This week’s tragic events in Sydney underline that the terrorist threat is evolving. It is therefore worth pausing to consider whether terrorism insurance is meeting the changing environment.
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 ->
The cocoa crisis began in November 2010, when incumbent president, Laurent Gbagbo, refused to relinquish power to opposition candidate, Alassane Ouattara, who was judged by international observers to have legitimately won the presidential election. A total ban on cocoa exports was imposed by Ouattara, with EU and US backing, in January 2011 to starve Gbagbo of revenue to finance his government and supporters. Continue reading ->
In our previous blog, we set the regulatory context for foreign investors in the Indonesia mining sector. In the following, we’ll explore the raw production, prices and quota data and the implications for investors.
Indonesia coal production levels have risen steadily despite the fall in prices from 2010, which led to a decline in revenue for government and private companies (Table 1).
As export prices for coal are far higher than domestic prices, one of the key provisions of the 2009 mining law was the development of a preference for allocating coal and mineral resources to meet domestic needs through production and exports restrictions known as the Domestic Market Obligation (DMO).
Table 1. Indonesian coal production, 2003 – 2011
|Date Coal production||(million t)
|31 December 2011||199.82
|31 December 2010||169.23
|31 December 2009||157.55
|31 December 2008||147.75
|31 December 2007||133.42
|31 December 2006||119.16
|31 December 2005||93.92
|31 December 2004||81.40
|31 December 2003||70.28
Source: BP, Statistical Review of World Energy
Within the coal sector, the DMO stipulates that 25% of coal must be sold in the domestic market to ensure that power plants could access sufficient supply. The law came into effect on 31 December 2009, at which time the 25% requirement equated to approximately 80 million tpa of coal.
This requirement was subsequently scaled back to 65 – 67 million tpa because the state had not built power plants at the pace anticipated to absorb the allocated coal. The imposition of production quotas has been debated as the government has become concerned that Indonesia’s 20 billion t of coal resources were being depleted too quickly. Most of Indonesia’s coal reserves are situated in Sumatra in the south, with the balance located in Kalimantan, West Java and Sulawesi. Coal quality varies, with lower grade lignite (59%), sub‑bituminous (27%) and high grade bituminous and anthracite (14%).
Production has increased from 254 million tpa in 2009 to 390 million tpa in 2012, with projections that it could reach 450 million tpa in 2013. Were quotas to be introduced, the government claims they would be set at limits higher than current production levels, which means their impact would be felt in the medium term.
Indonesia coal sector dominated by domestic companies
The coal sector differs from the rest of the minerals sector because it is not dominated by foreign companies. Therefore, the main beneficiaries would be politically well-connected conglomerates who are likely to receive a disproportionately large quota of shares. The coal mining sector is dominated by Indonesian companies with significant political influence. Some the largest producers, such as Bumi Resources, Kaltim Prima and Arutmin, are owned by Aburizal Bakrie, the chairman of the Golkar party, the second largest party in parliament. Bakrie is also a presidential candidate for 2014. Meanwhile, the owner of Adaro is a supporter of the current President Susilo Bambang Yudhoyono. These firms exercise great influence over policy making.
Irrespective of the imposition of quotas, the largest mining companies have indicated that they may limit production in 2013 until they have a clearer view of international demand. China stockpiled coal during the boom and in a downturn it is unclear how long it will take the country to work through its reserves.
A reduction in coal exports from Indonesia will impact Asian coal importers. India and China rely on Jakarta as their largest supplier of thermal coal, while the country as a whole is a major supplier to Japan and South Korea.
In the third and final blog, we’ll highlight two case studies that illustrate the challenges of doing business in the Indonesia mining sector – and the opportunities presented by Political Risk Insurance.
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 ->
Another week of protests, coupled with a high-profile hunger strike, has returned Bahrain to centre stage. 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 ->
As discussed in the previous blog, water scarcity can increase political risk and political violence in many areas. The table below includes the nine ‘perils’ rated by World Risk Review and the accompanying implications of water scarcity for business. Continue reading ->
In a rare diplomatic move, the UN Secretary General Ban Ki Moon on 28 November bucking the demands of major European powers France and Germany, and several African states, submitted a confidential report to the members of the Security Council raising very serious strategic and operational concerns about a proposed 3,500 troop plan to dislodge Mali’s Islamist and Tuareg rebels from power. Mali has since early 2012 lost about 60% of its sovereign territory to Tuareg and Islamist rebels. The military plan, submitted by the Economic Community of West African States (ECOWAS) was endorsed by the African Union (AU), France, Germany, Italy, Poland and Spain. Ki Moon is however sceptical. Continue reading ->
Some of the world’s richest mineral deposits are found in West Africa, a region only recently beset by civil war. The potential rewards for international mining and steel companies are great, but political risk presents significant challenges for investors. In this blog, the first of two, we’ll focus on the contract risks to mining operations in Guinea, Liberia and Sierra Leone, including forced renegotiation and expropriation. Continue reading ->
The weekend’s G20 summit held in Russia released a lengthy communiqué after the event that avoided saying very much at all. Continue reading ->
Kenya: Country hurdling towards major political crisis regardless of who wins today’s presidential vote..
Regardless of which major Kenyan presidential candidate wins today’s presidential vote, the once eerily peaceful major East African economy is headed towards a major national political crisis. The consensus view held by many analysts and western diplomats that, it is only a win by Uhuru Kenyatta and VP candidate William Ruto, (both indicted by the International Criminal Court (ICC)), that will trigger a major political crisis, is false. A win by Odinga, and a refusal by Ruto and Kenyatta to go back voluntarily to the ICC will also trigger a crisis. Continue reading ->
Structural flaws and political corruption epitomise the challenges confronting India’s mining sector and the obstacles to foreign investment. Continue reading ->