Two and a half months after the Sewol ferry disaster, South Korea has finally returned to normal. June 4’s local elections, which despite predictions saw hardly any backlash against the ruling party for the system-faults exposed by this accident, were a turning-point that will let the country move on. Yet many challenges remain for President Park Geun-hye and her conservative Saenuri (New Frontier) ruling party. This article surveys the current political and policy scene in Seoul. (It does not deal with foreign policy or security issues. Here as ever an unpredictable North Korea remains the major threat, but relations with Japan (icy) and China – surprisingly warm, as seen in President Xi Jinping’s visit to Seoul – are also in some flux.) Continue reading ->
The US Federal Reserve Bank is set to signal on Wednesday that it will commence a painstaking multi-year effort to dramatically reduce its bloated multi trillion dollar balance sheet. The historic move will trigger a sustained 2014-2016 monetary policy effort to raise long-term US interest rates towards their recent historic average of 4%, and with it, raise the entire term structure of interest rates globally. However all regions of the world will not be affected equally by the Fed tapering. Some economies are more sensitive to US interest rate changes than others. Using 2000-2012 statistical data we examine the correlative relationships between changes in the 10-Year US Treasury bond and GDP growth across all regions of the world – with a particular focus on Africa. Our regressions indicate that economies in Europe (especially Southern Europe), the Caribbean, Central Asia and Southern Africa which benefited the most from the ultra-low interest rate regime are the most vulnerable to the tapering. Surprisingly, East and West Africa, of all the regions examined had the least GDP growth sensitivity to changes in the US 10YR over the thirteen year period. Their economies may be the most endogenously resilient of all the regions examined over the thirteen year period.
Despite the optimism which the regression engenders, Africa is still likely to suffer some of the spillover effects of tapering through the transmission mechanism of commodity prices. Africa’s relatively illiquid domestic capital markets also remain vulnerable. As the tapering begins, the US dollar will accelerate its strengthening trend and almost all US dollar denominated commodities, including oil and gold will see price declines. African economies that depend heavily on commodity exports such as: South Africa, Zambia, Angola, Algeria, Nigeria, Ghana, Mali, Botswana, Guinea, Gabon, Equatorial Guinea, Chad, Sudan and DR Congo among others may come in for a shock as commodity prices drop amidst a liquidation of many multibillion dollar commodity trade positions held by hedge funds and banks. The flight to quality and the return of the US as the safe haven for global investors, rather than gold or other precious minerals like diamonds and platinum, will also hit the Southern African countries hard. New African Eurobond issuances will also have to offer higher premiums to remain attractive to foreign investors who may now be flocking back to the US. African countries with weakening FX positions such as Nigeria could see speculative attacks on their currencies.
North Korea’s sudden and very public purge of Kim Jong-un’s uncle-in-law and mentor Jang Song-thaek, who was executed on 12 December, is an extraordinary turn of events. It seems a stretch to regard this as positive for stability – although some do argue so, as discussed below.
Purges are of course routine in a regime originally created by and modelled on Stalin’s USSR. Fought out publicly in the early days when North Korea’s founding leader Kim Il-sung – the grandfather of Kim Jong-un – liquidated rival communist factions (pro-Soviet, pro-Chinese, South Korean – in the 1950s, and then in the 1960s got rid of those who dared to oppose his dynastic succession plans, in more recent decades such processes had become more discreet. Individuals simply disappeared sans explanation, or were retired on the pretext of ill-health. Jang himself vanished thus in mid-2003, reappearing only in early 2006. The likeliest reason is that Kim Jong-il feared his brother-in-law and his networks were becoming too powerful – but then needed him back to smooth the succession of the young and untried Kim Jong-un.
Readers of the drearily hagiographic party daily Rodong Sinmun are not used to subjects like gambling and orgies, much less talk of inciting a military coup on grounds of mass poverty. Yet the supposedly unthinkable in North Korea was plastered all over the Pyongyang media, not once but twice, in the two rambling, ferocious and eye-opening screeds that accompanied Jang’s denunciation and purge on 8 December and his trial and execution four days later.
It is risky to air such matters: telling a shocked public in graphic detail that even such a pillar of the system was in fact a thrice-cursed traitor. Two questions arise: who had it in for Jang, and what this all portends for stability. It may not have been simply the nephew disposing of an uncle-mentor who had outlived his usefulness and might pose a threat. Just as likely, hard-liners in the Party and military saw Jang and his gang as simply too powerful; and perhaps also too keen, as the charge-sheet suggests, on economic opening and reform. (Jang’s widow Kim Kyong-hui, the younger sister of Kim Jong-il, whose own fate was at first unclear, was spared and remains powerful: she was named to a state committee on 15 December. She and Jang may have been estranged; there is now speculation that she had a hand in his demise.)
Purging Jang so publicly is an act of state terror pour encourager les autres, warning elite and masses alike to stay in line. But it could backfire. If top nomenklatura figures must now fear for their lives, as they mostly need not have before, they may consider options thus far off the table, such as defection. Despite many fissures, the DPRK elite has been remarkably cohesive hitherto, on the basis that if they did not hang together they risked hanging separately; but all that could now unravel. Time will soon tell, if further purges – besides Jang’s people, already in the firing line – follow in 2014. If however the dust settles and all is stable, then Kim Jong-un’s cruel chutzpah and gamble might just pay off and allow him to consolidate his rule.
And then do what? The US scholar and quondam policy maker Victor Cha sees Jang’s ouster as confirming “the regime’s turn to a hardline, fundamentalist ideology by the young Kim, not one of opening and reform.” That is too simple, and also a misplaced either/or. On the contrary, Kim Jong-un’s Byungjin line is a both/and: declaring that North Korea will keep its nuclear weapons while also seeking economic development. Guns and butter, in a word.
To be sure, Kim may well be deluded in supposing he can (to mix the metaphor) both have his nuclear cake and eat the fruits of inward FDI. Capital shortages, UN sanctions and an as yet unreformed economy – where blind loyalty trumps and squelches enterprise any day, as the young Marshal has just bloodily emphasised – all militate against this amalgam of chalk and cheese actually working. Byungjin may even be less a coherent policy than a stalemate between hard-liners and modernisers at the time it was promulgated, on 31 March.
And yet the regime seems serious about economic opening. Pursuant to a law passed in May, on 21 November the DPRK proclaimed nine new Economic Development Zones (EDZs), all around the country, with incentives for foreign investors. Wasting no time, on the very day (9 December) Jang’s purge was revealed, the Chinese city of Tumen in Jilin province signed a deal to develop one such EDZ: a nearby site in the small DPRK city of Onsong, just across the eponymous Tumen river which forms the border. A Chinese source says this is to be “a high-class foreign tourists’ resort with a golf course, swimming pool and horse racing;” suggesting a closed enclave, alas, rather than an engine of wider national development.
Global Times, the Chinese paper that broke this story, in the same article quoted a South Korean opposition law-maker as claiming far bigger joint ventures are in the works. By this account, on 8 December (the day of Jang’s purge) China and North Korea agreed to build a 380 km high-speed railway – other reports add a motorway alongside it – all the way from Sinuiju on the border to Pyongyang and on to Kaesong, on the border with South Korea.
And further, to Seoul? Cross border North-South rail links already exist from the sunshine era (1998-2007) of cautious inter-Korean detente, but the North has refused to let them be used. Kim Jong-un may be more confident than his late father, especially if (to great chagrin in Seoul) it is China, not South Korea, that will be doing the construction and footing the bills.
In sum, the dust from Jang Song-thaek’s purge has yet to settle and will not do so for several months, as the mopping-up continues. Publicly liquidating his uncle is a high-risk strategy for Kim Jong-un, which may incite rather than prevent further ructions within the elite.
Yet analysis must avoid essentialism and false antitheses. It does not follow from this brutal act that Kim is benighted and reactionary on all fronts. On the contrary, rather than opposing economic opening (market reforms are another matter) he seems to favour it in some degree. Jang Song-thaek may have been purged not for doing the wrong thing, but for doing the right thing too well and independently; forcing his nephew to bump him off and steal his clothes.
If from next year the massive new bridge already rising over the Yalu river does indeed link China’s own modern road and rail networks with new ones beginning to be built across the DPRK– and what is the point of it otherwise? – then perhaps North Koreans, though cowed and surely worried by Jang’s purge, may not yet abandon hope that their headstrong young leader will deliver them, if not glasnost, then at least a modicum of perestroika. At all events no one is asking them, so unless insanely brave they have little choice but to wait and see.
Former South African President Nelson Mandela comfortably sits among the pantheon of 20th century immortals. Only in Plutarch, Aeschylus, The Talmud, Thucydides, and Gibbon or in Machiavelli’s writings do we get glimpses of ancient heroes and heroines equal in rank, stature and political stamina to Madiba. Yet, with eyes our glazed from mourning, we are tempted to conclude that the red soil of South Africa no longer births radical leaders of Mandela’s ilk to confront the socio-politico-economic ills of our times. However a brave night’s stroll through the poverty-stricken townships of Umlazi, Soweto, Khayelitsha or Guguletu will invariably set one on a collision course with the stark but oft-hushed reality – millions of nameless unemployed youth curdling in sweaty powerlessness and dreaming of freedom – economic freedom – a simple job! They ironically also cry, Mandela’s cry, ‘Amandla’ ‘Awethu’ (power to us). They yearn for a job and not ballots. They argue over how to change ‘The ‘System.’ Mandela’s, Mbeki’s and Zuma’s “system.”
Since 1994, each election cycle has widened the distance between the pocket and the mouth. Each ballot cast has seemingly increased the price of food and basic amenities. Each election has made jobs scarcer. With some of the highest unemployment rates in the world for 20 years running, many youth quietly question the choice of the ballot over bread which Mandela and his generation made. As Mandela, himself an avowed Marxist, would have perfectly understood, the sharpening socio-economic and class contradictions in South African life have today created an environment rife with the requisite incendiary factors to inevitably produce a proletarian economic revolt against the ruling African National Congress (ANC).
The children of 1994, now almost 20 years old, and mostly unemployed, may within this decade launch a revolt against the ANC. This revolt will not be aimed at economically privileged (and politically marginalized) whites – but at the increasingly distant and unrecognizable ruling Africa National Congress (ANC), its obese corrupt leadership, the out-of-touch black ‘empowerment’ billionaire elites, and the haughty nouveau riche middle class who coddle the party. The public boos hurled at President Jacob Zuma and his billionaire deputy, Cyril Ramaphosa, at Tuesday’s memorial service for Mandela in Johannesburg, the rise of a radical redistributionist party under former ANC Youth League President Julius Malema, and the recent launch by Steve Biko’s widow of an alternate black led political party to the ANC, are all dark and ominous clouds hovering over the future of the ANC and Mandela’s legacy. Unless the ANC formulates an economic and jobs program as radical as those which Malema offers, and yet as equitable and as wise as those which Mamphela Ramphele proffers, the party may be marching slowly towards irrelevancy and ultimate death. While Thabo Mbeki, Mandela’s technocratic successor, oversaw an honest, dramatic and often under-appreciated effort to redress the gargantuan structural socio-economic legacy of apartheid (a controversial task which Mandela, for all his enormous political capital, did not spearhead during his presidency), the country still remains today a veritable class paradox; an economic oxymoron, a-tale-of-two-cities, two-nations, one rich and one still very poor, a house still divided against itself — which ultimately cannot stand.
The argument over whether to sequence economic or political freedom first in decolonization has divided honest intellectuals since the noisy debates between Booker T. Washington and W.E.B. Dubois at the turn of the 20th century. It divided Mandela from Steve Biko; Elijah Muhammad and Malcolm X from Martin Luther King. That same argument now divides Winnie Mandela, Mangosuthu Buthelezi and Julius Malema from Jacob Zuma and the ANC leadership. W.E.B Dubois, Thurgood Marshall, Mandela and Martin Luther King won the first round in the 1960s, the ghosts of Steve Biko, Malcolm X, Marcus Garvey, Booker T. Washington and Julius Malema look poised to win the upcoming round.
By contrast, the dramatic improvement in the socio-economic status of the average Chinese over the past three decades, albeit without political freedom, casts a long shadow and amplifies the abysmal failure of the ANC and most of de-colonized ‘free’ African states to deliver basic economic freedom (i.e. jobs). As Karl Marx, the intellectual idol of Mandela would have recognized, South Africa, being the most industrialized African state and containing within it the sharpest socio-economic contradictions on the continent is a veritable crucible for a looming mass revolt against the status quo.
Risk of new Argentina bond default threatens African frontier capital markets and could stall Kenya’s USD1.5bn Eurobond issue
In 1989 at the time of the Tiananmen Square protests the sovereign capital markets risk perceptions of Brazil, India, China and Russia (BRIC countries) were uncorrelated as they are today. In much the same way, the underlying risks of the world’s last frontier capital markets (many of them in Africa), are only gradually becoming correlated with each other. It is against this dynamic background that a recent New York court ruling against Argentina ordering it to pay over USD1.3bn to foreign bond holdouts, and Argentina’s threat to not pay the amount, threatens to wreck havoc in Africa’s frontier capital markets. Kenya’s planned USD1.5bn Eurobond scheduled for November could be stalled. Other existing bond issues may see steep yield spikes.
The verdict on the hearing of the Supreme Court in Ghana is due to be delivered tomorrow, on Thursday 29th August 2013. For 48 days, Ghanaians have been exposed to a litigation process like no other, in which three petitioners from the opposition New Patriotic Party (NPP) including the party’s flagbearer for the December 2012 elections, are calling for the annulment of close to 4 million votes. Continue reading ->
On 29 August Ghana’s Supreme Court will deliver its landmark verdict on the legal challenge to President John Mahama’s disputed December 2012 election. Continue reading ->
The on-going bloody struggle between Egypt’s Muslim Brotherhood (MB) and the country’s military forces may soon be transported from the streets of Cairo to the sidewalks of major western capitals. Continue reading ->
Much has been made of the Bo Xilai trial as a statement of the intent of the new Chinese leadership to crackdown on corruption. In reality, nothing could be further from the truth. Continue reading ->
Investment patterns and sources of funding for trade
Private financing flows to Africa continued during financial crisis due to the high share of foreign direct investment over other more volatile forms of private capital. These funds favoured the most politically stable and resource rich territories, with Kenya, Mozambique and Tanzania attracting significant investment flows. Continue reading ->
Speculation into the role of religion in the region risks masking Egypt’s underlying economic concerns A key issue in last night’s debate, ‘After the Arab Spring’ (Sky News 8pm 24th January 2012) that perhaps deserved more attention was the role of economic hardship in fuelling the uprisings – and by implication the necessity of generating economic growth to appease protestors. Continue reading ->
Including: Strikes, Riots & Civil Commotion, Terrorism, War & Civil War Continue reading ->
Including: Expropriation, Contract Agreement Repudiation, Legal & Regulatory Risk Continue reading ->
Last week’s UK budget was probably as good as possible given the constraints of (a) maintaining credibility with the ratings agencies and (b) managing to correct past anomalies with no new money and a still-tentative economic recovery. Continue reading ->
While investors in oil & gas pipeline projects will always be among the most vulnerable to political risk due to the nature of the industry, steps can be taken to minimise the risk. Continue reading ->
The Arab Spring serves as useful example of the importance of commodities in geopolitics, especially how several different events, policies and underlying tensions can interact to create heightened political risk. Here we will explore some of the other factors impacting commodities that affect the political risk landscape. Continue reading ->
Unsustainable food subsidies
Food subsidies have been used as a tool to buy loyalty and ensure political stability for decades. Yet this form of appeasement lost its lustre in 2008 when grain prices reached record levels and unemployment soared; while for those governments in the region who lack a revenue stream from hydrocarbons reserves, the cost of subsidies became unsustainable.
Syria is at the nexus of a regional power struggle that has the potential to spread turmoil across the Middle East and realign the balance of power within and between states. Elizabeth Stephens, who heads JLT’s Credit and Political Risk Analysis and manages The World Risk Review, assesses the current state of play and the implications for the region. Continue reading ->
Investing in the Indonesian mining sector has the potential to be very profitable, but navigating the investment landscape can be fraught. The unpredictable regulatory environment is only part of the challenge: dealing with the personalities and vested interests is even more critical. Extensive due diligence is a pre-requisite, not just of the partner firm but of the individuals involved and their connections with political elites. Continue reading ->
The demise of Italy’s PM Berlusconi has ushered in technocratic governments both there and in Greece. The shape of both is still awaited, but market focus has now turned to Spain where bond yields have pushed sharply higher. Continue reading ->
Structural flaws and political corruption epitomise the challenges confronting India’s mining sector and the obstacles to foreign investment. Continue reading ->