing below their
historic levels in opinion polls because of the rise of Geert Wilders and his Freedom Party
(PVV), and will not want to risk a collapse that might force elections. Wilders’ favourite issue,
that of Islam and the integration of Muslims within Dutch society, will remain high on the news
agenda, though few of the headline-grabbing stories will reflect a genuine risk to business, or to
political or social stability. In common with most of Western Europe, the economic recovery will
begin in earnest in 2010, though with the banking system still not completely stable, this could
be rather slower than in neighbouring countries.
The country’s prominence in the Western economy and society, and its continued involvement in
Afghanistan, will add to the integration issue to create a credible threat of a terrorist attack.
Meanwhile, organised criminal structures will remain attracted to one of the main European
centres for shipping and distribution.
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Norway
Political risk: I
Security risk: I
The re-election in September 2009 of the governing centre-left coalition under Jens Stoltenberg
will ensure quiet continuity in policy in 2010. The sovereign fund for oil revenues, payments
from which limited the effects of the economic crisis on Norway, can be expected to resume
growth. The security environment will remain benign, though controversy relating to the
potential deportation of Iraqi Islamist extremist Mullah Krekar may resume.
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Poland
Political risk: L
Security risk: L
Intense political rivalry between President Lech Kaczynski and Prime Minister Donald Tusk will
continue to dominate the political scene in 2010. Conservative Kaczynski has vowed to veto any
legislation that does not meet his populist objectives, while Tusk has proven unwilling to
advance reforms that might jeopardise his popular support before a presidential election in
November 2010. Despite a series of high-profile political scandals in 2009, Tusk’s strategy has
helped to maintain his lead in opinion polls, ensuring that he is likely to beat Kaczynski in the
poll. In principle, such a result would allow Tusk’s ruling Citizens’ Platform (PO) to embark on
a more liberal reform agenda, including policies to improve the business environment, but these
may be further delayed until after general elections due in 2011.
Meanwhile, the primary challenge for the government in 2010 will be to rein in the growing
budget deficit and speed up the eurozone-accession process without discouraging economic
growth. To this aim, some progress with privatisation can be expected, though it is likely to
proceed in a haphazard manner, with the government preferring to sell minority stakes rather
than sell major companies to strategic investors. Infrastructure is likely to improve gradually, as
EU funds and pressure from construction lobbies encourage the government to undertake
improvement work. However, excessive red tape and corruption will continue to permeate the
business environment.
In security terms, Poland will remain a safe destination for foreign investment in 2010. Aside
from petty crime, foreign businesses are unlikely to experience direct threats. Poland is also an
unlikely target for terrorist attacks, despite having agreed to host elements of the newly
revamped missile-defence shield plan put forward by President Barack Obama’s administration
in replacement of that of his predecessor.
Portugal
Political risk: L
Security risk: L
The Socialist Party (PS) led by Prime Minister José Socrates lost its parliamentary majority in
legislative elections in September 2009. Consequently, it is likely to enter 2010 under pressure to
form a coalition, but preferring to govern in a minority. This is unlikely to derail its overall
policy direction of stimulus-spending in the short term, in the context of relative austerity in
better times. The risk of an attack by international terrorists is low, and no significant domestic
terrorist groups are active.
Romania
Political risk: M
Security risk: L
The prevailing political instability of the past few years intensified in autumn 2009 when the
grand coalition government collapsed, leaving an impotent minority government in its place,
which lost parliament’s confidence soon afterwards. This instability may drag on into 2010, with
the possibility of early elections being called for the spring once the presidential poll has taken
place in December 2009. Another election would bring even more uncertainty and, given the
likely inability of either party to easily form a governing majority, could entail months of
negotiation over government formation. Such an impasse would effectively block policy-making
and implementation. This would jeopardise the fulfilment of the country’s IMF stand-by
agreement and the overall condition of the economy, making tax increases more likely in 2011.
Moreover, regulatory uncertainty will increase for businesses until a strong majority cabinet is
able to establish itself. Similarly, no progress will be made in improving other aspects of the
business environment, such as streamlining excessive red tape or tackling widespread corruption,
which is especially prevalent within local government.
However, the security situation is expected to remain largely stable in 2010 and to pose very few
risks to investors on the ground. The risk of a terrorist attack remains low, as do overall crime
levels, though the incidence of robbery and theft from commercial outlets has increased in 2009.
Russia
Political risk: M; H in north Caucasus
Security risk: M; H in north Caucasus
Having managed to maintain political stability in 2009, the government is likely to continue to
do so in 2010. Although Prime Minister Vladimir Putin and President Dmitry Medvedev may
occasionally convey slightly divergent messages, their consensus on fundamental strategic
policies will ensure that they continue to collaborate smoothly. Nevertheless, social discontent
has increased and is likely to remain heightened in 2010. The country’s over-reliance on oil
exports at a time of declining oil prices at the end of 2008 and beginning of 2009, coupled with
poor levels of competitiveness in the rest of the economy, left it particularly vulnerable to the
effects of the global crisis. However, a recovery in oil prices in the second half of 2009, and the
government’s strategy of spending most of the national reserve fund to support the economy (by
cushioning the ruble’s depreciation, recapitalising banks and saving ailing enterprises in strategic
economic sectors or in ‘company towns’) has helped Russia to avoid more pronounced
instability.
The government failed to use the financial crisis as an opportunity to introduce structural reform
and diversify the economy away from energy exports, which would have helped it to become
more resilient to future international economic crises. Moreover, it is unlikely to do so as the
economy undergoes a sluggish recovery in 2010. Paradoxically, only a steeper decline in oil
prices (to well below $50 per barrel) would be likely to spur the authorities into considering such
measures. Consequently, the government will instead continue to prop up the poorly functioning
sectors of the economy by drawing on reserve funds and increasing taxation in 2010.
Russia is also likely to start borrowing internationally and privatising infrastructure and other
assets to balance its budget deficit in 2010. To contain growing unemployment levels, the
authorities have succumbed to appeals for financial support from the main business players. As a
result, well connected oligarchs loyal to the government will continue to dominate the economic
model in 2010, to the detriment of its overall competitiveness. There is little prospect of the
problems of conflict of interest and corruption abating in 2010. Despite the arrests of some high-
profile figures on corruption charges in 2009, Medvedev’s anti-corruption initiatives are unlikely
to produce tangible results because of their reliance on the flawed state apparatus for
implementation. The lack of a competitive political system in which the main media are
independent from the government will ensure that corruption persists.
Security and economic crime risks are likely to remain high during the recession and the initial
recovery period. Xenophobic and racist attacks will continue to pose a security risk in 2010,
exacerbated by the social effects of the economic downturn. The terrorism threat will remain
high in the North Caucasus, where the security situation is deteriorating, as are economic and
political stability. A collapse of law and order in the North Caucasus would probably also
presage an increase in the terrorism threat in Russia’s main cities.
Serbia
Political risk: M
Security risk: L; M in Sandzak, Presevo
The pro-Western government that took power in 2008 has remained stable in 2009. Nevertheless,
disagreements between the three main coalition partners have mounted, and the coalition is at
credible risk of breaking up in the course of 2010 – especially if economic conditions improve
and the ruling parties believe that early elections could work in their favour. Meanwhile, the
government is likely to persist in its efforts to stabilise the economy, and to pass some gradual
reforms to improve the business environment and fulfil EU accession conditions. However, those
reforms are not expected to be overly ambitious. Consequently, the business environment will
continue to face high levels of corruption, reputational risks associated with war criminals or
organised criminal groups, and a cumbersome bureaucracy, coupled with non-transparent
decision-making at all levels of government.
The country is expected to remain largely safe for business in 2010, because of the overall
stability of the security situation and absence of major sources of threat with the potential to
disrupt it. The risk of a terrorist attack also remains low, despite some alarmist rumours
published in local media that extremist Albanian Islamists have been plotting attacks in the
country. Security risks may be slightly higher in the southern regions of Sandzak and Presevo
valley, where law enforcement remains weak, allowing for occasional small-scale clashes
between various ethnic-Albanian political or criminal groups.
Slovakia
Political risk: M
Security risk: L
The increasingly populist position of Prime Minister Robert Fico and his Direction-Social
Democracy (Smer-SD) party is likely to continue in 2010. Fico and his government will continue
to advocate a greater role for the state in the economy, especially in the energy sector and others
that are considered key to public welfare, such as utilities, health insurance and retail. The trend
for this rhetoric to translate into state intervention in these sectors, in the form of sudden, non-
transparent regulatory changes, is also likely to persist. Fico’s interest in appealing to the less
affluent sectors of the electorate will intensify ahead of general elections due in June 2010.
Fico and Smer-SD are likely to be re-elected, but may have to again form a coalition government
with smaller nationalist parties. The country’s EU membership and dependence on Western
investors should effectively prevent the new government from proceeding with its threats of
nationalisation and market over-regulation. However, the operating environment will continue to
be plagued by significant regulatory uncertainty, an inefficient and politically influenced
judiciary, and corruption. The last problem appears to have worsened under Fico and affects all
layers of public administration and numerous public-procurement processes.
The security environment is expected to remain largely stable and will continue to present
minimal risks to investors.
Slovenia
Political risk: L
Security risk: L
The country remains essentially stable both politically and in terms of security. The centre-left
government led by Prime Minister Borut Pahor is expected to remain in office in 2010.
Nevertheless, disagreements between members of the ruling coalition government, as well as
more frequent protests as a result of increasing unemployment, may pose some challenges.
Under such pressures, the government is unlikely to pursue any substantial reform, such as of the
pensions or judicial systems, or to progress with privatisation. No major changes are therefore
expected in 2010 in the business environment. It is likely to remain largely favourable to
investment, but occasionally to lack transparency and to be slowed by an overburdened judicial
system. The security environment is likely to remain safe for doing business in 2010.
Spain
Political risk: L
Security risk: L; M in Basque country
Prime Minister José Luis Rodríguez Zapatero will continue in office. Although his Socialist
(PSOE) party’s minority government will face an increasingly tough task in passing legislation,
it is unlikely to be brought down before its term expires in 2012. The economy will continue to
be the predominant concern, with high unemployment persisting even as a recovery begins. The
opposition People’s Party (PP) will struggle to make a significant impact, having been beset by
internal discord and a corruption scandal in 2009.
Police operations, particularly those involving co-operation with France, will continue to weaken
Basque separatist terrorist group ETA. Nevertheless, the group is likely to carry out occasional
spates of activity, particularly in the holiday months of July and August. Law-enforcement
agencies, the military and symbols of the Spanish state will be the main targets, with little threat
to business.
The authorities are likely to carry out occasional arrests of Islamist extremists, though the
suspects are likely to be involved only in fund-raising. Nevertheless, an attack remains a credible
threat.
Sweden
Political risk: I
Security risk: I
Sweden will remain a calm and predictable environment for business. The centre-right
government will remain stable and active, buoyed by its success in ensuring the ratification of
the EU’s Lisbon Treaty under its leadership. The government’s 2010 budget is focused on
unemployment, which will continue to be the main economic problem. Few significant security
threats pertain, though a spate of armed robberies in late 2009 looks set to continue in the
absence of major arrests.
Switzerland
Political risk: L
Security risk: I; L in Geneva, Zürich, Berne

The governing coalition has settled into its role and is set to remain stable in 2010. Christoph
Blocher, the popular former minister from the right-wing Swiss People’s Party (SVP/UDC), will
continue to provide a controversial counterpoint to government policy, but is unlikely to
destabilise the situation significantly. Following the successes of the US and German authorities
in 2009 in challenging the practice of banking secrecy in the country in relation to tax avoidance,
other countries are likely to take significant action in this area in 2010. This will cause a degree
of resentment but will not significantly harm relations. Islamist extremist activity in the country
has increased in 2009, as it has in neighbouring Austria, though the likelihood of a significant
attack remains low compared with other Western European countries.
Tajikistan
Political risk: H
Security risk: H
Deteriorating living conditions resulting from declining remittance inflows, food shortages and
electricity rationing are likely to increase support for the opposition in the run-up to the February
2010 elections. In particular the Islamic Renaissance Party (IRP), which reports growing levels
of membership, is likely to benefit. However, the IRP will be unable to present a serious
challenge to President Imomali Rahmon’s People’s Democratic Party of Tajikistan (PDPT),
which is likely to emerge triumphant in the elections.
Despite food and energy shortages, appetite for social unrest will remain weak; the country’s
five-year civil war, which ended in 1997, has left the population unwilling to engage in
confrontational politics. Nevertheless, low-level turf wars between criminal groups might erupt
sporadically over control of lucrative trade and drug-trafficking routes. The core foreign-policy
relationship with Russia will persist, and the government will also seek to develop relations with
China and South Asian states, in the hope of securing investment in the hydroelectricity sector.
Tajikistan will also remain reliant on international development aid. Security concerns will
persist, particularly in areas close to the porous border with Afghanistan, and the threat of
militant activity spilling over will ensure that bilateral relations with Uzbekistan will remain
tense.

Turkmenistan
Political risk: M
Security risk: M
President Gurbanguli Berdimuhamedov will continue to court Western hydrocarbons companies

with the aim of securing investment in offshore oil- and gas-fields. However, opportunities for
Western companies to develop the country’s complex onshore fields will remain limited; instead,
Chinese state companies are likely to be Berdimuhamedov’s preferred suitors. The president will
continue to assert support for Western-backed projects such as the Nabucco gas-export pipeline,
but will remain reluctant to commit any gas supplies to Europe until construction is guaranteed.
Berdimuhamedov will continue along a path of incremental political and economic reform
without internal challenge in 2010. The security situation will remain broadly stable, and the near
absence of political opposition will ensure that the risk of social unrest stays low. Turkmenistan
could become a target for militants seeking to disrupt supply networks supporting the NATO
coalition forces in Afghanistan, but is also likely to benefit from greater US support in security
matters. Relations with Russia will remain strained, as a result of continued disagreements over
the volume and price of Turkmenistan’s gas exports. A gas-export pipeline to China is expected
to come on-stream in late 2009-early 2010, and China will eventually rival Russia as
Turkmenistan’s largest export market. Turkmenistan’s relations with its Caspian neighbours will
periodically come under strain. Ties with Iran are likely to stabilise following an agreement in
mid-2009 to increase the capacity of the gas-pipeline network linking the two countries; Iran’s
imports of gas from Turkmenistan are set to pick up from 2010, but disagreements over pricing
could destabilise relations again. We do not expect Turkmenistan to pursue its threat to take
Azerbaijan to international arbitration over several disputed offshore hydrocarbons fields, but nor
are the two sides likely to reach agreement on the issue.
Ukraine
Political risk: M
Security risk: M
After serious economic turmoil and a divisive presidential election campaign in 2009, the
business environment is likely to remain challenging in 2010. The budget deficit will continue to
require external financing following a sizeable GDP decline in 2009, with only modest economic
growth forecast in 2010. Although completion of the presidential poll in January 2010 would
bring a pause to populist electioneering and attenuate the bitter conflict between political leaders,
early parliamentary elections are likely, reigniting rivalries. Moreover, the risk of political
interference in business is likely to increase, with the new president targeting businesses
associated with his/her opponents.
The presidential election is likely to go to a run-off between opposition leader Viktor

Yanukovich and Prime Minister Yuliya Tymoshenko. It will be a neck-and-neck race, reflecting
the basic political division in the country. Tymoshenko’s chances rest on her capacity to retain
populist appeal in the face of IMF demands for austerity measures, while Yanukovich will blame
the government for economic hardship. The outcome will determine foreign relations,
particularly the tone of relations with Russia, which have been difficult under President Viktor
Yushchenko. Relations would be optimal under Yanukovich.
No single party or bloc is likely to gain an outright majority of seats if parliamentary elections
take place, which will lead to further instability. This will continue to impede regulatory reform,
imperil co-operation with international financial institutions and delay the country’s progress
towards the elusive goal of EU integration.
Crimea will remain a potential flashpoint because of its high concentration of ethnic Russians,
the long-term grievances of the local Tatar community and the contested status of the Russian
Black Sea fleet stationed in Sevastopol. However, the situation is unlikely to escalate into
sustained, widespread violence or armed conflict with Russia. Racist attacks in the capital Kiev
perpetrated by extreme right-wing youth groups are likely to persist.
United Kingdom
Political risk: L
Security risk: L
General elections, which must be held by the first week of June 2010, will dominate the coming
year. The Conservative party is likely to win a workable majority, ending 13 years of Labour
government, though the public remains unconvinced by the merits of Conservative leader David
Cameron; his chief attraction is that he is not Prime Minister Gordon Brown. The Conservatives
are likely to attempt to reduce the UK’s budget deficit and debt rapidly, and the resultant cuts in
public services are sure to attract opposition from trade unions. The economy will return to
positive growth in 2010, though it will lag one or two quarters behind the large economies of
continental Europe.
The threat of Islamist extremist terrorist attacks – which has faded from the headlines amid the
economic crisis and scandals such as that over MPs’ expenses – will remain real, though there
were some suggestions in late 2009 that extremist activity has eased slightly. Nevertheless,
heightened security will mark the election period, and a number of threats are likely – probably
from individuals or groups without the capability and intent to stage an attack. However, the
resilience displayed by business, government and the public after previous attacks will limit any
resultant disruption.
The question of policing in Northern Ireland remains a thorny issue as we enter 2010. However,
although the major Northern Irish parties are likely to engage in brinkmanship, they are unlikely
to reach a stage where they can no longer work together in the power-sharing government.
Dissident republican groups will stage occasional attacks in Northern Ireland, but are unlikely to
be able to attack in Great Britain.
Uzbekistan
Political risk: H
Security risk: M; H in Kyrgyz border areas, Fergana Valley

Parliamentary elections in December 2009 will not result in any significant change to the
political configuration of the legislature. Moreover, the dominance of the presidency in decision-
making will ensure that the legislature remains a toothless body. Speculation about the state of
President Islam Karimov’s health will continue to circulate, particularly as, with no clear
successor, his sudden departure from the political scene would create a political vacuum that
might give rise to a period of internecine conflict between elite factions. However, assuming that
he remains in charge, political and economic stagnation will persist, tempered by a few
superficial liberalising gestures in a nod to Western pressure. Ensuring stability in Uzbekistan
will remain a key goal of the US and the EU, given the country’s importance as a transit route for
goods destined for the coalition forces in Afghanistan. The security situation has been calm for
several years, but in mid-2009 several attacks attributed to Islamist militants were conducted
against the security and police forces. Further such attacks against the government and security
forces are likely to take place, particularly as NATO military operations in Afghanistan and
Pakistan force Central Asian militant groups out of these areas.
Uzbekistan’s complex relationship with Russia will remain strained. The government in 2009
rejected calls by the Russian administration to contribute to a rapid-reaction force under the
auspices of the Russia-led Collective Security Treaty Organisation (CSTO), and spoke out
strongly against Russian plans to establish a second military base in neighbouring Kyrgyzstan.
These issues will continue to cause unease and ensure that Karimov continues to court Western
and Asian investors, particularly in sectors such as mining. Close historical and economic links,
and long-standing familiarity with business practices, will nevertheless ensure that Russian
companies retain a strong foothold in Uzbekistan.
Middle East
Middle East and North Africa regional overview
While the rest of the world has been preoccupied with the global recession, politics has remained
the primary focus in the Middle East. Developments across the region in recent years have
emphasised the primacy of political over purely economic issues in generating large-scale
political instability. For example, incidents of economically inspired unrest in Iran in recent
years pale into insignificance compared with the protests in 2009 against the perceived
fraudulent re-election of President Mahmoud Ahmadinejad.
This trend will continue in 2010, with elections in Iraq in January and Sudan in April potentially
providing a focal point for already significant political tensions at the local, regional and national
levels. In southern Sudan’s heavily militarised environment, electoral rivalry is likely to translate
into localised violence; given the central and southern governments’ attempts to manipulate the
ballot, results are likely to be contested, raising the risk of a serious post-election political crisis.
In Iraq, meanwhile, extremists are likely to use the country’s parliamentary elections to stoke
tensions among ethnic groups, particularly in northern Iraq, Baghdad and disputed territories
bordering the northern Kurdistan Region, by carrying out a renewed campaign against ‘soft’ –
particularly civilian – targets. The spike in violence will be aimed at derailing the political
process, which is currently limiting foreign extremists’ room for manoeuvre, and compromising
the US military’s commitment to withdraw from the country under the terms of the Status of
Forces Agreement.
Escaping the crisis
Much of the region appears to have emerged from the global economic crisis comparatively
unscathed, in many cases shielded from the worst effects by the conservatism of regional
banking systems. Major oil-producers in particular escaped significant damage because of a swift
rebound in oil prices and, while non-oil producers fared less well, they have largely avoided
significant downturn-inspired political instability or serious socio-economic unrest. However,
central banks and sovereign wealth funds in the Gulf were forced to disburse large surpluses to
save less cautious neighbours such as Dubai, which had over-leveraged itself in its frenzied race
for development, and the effects of the downturn will continue to reverberate in the coming year.
Resource-poor…
Governments in resource-poor countries that attempted to follow the West in using expansive –
and expensive – fiscal policy to counter the effects of the downturn will, in common with many
other countries, have to start reining in spending in 2010 or face serious sustainability questions.
Turkey’s government in particular faces a tough choice between spooking international markets
or restoring fiscal discipline and potentially alienating voters ahead of parliamentary elections in
2011. The government has already announced plans for cuts, some of which will affect
international companies which rely on government projects and spending, though it remains to
be seen whether these will be sufficiently swift or wide-ranging to quell investors’ doubts. The
government risks satisfying no one, potentially opening itself up to further attacks by the
secularist establishment.
Although boosted by a return to co-operation with the international community and the likely
unfreezing of foreign aid, Mauritania will also have to take steps to reverse populist spending
rises introduced in the wake of the country’s 2008 military coup; according to the IMF, these
have resulted in a serious deterioration in public finances. Elsewhere, both Morocco and Egypt
will suffer from lower export and tourism revenues, and also their persistent inability to
eliminate wide-ranging subsidies, in large part because of unrest generated by past attempts to
reform their subsidy systems. Jordan, which the IMF expects to experience a 3% contraction in
GDP in 2009, is likely to continue to pursue expansionary fiscal policies to offset the impact of
the slowdown, though the lifting of fuel subsidies during the boom years should help to reduce
its vulnerability to external shocks.
Lebanon appears to have successfully weathered two separate storms, namely the global
economic downturn and persistent political instability, and bucked global trends in 2008 and
2009 with two years of stellar economic growth. In addition, the banking sector has attracted
investment because of state backing and a reputation for conservative practices that have helped
to shield it from external shocks. However, the long-term threat of renewed conflict between
Shia movement Hizbullah and Israel, which the economy would not be able to shake off so
easily, or protracted clashes between domestic armed groups, will remain a latent concern in
2010.
...and resource-rich
Oil-rich countries face different dynamics. This is particularly the case in Iraq, where global oil
prices and developments in the security environment will be the two key drivers of the economy.
The qualified rebound of the oil price, should it be sustained in 2010, will enable Prime Minister
Nuri al-Maliki’s government to continue to invest in security, though at the expense of
muchneeded investment in areas such as infrastructure. The continued withdrawal of US forces
in 2010 will present a significant challenge to the government, particularly if groups affiliated
with unsuccessful political coalitions are excluded from power once January’s scheduled
parliamentary elections have been held, leaving them with little option other than to revert to
violence.
The next government will have to divert considerable resources to develop the capacity of the
country’s intelligence and security services to meet a sustained spike in political violence.
Diverting resources towards security provision will mean that funds intended for other sectors,
including infrastructure, health and education, will dry up. Businesses operating in these sectors
may experience an increase in political risks in 2010 as issues such as contract frustration and
non-payment become more frequent, while gaps in security provision may appear in other areas
of the country, heightening the overall level of threat facing foreign businesses.
The financial crisis has not shaken the legitimacy or stability of the Gulf states, where
governments swiftly and actively reacted to the downturn, rapidly bailing out banks and real-
estate developers. Nonetheless, the downturn highlighted latent but intrinsic weaknesses in the
region’s business environment, which are likely to have an impact on investor confidence in
2010, regardless of the benefits that remain to be reaped. For example, a scandal involving two
prominent Saudi Arabian family-owned conglomerates in 2009 crudely exposed the absence of
transparency and regulation in the banking system, while also pointing to the inefficient and
corrupt system of money-borrowing by family businesses in the region. Further repercussions, in
the form of difficulties in accessing capital for similar conglomerates and possibly further major
insolvencies are likely in 2010.
Coming in from the cold?
US policy will be key in determining which regional countries move towards shedding their
status as international ‘pariahs’ in 2010. While Obama’s emphasis on engagement and
diplomacy has raised hopes across the board, more hawkish voices within the US administration
are likely to prevail on Iran and Sudan, exacerbating political, operational and reputational risks
for foreign business. There is, however, greater room for a thaw in relations between Syria and
the US.
Sanctions likely to replace engagement in Iran
Despite encouraging signs in October 2009 in the form of a mooted deal to remove stocks of
low-enriched uranium from Iran, an eventual failure of negotiated efforts to resolve the dispute
over the country’s nuclear programme remains the most likely scenario. Much will depend on
whether the Obama administration is willing to allow Iran to continue enriching uranium without
interruption (given that it appears very unlikely to stop) and whether or not Iran will permit a far
more intrusive inspections regime. Both are possible, but on balance both boxes are unlikely to
be ticked.
Obama is likely to feel that he has little choice but to let ‘liberal hawks’ pursue their aggressive
sanctions agenda from mid-2010 onwards. However, while he has managed to marshal a
significantly more unified international front against Iran’s nuclear programme than in previous
years, Russia and China are unlikely to sign up for anything like ‘crippling’ sanctions, and a
significant intensification of current UN sanctions consequently remains unlikely in 2010. A
coalition of largely Western countries is likely to seek to intensify bilateral sanctions, but few
will be willing to go as far as the US, threatening international unity over Iran. Although Obama
seems skeptical about the utility of sanctions, he is likely to be forced to allow Congress to put
forward at least some additional unilateral sanctions in 2010 in the absence of a major
breakthrough.
Sudan out, Syria in?
Although new measures such as additional sanctions are not on the horizon, we do not expect US
ties with Sudan to improve in 2010. As the Sudanese government remains unmoved in the
absence of genuine incentives, the US administration’s attitude is likely to harden, reducing
already limited prospects for an easing of sanctions- and divestment-related risks to business. By
diminishing the central government’s willingness to co-operate and encouraging grandstanding
by the southern regional government, a colder US approach would risk exacerbating north/south
tensions, potentially reversing mediation progress made by US envoy Scott Gration. However,
with little real fighting currently occurring in Darfur, additional pressure looks unlikely.
Despite speculation that Obama has already grown weary of trying to engage Syria and that
relations are souring, we believe that the US remains committed to engagement, though as an
adjunct to the Israel/Palestine conflict and, most importantly, the Iranian nuclear dispute, rather
than a priority in itself. Nevertheless, even if Iran-US dialogue fails – our most likely scenario –
we believe that progress will be made in some areas in 2010, specifically over matters of
intelligence-sharing and securing the border between Syria and Iraq. In exchange, the US is
likely to review sanctions against Syria with a view to lifting some of the more obtrusive
measures.
No breakthrough on Israel/Palestine
While there is a chance of talks and possibly even progress or agreement on a number of
secondary issues in 2010, prospects for a comprehensive and implementable Israel-Palestine
peace deal will remain as remote as ever. With a right-wing coalition in power in Israel and the
Fatah-led Palestinian Authority (PA) worried about being outflanked by Hamas, US efforts to
force the two sides together will remain pivotal if progress is to be achieved, as Obama appears
keenly aware.
Having seen his initial efforts run into trouble early on, with Israel more or less rebuffing his
demand for a settlement freeze, Obama is likely to take a different approach in 2010. This could
see him push for immediate final-status negotiations despite PA President Mahmoud Abbas’s
insistence on a settlement freeze first. However, this would make Abbas look weaker still and
limit his room to make concessions. Israel’s government also looks unlikely to make significant
concessions of its own free will, and is likely to be less fearful of major US pressure following
the settlement dispute. With battles over health care and US congressional elections looming
towards the end of the year, the US is likely to become increasingly distracted from the issue.
Meanwhile, Arab governments will see little reason to make conciliatory gestures towards Israel
in the absence of wider progress on the peace process.
Militant threats
The merger of Saudi and Yemeni militants announced at the beginning of 2009 will continue to
have serious implications for the security environment in the Gulf. The presence of Islamist
extremism in Yemen is not new, but the latest generation of militants, operating under the
umbrella of al-Qaida in the Arabian Peninsula (AQAP), will continue to prove a sophisticated
adversary with regional ambitions and evolving regional capabilities. However, despite the
region’s reputation as a hotbed of conflict and terrorism, security problems will remain a
moderate or minor threat in most countries.
Growing political instability and insecurity in Yemen during 2010 may increase militants’ room
for manoeuvre. This will enable AQAP to plan increasingly complex operations both in Yemen
and also against a widening array of targets across the Gulf. In Yemen, AQAP will continue to
target government, security force and foreign interests; in the wider region, attacks are likely to
be aimed at both official and foreign targets, with the numerous prestige construction projects in
the Gulf providing a range of potentially spectacular targets. A complicating factor might be the
arrival of al-Qaida’s core leadership from the Afghanistan-Pakistan border should the Pakistani
government’s military offensive in the country’s tribal regions be successful. Nevertheless, the
threat will remain largely manageable, and attacks are unlikely to have a lasting effect on the
business environment.
Elsewhere, al-Qaida in the Islamic Maghreb (QIM), while continuing to pose a serious threat in
certain mountainous areas of northern Algeria, remains under constant pressure from the security
forces, which is likely to prevent any significant expansion in the group’s activity. The group
also faces a more hostile security environment in most of Algeria’s North African neighbours –
in contrast to the more permissive environment offered by the Sahel states, and notably
Mauritania. In the latter, extremism has become a pressing problem since 2008, and will
continue to pose a threat in 2010, with the emergence of local QIM cells in the country
demonstrating the potential for new regional threats to evolve.
Algeria
Political risk: M
Security risk: H, M in main urban centres, southern-oil producing areas
Despite President Abdelaziz Bouteflika’s re-election in 2009 to another five-year term, high
politics in 2010 will be dominated by the unresolved issue of who will eventually succeed him
and how that succession will be determined. Rapid progress is unlikely. The question forms part
of a broader struggle concerning the balance of power between the presidency and powerful
factions in the politico-military elite, whose members are likely to prove tenacious in the face of
Bouteflika’s efforts to impose his chosen candidate. Clarity about the main candidates in the
succession contest is likely to prove elusive. This includes the possible presidential ambitions of
Bouteflika’s brother, Said. The Bouteflikas’ bid for a brother-to-brother succession is likely to
take shape only gradually, and the chances of such a bid succeeding will remain highly uncertain
in 2010.
Stalemate within the upper echelons of the state will ensure that policy- and decision-making
remain erratic and prone to sudden reversals, particularly on the economy and investment. The
government’s nationalist stance on economic policy will continue, as will pervasive intervention
by officials in business. This politicised commercial environment poses extensive obstacles and
risks to foreign investors, especially outside the upstream oil and gas sector. Companies will also
remain at risk of collateral damage from the recurrent corruption scandals that accompany tussles
between political rivals, as well as selective government discrimination (frequently for opaque
reasons). The sobering impact of measures introduced during 2008 and 2009 tightening foreign
investors’ terms will become increasingly apparent during 2010, but major changes to investors’
terms remain unlikely in the oil and gas sector, which is governed by a separate regulatory
framework.
Security will remain both a source of concern and an operational obstacle for foreign companies
in 2010. However, the main domestic extremist group, al-Qaida in the Islamic Maghreb (QIM),
will remain under sufficient pressure from the security forces to prevent it from expanding
beyond its traditional strongholds in mountainous areas in the north. Following a campaign of
spectacular suicide bombings in 2007-08, the group’s capabilities and intention to carry out
major attacks in main cities and/or against foreign companies have been weakened by counter-
terrorism operations and internal squabbles. While a new campaign of bombings remains
possible, a significant increase in terrorist activity is unlikely, and attacks in cities or against
foreign companies are likely to remain infrequent.

Bahrain
Political risk: L
Security risk: L
Following labour market reforms in 2009, including abolition of the sponsorship system for
foreign workers, the government is likely to remain focused on increasing the proportion of
Bahrainis in the local workforce. The government to date has tried to balance retaining foreign
workers while finding employment for local nationals who currently lack the skills to compete
effectively for positions in the private sector.
The issue is complicated by continuing tensions between the ruling Sunni minority and the Shia
majority, which faces systematic discrimination. The government will persist with efforts to ease
these tensions, but reforms in recent years have been largely cosmetic, and significant political
and economic disparities are likely to persist in 2010. Well-attended popular protests by
members of the Shia community are likely to be relatively frequent and some could turn violent
as the Shia community’s sense of political and economic marginalisation deepens.
Bahrain’s pro-Western orientation, rich array of targets and relatively loose physical security
around key symbolic and commercial facilities will continue to make the kingdom a potentially
attractive target for extremist groups in 2010. However, its relatively peaceful history and lack of
known domestic extremist groups will mean that the terrorist threat remains low.
Egypt
Political risk: L
Security risk: L
President Hosni Mubarak’s son Gamal has said that 2010 will be a decisive year for Egypt,
suggesting that his candidacy in the 2011 presidential election could be formally confirmed. The
timing of any announcement depends on how soon after November’s parliamentary elections the
ruling National Democratic Party (NDP) holds its congress. Serious opposition to Gamal’s bid
from within the ruling elite and security establishment is unlikely, while the opposition lacks the
ability to mobilise sufficient popular support to credibly threaten a smooth succession.
The parliamentary elections will provide a focal point for tensions between the state and the
main opposition group, the Muslim Brotherhood, as well as between rival establishment
politicians running for the NDP or as independents. However, while localised demonstrations
and intimidation of politicians and voters are likely, the elections will be tightly controlled. The
Muslim Brotherhood will face wider obstacles to its participation than during the 2005 elections,
and is consequently unlikely to maintain its current strength in parliament.
The global downturn will continue to affect economic growth, the government’s fiscal position
and the fundamentals underlying both – Suez canal receipts, workers’ remittances, tourism and
FDI. As during the past three years, the 2010-11 budget will require a careful balancing act
between protecting fiscal sustainability and minimising socially unpalatable moves such as
privatisations or cutting spending on subsidies and public-sector wages.
The security situation is likely to remain stable. Close monitoring of the Islamist extremist milieu
and regular arrests of suspected extremists by the powerful security apparatus will keep a lid on
the terrorist threat, though occasional small-scale attacks on soft targets by small cells or
individuals without sophisticated capabilities remain possible. Large-scale attacks would remain
isolated incidents.
Iran
Political risk: H
Security risk: L: M in Sistan-e Baluchistan, north-western border areas

The opening in late 2009 of negotiations between Iran and the international community –
including direct US involvement and bilateral Iran-US contact – has given rise to a significant
opportunity to reverse Iran’s increasing international isolation in 2010. However, the most likely
scenario remains the eventual failure of talks, and moves by the US and some Western allies to
exert more pressure on Iran in the form of sanctions, with conflict possibly waiting in the wings.
The result of the talks may become clear early in 2010 should the Obama administration decide
that it has not made sufficient progress ahead of its self-imposed deadline (the end of 2009). The
US is likely to keep some form of engagement open even if the talks go poorly: the
administration is aware that there are no straightforward military or sanctions options that
guarantee an Iran free of nuclear weapons.
Should the talks fail, Russia and China are highly unlikely to agree to strong sanctions at the UN,
though a fourth round of more targeted and comparatively mild UN sanctions will be possible
from early 2010 onwards. These would have only a minimal effect on the Iranian economy, but
could further complicate doing business both in and with Iran. The US will seek to implement
further imaginative and targeted sanctions, and intensify informal pressure on business, with the
aim of further isolating Iran. It is likely to remain lukewarm over implementing proposed
unilateral sanctions being considered by Congress in late 2009 because of doubts about their
effectiveness, as well as international opposition. However, political considerations mean at least
some of the measures could be signed into law.
The threat of a US and/or Israeli military strike will persist in 2010. If a mooted deal to ship
Iran’s stocks of low-enriched uranium out of the country proceeds, delaying Iran’s notional
ability to build a nuclear weapon by at least a year, the timetable for any such strike would be
likely to be pushed back. A unilateral Israeli military strike will become more credible towards
the end of 2010 if there is no progress towards a deal, but is not the most likely outcome under
almost any circumstances in coming years. A US strike, though not out of the question even
under Obama, is less credible in 2010, with the administration likely to be in no hurry to enter
another Middle Eastern war.
On the domestic front, the re-emergence of the mass demonstrations and unrest that followed the
2009 presidential election is unlikely. The regime appears to have regained control of the
situation and rifts among conservative factions seem to have temporarily healed. However, the
protests revealed significant levels of political discontent, and developments such as future
elections or the succession to Supreme Leader Ali Khamenei could give rise to further bouts of
instability.
Iraq
Political risk: H
Security risk: E; H in south, M in Kurdish Region
Iraq will pass another major milestone on its path to recovery in 2010. Parliamentary elections in
January will demonstrate that the political process is gaining traction, building on the success of
the provincial elections in 2009. With US combat forces set to withdraw, the country is edging
towards full independence, and issues of state will become increasingly national in character.
The politics of ethnicity will endure – as they have throughout Iraq’s modern history – but
political parties and coalitions will increasingly converge around national issues.
The formation of three cross-sectarian coalitions in late 2009 highlighted the re-emergence of
concerns such as security, the economy, health and natural resources as electoral issues. The
Iraqi National Alliance (INA) – incorporating the Islamic Supreme Council of Iraq (ISCI), the
Office of the Martyr Sadr (OMS) and the Fadhila Party – and Prime Minister Nuri al-Maliki’s
State of Law coalition differ in their visions for Iraq’s future: the former favours a weak centre
and strong provinces, the latter increasing centralisation. But the trappings of statehood are likely
to result in opinion converging on the vision of a strong central state.
We believe 2010 will see a strong state start to emerge that will eventually reassert its authority
over the country, in particular challenging the status of the northern Kurdistan Region (KR) in
the years ahead. However, the process is likely to take at least five to ten years, and will require
the state to build durable and professional intelligence and security services free from ethnic and
external influences. The KR government will attempt to underline its autonomous status by
creating a dynamic business environment that engages international companies and ties in the
national interests of countries such as Turkey and Syria. Such links could provide critical
leverage as the central government starts to throw its weight around.
The security environment is likely to deteriorate, particularly in major cities such as Baghdad,
Mosul and Kirkuk, and in the disputed territories. The withdrawal of US forces by September
2010 – which could be brought forward if Iraqis reject the current timetable in a referendum
scheduled for January – will present a significant challenge to the Iraqi security forces. They are
unlikely to be able to quell a significant spike in attacks. US deployment in disputed territories is
likely to prove crucial to containing potentially explosive tensions between Iraqi and Kurdish
security forces. Their withdrawal – particularly if brought forward – could have serious
implications for security. The continuing drawdown of US forces will put greater pressure on the
Iraqi security forces and potentially increase the likelihood of successful insurgent attacks in the
KR. However, this is unlikely to result in either a sustained insurgent campaign or a major
deterioration in the KR’s security environment.
Foreign fighters, supporters of the former ruling Baath Party and other disaffected groups
opposed to the political process will attempt to derail it. As evidenced by attacks towards the end
of 2009, the focus for such groups is likely to move away from attacks on Shia Arab civilians
towards government assets and personnel.
Israel
Political risk: L
Security risk: L
Israel will remain a broadly attractive investment destination with one of the region’s most
dynamic and efficient economies in 2010. However, major progress in the one area that could
lead to a large improvement in its security and economic prospects – the Israeli-Palestinian and
Arab-Israeli peace processes – is likely to remain elusive.
Further peace talks may start in early 2010 or even before, with Prime Minister Binyamin
Netanyahu stating that he is willing to revive talks without preconditions, and the US appearing
to have dropped its insistence on a prior Israeli settlement freeze. However, progress towards an
implementable deal is unlikely. There is very little prospect that the right-leaning coalition that
came to power in early 2009 is willing to make even the barest of concessions needed for the
Palestinians to accept a deal.
Significant US pressure for Israeli concessions could speed up the government’s collapse, which
in the tradition of fragile coalitions could implode in 2010 over other issues, or at least see
changes to its line-up. However, such pressure appears unlikely as the Obama administration
becomes increasingly distracted by domestic politics and the likely prominence of Iran on the
foreign policy agenda. Peace process aside, the collapse of the government or a change to its
composition would have minimal implications for the investment environment, as there is little
to choose from in terms of the major parties’ economic policies.
The security environment could deteriorate in 2010 following three comparatively quiet years as
Palestinians become increasingly dissatisfied with the lack of progress in the peace process and
fatigue from the second Palestinian intifada (uprising) begins to fade. Rioting in late 2009 at holy
sites in Jerusalem may augur poorly in this respect. However, intensified Israeli security
measures would be likely to prevent a major deterioration, while any attacks would not be aimed
at foreign businesses or personnel. Levels of social and inter-communal unrest have increased in
recent years, particularly regarding the Arab-Israeli minority, but this would pose only minor
incidental risks to business.
Jordan
Political risk: L
Security risk: L; M on Iraqi border
The political environment will remain broadly stable in 2010. However, public dissatisfaction
with the government's domestic policies will grow, particularly because the global economic
downturn has undermined its strategies for growth. Key structural challenges, notably high levels
of poverty and unemployment, high public debt, a growing trade deficit and continued
dependence on foreign aid and remittances will persist.
The frequency and intensity of public protests is likely to increase in 2010, but the government
has become adept at containing protests and will manage regular demonstrations in major cities
effectively. Triggers for protests will include economic problems, particularly in the event of
further price rises, and developments in the Israeli/Palestinian conflict, which resonate most
strongly with the kingdom's Palestinian community. In the likely absence of a regional peace
deal, political reforms will remain firmly on the backburner.
Periodic outbreaks of violence in traditionally pro-regime tribal areas will continue amid a
growing sense of frustration among ethnic-Transjordanian youths over an increasing sense of
political marginalisation and deteriorating socio-economic conditions. Instability in traditionally
pro-regime areas will increase in tandem with the emergence of sub-tribal gangs involved in
criminal activities.
Terrorist attacks by transnational terrorist groups against high-profile and lightly defended
targets, such as five-star hotels, bars and shopping centres, will remain a credible threat in 2010.
However, lone individuals aggrieved at Western policies in the region will present the most
immediate threat to foreign personnel. Anti-Western sentiment, which is already prevalent in
Jordan, will intensify in tandem with upsurges of violence in the Palestinian Territories, Lebanon
and Iraq.
Kuwait
Political risk: L
Security risk: L
Corruption is likely to remain centre-stage of political and economic life in 2010, with graft and
unethical practices continuing to pose obstacles for foreign companies. Despite developments in
2009 including the questioning of MPs by parliamentary committees and criticism of
government policy by local anti-corruption watchdogs, macro- and micro-level corruption
remains entrenched as standard business practice, as highlighted by the lack of clear distinction
between the ruling Sabah family's public and private interests.
Disputes between the reformist government and the more traditionalist parliament will continue
to undermine political debate in 2010, when parliament is once again likely to block much-
needed economic reforms, slowing the emirate’s emergence from the global economic downturn.
Parliament is also likely to persist with its questioning of cabinet ministers, which could result in
the resignation of the current government.
Lebanon
Political risk: M
Security risk: M
Improving relations between Saudi Arabia and Syria will have a positive impact on the political
environment in 2010 and result in the formation of a coalition government. The minority March
8 alliance, which includes Shia movements Hizbullah and Amal, as well as Michel Aoun’s Free
Patriotic Movement, is likely to relinquish its demand for the right to veto government decisions,
though will retain considerable influence over policy.
Hizbullah’s formal representation in the cabinet will remain modest and its partners will enjoy
latitude to shape policy, but the Shia movement will retain significant influence over issues
including its right to carry arms, co-operation with the Special Tribunal for Lebanon (established
to investigate the 2005 assassination of former prime minister Rafiq Hariri) and Lebanon’s
relations with Iran and Syria. As a result, the new government’s agenda to introduce wide-
ranging reforms, including privatising the telecommunications sector, will be severely
constrained by the interests of constituent groups.
Groups loyal to the main coalitions, external powers, foreign fighters and Israel will continue
strain the security environment, though a major conflagration between groups loyal to the main
coalitions is unlikely. However, Sunni and Christian militias are likely to continue to arm and
prepare to avenge their defeat by Hizbullah in political violence in May 2008.
The countdown to the next round of conflict between Hizbullah and Israel is also likely to have
begun, and the two sides can be expected to step up their violations of UN Security Council
resolution 1701, which provided for the ceasefire following Israel’s 2006 offensive. Hizbullah
has spent the past three years recovering and developing its military capabilities, and Israel,
which has carefully monitored its activities, is likely to decide that the situation is fast
approaching a ‘tipping point’. As a result, the tit-for-tat exchanges that currently dominate
relations between Hizbullah and Israel will become both more frequent and more intense in
2010, increasing the prospect of conflict towards the end of the year.
Libya
Political risk: M
Security risk: L
The evolving roles of ruler Col Muammar al-Gadhafi’s most prominent sons, Saif al-Islam and
Muatasim, prompted continuous speculation in 2009. The year also saw a number of capricious
moves with negative implications for foreign investors, most notably the government’s forcible
acquisition of Verenex, a small Canadian oil company. Both factors – uncertainty over
succession prospects and the potential for unpredictable government interference in business –
will remain key aspects of the political risk environment for foreign companies during 2010.
Gadhafi’s plan to appoint Saif al-Islam to a permanent, senior position is unlikely to provide a
genuine boost to the latter’s reform agenda. Nor does it equate to Muatasim’s eclipse, let alone
signify that Saif al-Islam is the most likely successor. In the same vein, the state’s unpredictable
stance towards foreign investors does not reflect a systematic nationalist strategy – there will be
no trend towards ‘creeping nationalisation’ in the oil sector – but rather the institutionalised
chaos that is part and parcel of the political system.
Mauritania
Political risk: H
Security risk: M; H in eastern desert areas
Mauritania will continue its gradual emergence from the international isolation that followed the
2008 military coup. The international community has accepted the validity of the 2009
presidential election, and the restoration of international non-humanitarian aid and help from
international financial institutions will improve prospects for the beleaguered economy, which
appeared to suffer foreign-exchange shortages in 2009. Oil companies will step up exploration
activities in the east, though it will be many years before any discoveries bring significant
benefits to the economy.
While another military coup is unlikely in 2010, there remains significant potential for further
reversals and deterioration in the political environment, with the new government facing
criticism on a number of fronts. The poor state of infrastructure remains a serious concern, as is
security following fresh terrorist attacks in Nouakchott in 2009. Signs of significant
improvements in the technical capabilities of domestic extremists would be likely to signal a
serious deterioration in the security environment.
Morocco
Political risk: L; M in Western Sahara
Security risk: L; M in Western Sahara
2010 is likely to be another relatively quiet year, and major changes in the security or political
environment stability are unlikely. No significant elections are planned. With the international
community focused on issues such as Iran’s nuclear programme, the Western Sahara dispute will
not receive the attention needed for significant progress towards any form of resolution. As a
result, it will continue to give rise to reputational risks for foreign companies interested in
operating in the territory, though a return to conflict remains very unlikely.
A significant deterioration in the security environment is also unlikely, and there is little sign that
al-Qaida in the Islamic Maghreb (QIM), the main regional extremist group, is making significant
efforts to launch operations in Morocco. However, there remains a risk of one-off attacks by
small home-grown groups.
Oman
Political risk: L
Security risk: L
The government is likely to persist with efforts to attract foreign investment in 2010 through
reforms to the regulatory framework and further economic diversification. With oil and gas
receipts continuing to account for around 80% of government revenues, ruler Sultan Qaboos bin
Said al-Bu Saidi will remain keen to proceed with reforms, albeit slowly and cautiously. Despite
the decline in oil prices in 2008-09, a combination of cautious economic policies and
conservative banking regulations has left the sultanate well placed to manage the effects of the
global economic downturn.
Oman is likely to remain free from terrorist attacks in 2010 despite its close relationship with
Western governments and increasing expatriate population. No extremist groups are thought to
be active in the country, and such groups in any case would be unlikely to receive support from
the local population. However, the sultanate will remain vulnerable to the transit of transnational
militants through its territory because its borders and long coastline remain porous and difficult
to monitor.
Palestinian Territories
Political risk: M in West Bank; H in Gaza
Security risk: M in West Bank; H in Gaza
We believe that 2010 will prove a decisive year for the Palestinian Territories. Considerable
international attention has focused on the US’s ability to kick-start the peace process, but
domestic issues are likely to predominate. The political, institutional and geographical divide
between the West Bank and the Gaza Strip is likely to deepen despite efforts by regional powers
such as Egypt, Saudi Arabia and Jordan to heal the rift between main factions Fatah and Hamas.
Palestinian Authority (PA) President Mahmud Abbas in late 2009 called for presidential and
parliamentary elections in January. The move was aimed at cajoling Hamas into reconciling with
Fatah under the auspices of national dialogue and creation of a unity government, but is unlikely
to achieve that goal. Hamas suspects that polls would be manipulated to produce a result more
favourable to Fatah, and is unlikely to agree to parliamentary elections until it has resolved its
differences with Fatah on terms that include guarantees that a unity government will be
recognised by the international community.
If Abbas holds elections in the West Bank only, he would further institutionalise the division
between the West Bank and Gaza and set the territories on permanent and different political
trajectories. We believe that he will be persuaded to postpone elections, but at the expense of
another embarrassing public climb-down. Abbas may forced to retire in 2010 and make way for
a new generation of Fatah leaders acutely aware that their faction has irrevocably lost influence
to Hamas.
The security environment in Gaza is unlikely to change substantially in 2010 without a major
political breakthrough between Hamas and Fatah. Another round of major conflict between
Israel and Hamas is unlikely, but militants are likely to continue to launch short-range unguided
missiles into Israel. Israeli efforts to prevent such attacks will include short military
interventions, intermittent aerial strikes and targeting smuggling tunnels between Gaza and
Egypt. The security environment in the West Bank is likely to deteriorate slowly as tensions over
Jerusalem increase and political frustration mounts over Obama’s perceived failure to improve
the prospects for peace.
Qatar
Political risk: L
Security risk: L
Sweeping reforms are unlikely in 2010, largely because of opposition from more conservative
members of the ruling family and powerful business interests. Nevertheless, widespread public
satisfaction with ruler Emir Sheikh Hamad bin Khalifa al-Thani, coupled with Hamad’s rising
regional stock and Qatar’s increasing economic influence, will render his position virtually
unassailable in 2010 and most likely beyond. The global economic downturn has had little
impact on either regime stability or the livelihoods of the local population, though Qatar’s large
expatriate workforce has been hard-hit by the downturn in the local construction sector.
Qatar will remain vulnerable to terrorism in 2010 because of its extensive land border with Saudi
Arabia and the fact that weapons are readily available on the black market. However, the emirate
has not experienced a terrorist attack since 2005 and, despite the emergence of al-Qaida in the
Arabian Peninsula (AQAP) in Yemen, terrorism and security threats are likely to remain low.
Saudi Arabia
Political risk: L
Security risk: M
Saudi Arabia will remain politically stable in 2010 and the al-Saud’s rule will not be challenged.
However, a re-emerging terrorism threat – primarily from Yemen – is likely to test the
government once again. Extremist activity is likely to increase in 2010, when successful attacks
against government and foreign assets and personnel will be possible.
Changes to the regional threat environment, including the continuing withdrawal of US forces
from Iraq, the diminishing authority of the government in Yemen and the (related) increasing
activities of al-Qaida in the Arabian Peninsula (AQAP) mean that transnational extremist groups
equipped with new experience, skills and techniques are likely to pose an increasing security
challenge in 2010, though the threat will remain essentially manageable. The risk of small-scale
attacks akin to the opportunistic attack on foreign workers in Jubail in May 2009 will remain
greater than that of a large-scale attack.
The knock-on effects of the global economic downturn will continue to make themselves felt in
2010. The 2009 scandal involving the Saad Group and Ahmad Hamad al-Gosaibi & Bros in
particular dealt a significant blow to confidence in the transparency of the kingdom’s banking
and financial system, as well as the adequacy of its regulatory structures. While Saudi Arabia’s
economic fundamentals remain strong and the scandal is unlikely to have long-term implications,
it could cause the government to pull back on recent efforts to encourage private-sector growth.
Sudan
Political risk: H
Security risk: H; E in Darfur, L in northern states
Relations between the central government – dominated by President Omar al-Bashir’s National
Congress Party (NCP) – and the Sudan People’s Liberation Movement (SPLM), which controls
the southern regional government, will remain the most important factor influencing political
developments and the security situation. Although relations were tense in 2009, a number of
developments demonstrated continuing – albeit tentative – co-operation, including their
recognition of international arbitration on the disputed Abyei area and gradually narrowing gaps
in their positions on the framework for the scheduled 2011 referendum on southern
independence.
However, there are plenty of pitfalls ahead that could have major consequences for stability and
security. Presidential and parliamentary elections – due in April, if the two sides agree on the
framework – will provide a focal point for political tensions. In the best-case scenario, violence
triggered by electoral rivalry will remain confined to sensitive areas such as South Kordofan, and
the two parties will continue their power-sharing agreement with elections cementing NCP
dominance of the north and SLPM control of the south. However, it is equally plausible that
electoral violence, attempts to manipulate the election process or results that are unacceptable to
either side trigger a deep political crisis at the national level and – in the worst-case scenario –
cause the 2005 Comprehensive Peace Agreement (CPA) to unravel.
Developments surrounding the elections and the run-up to the referendum pose a credible risk of
armed conflict. This would most likely remain localised and confined to sporadic skirmishes
along the oil-rich north/south border, but large-scale fighting is not inconceivable. Even if
north/south tensions are contained in the run-up to the referendum, the security situation in the
south is likely to deteriorate further given the southern government’s struggle to contain tribal
conflict. Communities in the north, including the Nuba and Misseriya tribes in South Kordofan
and Abyei, could also turn to violence to push their demands.
All but the most risk-hungry prospective investors will shy away from southern Sudan because
of the volatile security situation and highly uncertain political outlook, while the referendum will
leave existing oil-sector investors concerned over their contractual rights in the south. More
generally, business risks are unlikely to recede and there is little real prospect for an easing of US
sanctions. The US is likely to shed its reconciliatory approach as the Sudanese government fails
to co-operate because of a lack of real incentives. This is particularly likely if the Darfur conflict
flares once again, though sporadic bouts of fighting with little prospect of sustainable peace is
more likely.

Syria
Political risk: M
Security risk: L; M on Iraqi border
Syria will continue its gradual rapprochement with the US in the hope of further easing its
international isolation, reducing sanctions and ultimately securing the return of the Golan
Heights. Talks with the US will proceed slowly. While both sides will remain committed, there
will be periodic reversals and interruptions. Selected sanctions will be lifted on a case-by-case
basis, which could result in some improvements to the business environment. However,
sanctions that require Congressional approval to remove are likely to remain in place for some
time.
A full peace treaty between Israel and Syria is likely to remain elusive in 2010 as talks falter over
border issues and control of water resources in the River Jordan and Lake Tiberias. Syria’s
refusal to publicly and demonstrably distance itself from Iran and sever ties with Hizbullah and
Hamas are another stumbling block. In the absence of a full peace deal, Syria will maintain its
alliances with non-state actors in Iraq, Lebanon and the Palestinian Territories as a means of
retaining influence over regional developments.
Although periodic assassinations of senior regime figures, defections and infighting suggest the
existence of internal divisions within the ruling elite, the country is likely to remain politically
stable in 2010. The regime continues to enjoy the strong backing of the army and security
services, many of whose key figures are members of the ruling Assad family. President Bashar
al-Assad’s strong grip of power will keep inter-familial feuds in check.
The effects of the global downturn will lower growth rates and complicate efforts to alleviate
unemployment. Members of the ‘old guard’ with vested interests in maintaining the status quo
will continue to make it difficult for Bashar to implement political and economic reforms, while
slow progress in reforming the regulatory environment will hamper Syria’s ability to attract
foreign investment. Most foreign investment will come from the Gulf states and non-Western
investors such as China and India.

Tunisia
Political risk: L
Security risk: L
Following President Zine el-Abidine Ben Ali’s re-election in October 2009, the 73-year-old
president is set to preside over yet another five-year term. In common with the past ten years,
this is likely to be characterised by unchallenged political control, steady export-oriented
economic development and a stable security situation. However, Ben Ali’s age means that he
may not finish his term and is unlikely to stand for re-election in 2014.
The question of Ben Ali’s succession will become the most pressing concern for foreign
investors, particularly as many foreign business interests are closely associated with members of
Ben Ali’s extended family. A shift in the balance of power among the ruling elite could have
significant implications for the continued ability of Ben Ali cronies to back up their commercial
interests with political influence.
Turkey
Political risk: M
Security risk: L; M in Istanbul, south-eastern cities; H in rural and border areas of east
2010 will be a key year for Turkey’s EU accession process. Unless the dispute over its refusal to
admit shipping and aircraft from Cyprus is resolved, the process is likely to grind almost to a
complete halt. Resolving the issue will probably require a successful outcome to peace talks
between Turkey and Cyprus, which are likely to reach some form of conclusion in 2010. Even
this would not guarantee accession: powerful EU member states such as France must also change
their stance. Failure of the Cyprus talks would undermine accession prospects significantly, and
would lead to serious peace process ‘fatigue’, effectively making it impossible for Turkey to join
the EU while it has a military presence in Cyprus.
Events in 2009 to a certain extent bode well for political stability for 2010, with the absence of
further political crises suggesting that the government and its secularist opponents in state
institutions such as the military have reached a modus vivendi. However, 2010 will see the
replacement of military Chief of the General Staff Ilker Basbug, whose appointment in 2008 is
likely to have been a factor in reduced tensions. His most likely replacement, Land Forces
Commander Isik Kosaner, is viewed in some quarters as a ‘hawk’ on issues such as the conflict
with the Kurdistan Workers’ Party (PKK) in the south-east, which could threaten the
government’s ‘Kurdish initiative’. As with all new chief of staff appointments, his leadership
style will only become clear once his feet are under the desk.
Likely parliamentary elections in 2011 will loom increasingly large for the government in 2010.
The prospect is likely to further erode enthusiasm for reforms and sustain the governing Justice
and Development Party (AKP)’s slightly more populist tendencies compared with its early years
in power.
Cyprus aside, tensions between Turkey and its neighbours are likely to be limited in 2010,
particularly following agreements with Iraq and Iran in 2009. The signing of an agreement in
2009 normalising ties with Armenia is likely to avert the annual storm over whether the US
president will term the killing of Armenians by Ottoman Turkish forces in 1914-18 as
‘genocide’. However, it remains unclear whether Turkey will implement the deal in the absence
of progress in talks between Armenia and Azerbaijan, and the issue could return to haunt Turkey.
United Arab Emirates
Political risk: L
Security risk: L
The federation will remain politically stable in 2010 as it emerges from the global economic
downturn. While Dubai was particularly hard-hit by the downturn and effectively bailed out by
the federation’s central bank, the emirate is likely to attract fresh investor interest as the Dubai
authorities renew their ambitious economic development plans, albeit more cautiously. However,
issues of transparency and inadequate regulations are likely to persist.
Although the terrorist threat to the federation is likely to remain low, the deteriorating security
environment in Yemen, the drawdown of US troops from Iraq and the increasing strength of al-
Qaida in the Arabian Peninsula (AQAP) could affect the security environment in 2010. Of all the
emirates, Dubai will remain at greatest threat because of its drive to open up to foreign
investment and attract large numbers of expatriate personnel.
Issues concerning the large expatriate workforce are likely to be less problematic in 2010 than in
previous years. The economic downturn has hit the local construction sector hard, while there
has been modest improvement in foreign labourers’ living and working conditions. Power and
water shortages will pose a challenge, particularly in the northern emirates. This situation is
likely to persist until 2012, when new power plans are scheduled to come on line.
Yemen
Political risk: H
Security risk: H; E in Saada and northern Amran province
The patronage network that has kept President Ali Abdullah Saleh in power for so long will
come under increasing strain in 2010. The government’s share of oil production will continue to
fall, severely restricting funds to cover basic operating costs and placate key constituencies.
Revenues from a new liquefied natural gas (LNG) facility will help the situation, but will not
compensate for declining oil production.
The government’s limited authority will weaken as it struggles to service patronage networks,
leading to greater socio-political fragmentation and an increase in the influence of local power
holders. Tribal disputes will intensify, particularly east of the capital Sanaa and the southern port
city of Aden, as local leaders fight for a share of resources. Tribal leaders will see their authority
wane as tribes struggle to provide jobs and resources for the rapidly growing population.
Demands for employment and favouritism in procurement and compensation will continue to be
backed up by threats and intimidation, with disputes periodically escalating into violence.
Critical water shortages will exacerbate tribal disputes and prompt urban protests.
The southern independence campaign will gather momentum in the absence of a genuine
redistribution of power and wealth. The government will make periodic statements on
decentralisation, but progress is likely to be limited. The government’s continued failure to
address the grievances of residents of the south and east is likely to prompt growing political
violence. There may be ceasefires in the conflict between government forces and Houthi rebels
in northern Saada and Amran provinces, but a comprehensive settlement is unlikely.
Increasing political instability and insecurity will provide a permissive environment for domestic
extremists and transnational militants. Al-Qaida in the Arabian Peninsula (AQAP) will continue
to enjoy considerable freedom of movement and action. Containing extremism will be a priority
for external actors, but the government will focus on the northern uprising and southern protest
campaign. Political will to tackle extremists – with whom much of the public and many members
of the security forces sympathise – will remain limited.

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Weathering the storm

Continuing commodity dependence

Open for business

Infrastructure deficiencies to hold back progress

Feeling the strain

Governments not under threat

Put away the red flags

Security risk: M; H north-east of Cabinda exclave

Bespoke consultancy support

Security risk: L; M on Nigerian border

Bespoke consultancy support

Bespoke consultancy support

Bespoke consultancy support

Security risk: M; H in north-western provinces

Bespoke consultancy support

Bespoke consultancy support

Bespoke consultancy support

Bespoke consultancy support

Central African Republic

Security risk: M; H in north-western and north-east prefectures; Congo-Sudan tri-border

Bespoke consultancy support

Security risk: H; E on Sudan border

Bespoke consultancy support

Security risk: L; M in Moroni and Mutsamudu

Bespoke consultancy support

Security risk: H; M in Kinshasa, southern Katanga province; E in Ituri district, Orientale

Bespoke consultancy support

Security risk: M; H in Eritrea border region

Bespoke consultancy support

Bespoke consultancy support

Security risk: M; L in Asmara; H on Ethiopian, Sudanese, Djiboutian borders

Bespoke consultancy support

Security risk: M; H in regions bordering Eritrea, Somalia, Kenya, Sudan

Bespoke consultancy support

Bespoke consultancy support

Bespoke consultancy support

Bespoke consultancy support

Bespoke consultancy support

Bespoke consultancy support

Security risk: M; H in north, areas bordering Sudan

Top-level politicking is likely to continue to consume the unwieldy power-sharing government

Despite an investment-friendly climate and reasonably prudent macro-economic policy in recent

Bespoke consultancy support

Bespoke consultancy support

Security risk: M; H in Monrovia, border with Cote d'Ivoire

Bespoke consultancy support

Bespoke consultancy support

Security risk: L; M in major urban centres

Bespoke consultancy support

Security risk: L; M in north-east including Gao and Timbuktu

Bespoke consultancy support

Bespoke consultancy support

Bespoke consultancy support

Bespoke consultancy support

Security risk: M; H in Niger delta, Lagos

Bespoke consultancy support

Security risk: L; M on borders with Burundi, Congo (DRC)

São Tomé and Príncipe

Bespoke consultancy support

Security risk: L; M in Casamance

An upsurge in violence by the separatist Casamance Movement of Democratic Forces (MFDC)

Bespoke consultancy support