D&B Country Risk Services

Too Big To Fail?

Almost five years after the emergence of the sub-prime crisis that led to the 2008-09 global crash, the problems of the global banking sector continue to weigh heavily on the minds of regulators and politicians across the world. These experts are still grappling with the ‘too big to fail’ syndrome, whereby banks feel able to adopt risky policies because they know they will be bailed out by governments if they get into trouble. As we have seen since 2008, this has left governments teetering on the edge of bankruptcy and ordinary citizens paying the price through higher taxes, lower social welfare payments and job losses. 

Earlier this month, the Independent Commission on Banking in the UK delivered its report: the Commission was asked to solve the difficult conundrum of coming up with a solution that resolves the too-big-to-fail problem at a cost that will not see financial institutions fleeing the country: the banking sector in the UK is the fourth-largest in the world as a ratio of GDP, behind Iceland, Ireland and Switzerland. In the run-up to the issue of the report, a number of banks threatened to move away from the UK if the Commission’s findings were thought to be too harsh. 

These threats seem to have worked, as the Commission’s two key proposals are weaker than many would have wanted. The two main recommendations of the interim report (the final version will be published in September) are: (1) increasing the core tier one capital ratio to 10% (from the 7% set in the Basel III global banking regulations); and (2) building a ‘firewall’ to separate the retail and investment arms of each bank. Let’s look at each proposal in turn. 

Firstly, increased capital ratios would help to offset any potential losses in the event of another banking collapse. Furthermore, the higher ratio is in line with changes introduced by other countries such as Sweden and Switzerland (albeit it is higher than in the US), while the level was also met positively by EU regulators (who are drawing up their own plans). Finally, many banks already hold tier one capital of nearer to 10% than 7%. This all reduces the chances of banks leaving the UK’s shores in any significant numbers. 

However, any increase in the capital ratio will result in increased costs for the banks, which would inevitably be passed on to customers. More importantly, the 2008 crisis showed that some banks were able to run up losses equal to more than 10% of their capital assets, leaving the question of who makes up any shortfall (a question not yet addressed by the Commission). 

On the second proposal, the firewall would aim to prevent any failure in the riskier investment banking side bringing down the retail side and thus threatening the savings of individual depositors: the proposal is in line with US regulation, thereby reducing the threat of ‘bank flight’. The report does not make clear where such firewalls would be erected: something that will have to be addressed. The proposed solution will help to mitigate risk but will not eliminate it, whereas breaking the banks up into two separate arms would resolve this issue (but the banks are set against such a move).

Admittedly, the commission’s report is still a work in progress. However, it is worth noting that it does not answer the really important question: will the reforms protect the UK economy from another banking crisis? (Especially bearing in mind that the previous crisis originally stemmed from US banks’ problems…) Nor does the report address the supplementary question: who picks up the bill for the next failure? These key issues remain to be resolved.

Warwick Knowles

Chief Economist - Country Risk Services

At D&B Country Risk Services we have a team of economists dedicated to analysing the risks of doing business across the world (over 130 countries). We monitor each of these countries and produce both shorter analytical pieces (Country RiskLine Reports), as well as more detailed 50-page in-depth pieces (Country Reports). For further details please contact Country Risk Services on +44 (0)1628 492595, or email CountryRisk@dnb.com.

The Opening and Closing of Libya

Even allowing for the short attention span of the mainstream media, it seemed that it would take something extremely significant to grab the headlines after the earthquake, tsunami and nuclear problems in Japan; nevertheless, the bombing of Libya by American, British and French jets has managed to achieve this. The UN-mandated intervention is ostensibly about protecting Libyans who have sought the overthrow of the country’s long-term leader, Colonel Mu’ammar al-Qadhafi, and the Libyan experience has been portrayed in the media largely as a simple autocracy/democracy conflict. In the context of the ‘Arab Spring’ that has been unfolding across the Middle East and North Africa, it’s instructive to look a little more closely at developments in Libya.

After over 40 years of authoritarian rule in Libya, the catalyst for conflict was the overthrow of the regimes in neighbouring Tunisia and Egypt after popular uprisings. However, there are also factors unique to Libya that are important, and to understand these we need to remember the recent history of Libya and the Qadhafi regime.

In 1992, the UN followed America’s lead and imposed sanctions against Libya, primarily in response to the bombing of PanAm Flight 103 over Lockerbie. Even before this, Libya was already virtually a pariah state because of its support of various anti-state/terrorist groups. However, in 2003, driven in part by the US-led overthrow of Saddam Hussein’s regime in Iraq, Qadhafi renounced his WMD programmes. This resulted in the lifting of sanctions and led to Libya’s return to international acceptance.

Paradoxically, the current uprising is firmly rooted in Libya’s rehabilitation, which brought about significant (and arguably unsustainable) changes for Libya and the regime. The US, which had previously thought of Qadhafi as the devil incarnate, swapped ambassadors and encouraged its business community to become involved in the country, while five-star hotels serving alcohol sprouted in the major cities. At the same time, Western universities competed to offer study packages to Libyan students, particularly postgraduates; many of these students, inspired by ideas of Western liberal democracy, human rights and free markets, have been at the forefront of the uprising.

Other changes also took place in the wake of Libya’s return to the international fold: what had previously been one of the world’s most egalitarian societies saw a proliferation of top-of-the-range cars on the streets, while high-end luxury goods were increasingly seen in shop windows as members of the regime exploited the opportunities offered by the opening of the economy. The resultant wealth gap undermined the principles of Libya’s 1969 revolution, which had been based on sharing oil wealth equally among the population. Another significant shift was that Qadhafi could no longer blame the international community for any troubles facing the country, and he was no longer able to use ‘the Great Satan’ (i.e. the US) as a means to deflect criticism and garner domestic political support. Thus the ‘opening up’ of Libya planted some of the seeds (economic inequality, the creation of space for political opposition, and the removal of a unifying ‘enemy’) that have now borne fruit in the uprising.

So what happens next? Will the bombing allow Qadhafi to once again unite his people against an outside enemy? Or will it allow the people to take the opportunity to rise up against him? My instinct is that the bombing will be counter-productive and that it will allow Qadhafi to consolidate power (at least in the short term). Under such a scenario the international community’s next step is likely to be a series of ever-increasing economic sanctions against the regime (following the pattern set in Iran), which will see the risk of doing business with Libyan counter-parties rise to unprecedented levels. Whatever happens next, it looks as if Libya could be ‘closed’ again for a while.

Warwick Knowles

Chief Economist - Country Risk Services

At D&B Country Risk Services we have a team of economists dedicated to analysing the risks of doing business across the world (over 130 countries). We monitor each of these countries and produce both shorter analytical pieces (Country RiskLine Reports), as well as more detailed 50-page in-depth pieces (Country Reports). For further details please contact Country Risk Services on +44 (0)1628 492595, or email CountryRisk@dnb.com.

Economic Aftershocks

The news this week has been dominated by a stark and tragic reminder of Nature’s destructive potential, with the earthquake and a tsunami that devastated parts of Japan also giving rise to the prospect of nuclear meltdown. More prosaically, the reverberations of these events have been felt not only in the Japanese stock market but on markets worldwide. While the local physical destruction and human tragedy wrought by the natural disaster is there for the world to see, the quake has also had additional, less obvious effects on the global risk environment. 

One immediate cause for concern is the open-ended nature of the industrial closures in Japan (the automotive sector, electronic component and agricultural manufacturing industries, to name but a few) and the long-term effects this will cause. These problems stem from the quake’s destruction of power-generation capacity; the Japanese government has demanded restrictions of power usage amid the loss of 11 of Japan’s 54 nuclear reactors, while infrastructure damage is restricting the delivery of alternative energy supplies. 

In this difficult context, Toyota (the world’s largest carmaker) has joined Mitsubishi and Nissan in re-opening a small number of plants, but many others remain closed. The plant closures are causing Toyota alone estimated losses of 6.5 billion yen (42.2 million pounds sterling) a day, illustrating in microcosm the quake’s immediate financial impact. As a knock-on effect that demonstrates the length of international supply chains, Toyota’s North American plants have had to scale back their working hours in order to conserve supplies of parts that are sourced from Japan. 

It is these supply chain-related implications that are already affecting business across the world, from insurers to energy, fashion houses to hotel chains and, in particular, manufacturing industry: if you own a smartphone, camera or iPad, it is likely that some of its hardware originated in Japan. Around 60% of all silicone wafers (a key component in your phone) are made by Japanese companies, a fact that is threatening not only to halt some technology production in China, but also to send the price of ‘flash chips’ soaring. As a result, Apple has seen a drop in share prices amid speculation over the impact; such uncertainty does not bode well for investors. 

Elsewhere, although commodity prices fell in the quake’s immediate aftermath, upward pressure is expected to increase prices in the longer term as Japan replaces its extensive nuclear energy usage with alternative sources. Prices of liquefied natural gas (LNG) have already risen on this expectation, which will cause an increase in domestic and business gas prices in markets further afield (e.g. in the UK). 

More broadly, the nuclear energy industry is likely to be the biggest loser. Amid falling uranium prices and strengthening anti-nuclear protests, the disaster has provided a sharp reminder about tightening safety measures and policy. China has already suspended approvals for plans for new nuclear plants, and Germany has shut down seven of its plants while carrying out safety checks on others, with more countries likely to follow suit. 

The Japanese earthquake and tsunami, in addition to creating an enormous national and human tragedy, have demonstrated the interconnectedness and fragility of many features of the global environment and infrastructure that most of us take for granted.

Alex Glynn

Guest Contributor - Country Risk Services

At D&B Country Risk Services we have a team of economists dedicated to analysing the risks of doing business across the world (over 130 countries). We monitor each of these countries and produce both shorter analytical pieces (Country RiskLine Reports), as well as more detailed 50-page in-depth pieces (Country Reports). For further details please contact Country Risk Services on +44 (0)1628 492595, or email CountryRisk@dnb.com.

A Second Wind of Change?

Sometimes it’s nice to be proved wrong. When I wrote a few weeks ago that it was unlikely that the dominos in the Middle East and North Africa (MENA) would fall, I got it at least partially wrong (as did most regional experts). It does now look as if a significant shift is taking place in the region. In 1960, British Prime Minister Harold Macmillan spoke about ‘winds of change’ blowing across the African continent, bringing in their wake a wave of de-colonisation. Now it appears that a similar wind could be sweeping across MENA, this time maybe heralding the overthrow of autocracies rather than colonialism. But is this really the case?

Well, so far Tunisia and Egypt have replaced their leaders following extensive protests by those countries’ citizens. Elsewhere, there have been protests of varying sizes and intensity in virtually every country across the region, spurred on by concerns over unemployment, rising prices, a growing sense of injustice (fuelled by high levels of corruption and cronyism), and anger towards long-standing dictatorships and political repression.

Different regimes have offered different responses, ranging from violent repression in Libya, through permitting demonstrations to take place (Morocco), changing the government (Jordan), to bribing populations with payments to all families (Bahrain and Saudi Arabia) or via reduced prices on basic goods (Syria).

Which countries now appear most vulnerable to change? The ‘very high risk’ category includes Libya, where Colonel Mu’ammar al-Qadhafi’s grip on power is looking more desperate by the day, and the dysfunctional Yemen, which is already close to being a failed state. In Bahrain, tensions derive from the secular divide between the disenfranchised Shi’a majority and the ruling Sunni: any major problems here could also portend major tensions between Shi’a Iran and Sunni Saudi Arabia.

In the ‘moderate to high risk’ category come Algeria and Syria. However, the scars of the 15-year civil war in Algeria remain fresh in the minds of much of the population, while protests in Syria have been relatively muted, probably due to the pernicious presence of the mukhabarat (secret police).

Countries that can be categorised as ‘medium to low risk’ include the monarchies of Morocco and Jordan, where protestors have not criticised the legitimacy of the regimes but are instead more concerned about jobs, poverty and prices. The ‘low risk’ category covers the Gulf states (with the exception of Bahrain), i.e. the UAE, Qatar, Kuwait, Saudi Arabia and Oman, which have the funds from hydrocarbon earnings to keep their small populations happy.

Even in the countries that are most at risk, the chances of a rapid, peaceful transition to a fully-fledged democratic state (with respect for human rights, access to basic necessities and a lack of corruption) are still extremely low; Western liberal democracy does not translate easily into a region where identity, and not ideology, influences election results (for example, consider the problems of creating governments and passing legislation in Lebanon and Iraq). In addition, it will be virtually impossible for any incoming government to meet the unrealistic level of expectations about providing jobs, reducing poverty and tackling corruption: the failure to meet such expectations will ensure that there is potential for further unrest.

All in all, the unprecedented situation in MENA remains extremely fluid and unpredictable, with the final set of outcomes unlikely to become clear in the short term. Watch this space.

Warwick Knowles

Chief Economist - Country Risk Services

At D&B Country Risk Services we have a team of economists dedicated to analysing the risks of doing business across the world (over 130 countries). We monitor each of these countries and produce both shorter analytical pieces (Country RiskLine Reports), as well as more detailed 50-page in-depth pieces (Country Reports). For further details please contact Country Risk Services on +44 (0)1628 492595, or email CountryRisk@dnb.com.

Pirates of the Indian Ocean

The aftershocks from the instability created by anti-government demonstrations in the Middle East and North Africa continue to reverberate around the world. As discussed last week, one of the side effects of these demonstrations was to hike oil prices to levels not seen since before the global financial crash in 2008; however, the good news here is that this particular impact on oil prices should fade once political stability is restored.

While the dramatic events were unfolding in Egypt and capturing the headlines, a more worrying threat to global trade and supply chains was manifesting itself: the capture of the bulk oil tanker Irene SL in the Arabian Sea by pirates (who were operating over 900 nautical miles from the Somali coast, where the majority of them are based). The oil on board is worth USD200m, making this probably the most valuable cargo ever captured by pirates.

However, it’s not so much the size of the booty that is of concern but the fact that Somali pirates are now operating so far from their homeland, and in a stretch of water through which around 33% of the world’s seaborne oil is transported: on average, 19 huge tankers pass through these shipping lanes every day. Even more alarming is that this level of traffic is set to increase in the next decade as oil supplies are run down in areas such as the North Sea, off the coast of the UK.

A quick glance at the International Maritime Board’s piracy maps shows how quickly the problem has escalated. Already in 2011 there have been five attacks and a further five attempted attacks in the area where the Gulf of Oman empties into the Indian Ocean. For comparison, in the whole of 2010 there was one attack (and a further five attempts), while in 2009 just one incident was reported in total.

The reason for the dramatic increase in piracy appears to be the success of the international maritime forces that are policing the Gulf of Aden, which lies directly off the coast of Somalia and which was the focus for the majority of pirate attacks in 2008 and 2009. At that time, the issue became a major international concern because the waters lay on the route connecting Europe with Asia. As a result, the UN passed a resolution in June 2008 enabling international navies to patrol within Somali waters.

However, the success of these naval forces has meant that pirates have widened the scope of their activities, not just to the mouth of the Gulf of Oman but also across much of the Indian Ocean (an area twice the size of Europe and therefore impossible for international naval forces to patrol effectively).

This development could create major problems over guaranteeing the supply of oil from the Persian Gulf. As well as pushing up the cost of insuring tankers and cargos, it will mean that markets will also be concerned that supplies could be interrupted for significant periods. Consequently, prices at the pumps will remain high, while energy costs will continue to increase, eating into business profits and/or raising prices. The one bright element in this gloomy picture is that, in the longer term, such problems will influence the increase in the volumes of oil transported by pipeline, which will in turn provide new opportunities for businesses involved in this sector.

Warwick Knowles

Chief Economist - Country Risk Services

At D&B Country Risk Services we have a team of economists dedicated to analysing the risks of doing business across the world (over 130 countries). We monitor each of these countries and produce both shorter analytical pieces (Country RiskLine Reports), as well as more detailed 50-page in-depth pieces (Country Reports). For further details please contact Country Risk Services on +44 (0)1628 492595, or email CountryRisk@dnb.com.

The Hidden Costs of Egypt’s Unrest

The events unfolding in Egypt continue to dominate the headlines across the world. While the number of articles and news stories spawned by the unrest at times seems to outnumber the protesters, little has been written on the wider effects. These effects could be highly significant, and I’ll discuss the main ones here.

The first effect was on oil prices, which broke the USD100 per barrel mark for the first time since September 2008 as oil traders overreacted, in a manner that typifies the response to even minor difficulties in the Middle East and North Africa region (MENA). Although Egypt produces less than 1% of total world output, worries over the closure of the Suez Canal and the domino effect in the wider region stoked traders’ concerns about an interruption to supplies from the Gulf (which produces around 30% of the world’s supply). Prices subsequently eased, but traders remain jittery and the oil price could easily jump again.

The second impact was seen in a sharp rise in the degree of political risk associated with emerging economies. This means that foreign players (and to a lesser extent domestic agents) react to uncertainty by pulling out of local stock markets, causing them to fall. Similarly, currency traders mark down the local currency, and speculators start looking for new homes for their money. Normally, this would signal a move towards the ‘safe’ stock markets and currencies of the developed world, but confidence in these is still being undermined by the after-effects of the 2008-09 global financial crisis. So speculators are eyeing other areas, such as commodities; and investing in the likes of oil, pushing its price up further, adding to inflation and creating further social unrest: a vicious circle.

The third impact is also related to political risk: increased tensions mean that investors consider the affected markets to be more risky, and therefore look for higher returns on any debt issued to emerging markets. This leaves companies in these markets facing additional costs, curtailing profits and pushing up prices for their goods. Similarly, governments find it more expensive to borrow to fund their budget needs.

The fourth and final impact occurs when authoritarian regimes attempt to buy popular support via increased subsidies (particularly on basic goods such as bread and fuel), government wages and pensions, and public sector jobs. Although the shift towards a more free-market economy in many MENA states has partly destroyed this unwritten agreement between authoritarian regimes and the populace, regimes will still attempt to make use of the subsidy ‘lever’.

The policy of buying support can reduce political pressure on the regime in the short term, but creates problems for the state budget. In many cases this will mean that governments will have to borrow more to fund extra spending (and at a higher cost), which could lead to massive problems if the government then has to slash spending.

Overall, these factors have created a new element of uncertainty in the global economy. Just as it appeared that the world was starting to stabilise after the economic crisis that erupted in mid-2008, and businesses could start looking ahead with greater certainty, the illusion has been shattered by the events in MENA. Perhaps the only safe bet in 2011 will be on high levels of political and market uncertainty.

Warwick Knowles

Chief Economist - Country Risk Services

At D&B Country Risk Services we have a team of economists dedicated to analysing the risks of doing business across the world (over 130 countries). We monitor each of these countries and produce both shorter analytical pieces (Country RiskLine Reports), as well as more detailed 50-page in-depth pieces (Country Reports). For further details please contact Country Risk Services on +44 (0)1628 492595, or email CountryRisk@dnb.com.

On the Brink?

Two weeks on from Tunisia’s ‘jasmine’ revolution, the politics of the Arab world look rather different. Protests have convulsed the Egyptian economy, with ports crippled, factories silent and banks shuttered. Opportunistic crime in the wake of the looting of police arsenals has brought a security vacuum, making trading conditions impossible for tourism (a tenth of the economy) and foreign businesses unlucky enough to have suppliers in Egypt.

So will Egypt undergo regime change, triggered by a people-power movement? Late last year, we said that the country’s risk outlook was deteriorating and that “the uncertain succession to President Hosni Mubarak [is] the main risk factor in the short term” – and this remains the case. However, after Tunisia, experts on the Arab world (including us) underestimated the despair of the Egyptian middle-classes, which has made them willing to man barricades to hasten the collapse of the Middle East’s pre-eminent police state.

The street protests in Cairo, Alexandria and elsewhere briefly indicated that Egypt might be ‘the next domino to fall’, but the response of the US, Egypt’s military and President Mubarak’s security apparatus has suggested that a longer, more dangerous transition period is looming, without the kind of clear resolution businesses would like to see. Egypt will be lucky if it can follow Tunisia’s example of a brief period of mass protest giving way to a caretaker regime populated by the governing party.

Instead, a longer period of strikes, demonstrations, provocation, covert reprisals and overt repression is likely. The regime and the protestors alike seem prepared to hold the economy to ransom. In this scenario, Egypt will record a severe recession in 2011, even if the Suez Canal and the Red Sea-Mediterranean Sumed oil pipeline continue to operate without hindrance. The oil price will feel upward pressure, in any case, but there is more to it than that.

More broadly, Egypt’s difficulties will affect how risk fundamentals are perceived. Already, fortunes have been made by those who bet the right way on swaps on the Saudi and Qatari riyal currencies, feeling fearful vibrations from Egypt. Emerging market bourses as far afield as Indonesia have felt selling pressure.

Superficially, this is because of Egypt’s importance as a conduit for Middle Eastern oil to major OECD markets, and its leading position in the Arab world, but it has also been because the Egyptian lesson could lead investors and credit managers to re-price risk across the board. Investors may begin to realise that there is no predictable science to when populaces alienated by corruption, food price inflation or disenfranchisement become willing to put their own livelihoods on the line to bring the days of a hated regime to an end.

In a world where the political lifetime of a ‘safe pair of hands’ (as Mubarak has been perceived in the West) can no longer be measured in years, managing supplier risk and choosing markets could become a tougher game, demanding wiser counsels.

 

Isaac Leung

Senior Economist - Country Risk Services

At D&B Country Risk Services we have a team of economists dedicated to analysing the risks of doing business across the world (over 130 countries). We monitor each of these countries and produce both shorter analytical pieces (Country RiskLine Reports), as well as more detailed 50-page in-depth pieces (Country Reports). For further details please contact Country Risk Services on +44 (0)1628 492595, or email CountryRisk@dnb.com.

Going Downhill at Davos?

Around this time every year the world’s business and political leaders gather in the exclusive Swiss ski resort of Davos, where the World Economic Forum (WEF) has become a must-attend occasion in the annual round of political and economic gatherings. Although many deals are struck back-stage during the conference, and smiling groups of world leaders shake hands for the cameras, it remains unclear whether the outcomes actually serve to resolve the key issues facing the world. For example, the regulation of the global banking system has been a key theme at Davos in the past two years, but little real progress appears to have been made.

There are certainly plenty of ongoing problems to exercise the minds of the Davos elite this year, including: the political turmoil in the Middle East; the strength of the Asian economies; the European debt crisis; banking sector regulation (still); and the two-speed global recovery. This already-toxic mix of global difficulties is being exacerbated by surging food and oil prices, with economic growth curtailed and inflation rising: a repeat of the ‘stagflation’ of the 1970s. These are Big Issues requiring Big Solutions and, while the year ahead promises to be another exciting period for economic analysts, for the vast majority of the world’s population it will be another tough, uncertain time.

Historically, the years immediately following recessions have seen political upheaval as economic effects feed through into the social sphere: retrenchment entails cut-backs in jobs and welfare benefits, hitting the poor hardest and feeding into social discontent (manifested either through strikes and the use of the ballot box, or via demonstrations against authoritarian regimes). The latest crisis is proving no different. Elections in the UK, Iceland, Greece and the Netherlands have seen the ousting of the parties and leaders that were in power when the crisis broke, with Ireland’s government likely to follow. Further afield, Tunisia’s authoritarian leader has been overthrown and there have been significant demonstrations in Algeria, Egypt and Yemen.

As with the banking regulation issue, it is difficult to see how the elite at Davos will be able to reduce the socio-political tensions fuelled by these negative developments. The general aim of the WEF at Davos is to promote a pro-business environment through an agenda of promoting free markets and limiting government intervention: that is, perpetuating the economic orthodoxy that has dominated thinking over the past thirty years (when growth conditions were generally more propitious). Now, though, under-pressure authoritarian regimes are rolling back this orthodoxy (and the IMF-mandated policies that have accompanied it) in order to placate populations encouraged by the events in Tunisia. If these regimes fall, they could be replaced by governments that create additional problems.

The decision-makers gathered in Davos therefore have a series of intractable problems to try and resolve, and only a limited number of actions they can take to affect future outcomes. When the juggernaut of growth was steering serenely along the global highway, their task was somewhat easier. The juggernaut now appears to be running downhill, with nobody exactly sure which are the right levers to pull in order to bring it back under control.

Warwick Knowles

Chief Economist - Country Risk Services

At D&B Country Risk Services we have a team of economists dedicated to analysing the risks of doing business across the world (over 130 countries). We monitor each of these countries and produce both shorter analytical pieces (Country RiskLine Reports), as well as more detailed 50-page in-depth pieces (Country Reports). For further details please contact Country Risk Services on +44 (0)1628 492595, or email CountryRisk@dnb.com.

Why Tunisia is not a Domino

Until recently, Tunisia was probably associated in most people’s minds with sun, sea, sand and maybe the odd Roman ruin. Not any longer. As has been widely covered in the Western media, a series of mass protests against poverty, unemployment, price rises and the country’s huge wealth disparities resulted in the unexpected overthrow of the long-serving authoritarian president, Zine al-Abidine Ben Ali, who fled the country with his family.

The intensity of the protests in Tunisia found an echo in the over-excitement of the press in the West. A wave of stories predicted that Tunisia would be only the first domino to fall, and that it could be followed by the collapse of other authoritarian regimes throughout the Middle East and North Africa (MENA). Many of these stories imply that democracies could rise, phoenix-like, from the ashes of the protest, perhaps mirroring Eastern Europe’s post-Communist experience in 1989. Such optimism (or wishful thinking) appears misplaced, as the Tunisian experience (which is still being played out) does not provide a simple template that can be replicated across the region. There are a couple of key reasons for this.

Firstly, protests over food prices (‘bread riots’) are not uncommon in the region: Algeria, Egypt, Jordan, Morocco and Tunisia have all such demonstrations over the past couple of decades, and regimes are thus experienced in controlling the after-effects of these types of action.

Secondly, other governments’ responses to their riots proved less intransigent than those of the Tunisian regime: Jordan’s rulers promised cuts in fuel and food prices worth 225 million dollars, Syria’s government announced cash handouts to over 400,000 families, while Kuwait is giving free food rations to all Kuwaitis (as well as a cash payment of 3,500 dollars). In the short term, such concessions will reinvigorate the tacit social contract whereby the governing classes provide the populace with subsidised staples in return for political support (or acquiescence).

In any case, free and fair polls in MENA are more likely to elect Islamists of various hues rather than pro-Western, pro-business parties following a liberalising agenda: for example, Islamists were on the verge of gaining control in Algeria in 1991 before the army took over (sparking a ten-year civil war that killed more than 150,000 people), while Hamas won the 2006 elections in the Gaza Strip before being undermined. The dream of democracy flowering in MENA in the wake of the kind of ‘soft’ revolutions seen in 1989-90 is illusory. Further threats to the current regimes in MENA are more likely to lead to a repeat of Central Asia’s post-Communist experience, whereby the Soviet state was replaced by authoritarian dictatorships.

The reality, for now, is that businesses trading or investing in the MENA region are going to experience heightened political tensions, which are liable to create greater uncertainty in the commercial arena. Moreover, there is every possibility that the authorities will adopt populist policies that act against foreign business interests. In the longer term, increased concessionary subsidies could eventually lead to government cutbacks, higher taxes and constrained growth, all contributing to continued uncertainty in the business environment.

The dominos are still standing.

Warwick Knowles

Chief Economist - Country Risk Services

At D&B Country Risk Services we have a team of economists dedicated to analysing the risks of doing business across the world (over 130 countries). We monitor each of these countries and produce both shorter analytical pieces (Country RiskLine Reports), as well as more detailed 50-page in-depth pieces (Country Reports). For further details please contact Country Risk Services on +44 (0)1628 492595, or email CountryRisk@dnb.com.

Banks: Heroes or Villains?

Most good stories need villains: characters who exemplify immorality or excess, and who throw the flawless behaviour of the rest of us into clearer relief. Since the economic crisis of 2008, banks and bankers have been cast as our villains, with politicians, newspaper columnists and the general public alike all taking turns to heap opprobrium on them. However, if you took the banks out of the story, it would be pretty empty: without them, businesses could not operate and grow, and neither could we buy the houses and cars that most of us desire. Banks are essential to the functioning of our market system.

There was some better news from the banking sector this week (although it risked being drowned out by the ongoing furore over demands to limit bankers’ bonuses). In a move designed to stop the spread of problems caused when local asset bubbles burst, the 27 members of the Basel Committee on Banking Supervision, who represent all of the world’s major economies have agreed a proposal for effective cross-border regulation. So why is this thought necessary, and how would it operate?

Well, you’ll no doubt recall that the latest global downturn started with the bursting of the housing market bubble in the US. Moreover, the internationalisation of the financial sector over the past two decades meant that it was not just US banks that were exposed to these bad debts. In the aftermath, many banks in the advanced economies were only saved by strong government action, which included the shock of having to nationalise banks, long after the practice of nationalisation was thought to have been consigned to the ideological dustbin of history.

The crisis also highlighted the failure of regulation in the global financial system, and there were strident calls for change. Bankers often seem to move slowly when reacting to sudden changes in the environment, and so it proved in this case: it was not until November 2010 that new regulations were finally agreed. Worse still, these were heavily diluted compared with the initial proposals.

Nonetheless, the proposal announced in early January is an important step in trying to reduce the risk of another uncontrolled global credit boom. The new regulations would work like this: if the central bank in country A decides that banks are lending too quickly in relation to how fast the economy is growing, it can force the banks to slow down their lending by making them hold extra capital as security against potential losses if and when the economy slows down.

While such measures have long been a weapon in the armoury of central banks, an important new element has been introduced: the banks in other countries will also have to increase their capital in proportion to the amount of lending they have to country A. Once the bubble bursts, as is inevitable, the banks will be able to reduce their capital to the original level, using the excess to absorb any losses.

If successful, the proposal would mean (1) that the cost of lending would not rise dramatically (as it did in 2008), and (2) that the banks would still have funds to lend to businesses and households. Result: no more credit crunch, and less risk of repeating the nightmare scenario of 2008, when businesses were left high and dry as the banks stopped lending.

So, next time around, the banks could even be cast as the heroes of the piece, making sure that the rollercoaster of growth and contraction remains firmly on the rails.

Warwick Knowles

Chief Economist - Country Risk Services

At D&B Country Risk Services we have a team of economists dedicated to analysing the risks of doing business across the world (over 130 countries). We monitor each of these countries and produce both shorter analytical pieces (Country RiskLine Reports), as well as more detailed 50-page in-depth pieces (Country Reports). For further details please contact Country Risk Services on +44 (0)1628 492595, or email CountryRisk@dnb.com.