WELCOME TO THE CONTINUITY CENTRAL ARCHIVE SITE

Please note that this is a page from a previous version of Continuity Central and is no longer being updated.

To see the latest business continuity news, jobs and information click here.

Business continuity information

The business impacts of contagion

Maplecroft has issued a business and political risk briefing for the MENA region. It is published below verbatim:

The toppling of Zine El Abidine Ben Ali in Tunisia and Hosni Mubarak in Egypt has encouraged the populations of many Middle East and North Africa (MENA) countries to demand reform and political change. Whilst differences exist between individual countries, unemployment, the high cost of living, corruption, the stifling of political dissent, a lack of freedom and violent security forces are amongst the primary sources of discontentment. The momentum of the protest movement across the region continues to pose a series of risks to business, as outlined below:

Key risks to business:

* The physical and human resources of companies risk being targeted or caught in the cross-fire of violence in countries where clashes between agents of the state and its opponents persist. This risk is most severe in Libya, where Colonel Gaddafi is fighting tooth and nail to cling onto power. As publicly stated by Saif al-Islam, Gaddafi’s son, the Libyan leader plans to use every last bullet against the anti-establishment movement. In addition to the mass exodus of foreigners from Libya, oil companies such as Italy’s ENI and Spain’s Repsol YPF have closed their offices and evacuated staff from the country due to the extreme level of violence. With between 10,000 – 12,000 loyalists, Gaddafi is prepared for a long, protracted and bloody struggle. The outcome is likely to impact the momentum of protest movements elsewhere in the MENA region.

* Companies which are closely associated with autocratic regimes risk being targeted by protestors and individuals fighting against the establishment. They may also be subject to violence by opportunistic criminals seeking to take advantage of the security vacuum. In the second half of February 2011, CNPC, China’s biggest gas and oil producer, confirmed that its facilities had come under attack in Libya and that its employees were being evacuated back to China.

* Militant groups such as al-Qaeda are seeking to capitalise on the turmoil in North Africa and the Middle East. The internet monitoring service SITE has reported a spike in Islamic extremist groups attempting to ferment chaos in the Middle East during the current period of political turmoil. Days prior to the attack on 5 February 2011 against the Arish-Ashkelon pipeline which delivers gas to Israel from the Sinai, SITE warned that jihadists were discussing plans to target the pipeline. Al-Qaeda has also tried to harness the momentum of demonstrators to achieve its own political ends. At the end of February, Ayman al-Zawahiri, Osama bin Laden’s deputy, released a recorded message calling for the establishment of Islamic states in both Tunisia and Egypt. This is despite the fact that the protests in both countries were propelled primarily by secular youths demanding greater democracy and freedom.

* Political instability in the MENA region means that the business environment has become less certain. Egypt is a case in point. The country’s Supreme Council of the Armed Forces, which says it is overseeing the transition to a democratic process, has promised that Egypt will honour international agreements. However, concerns persist about the agenda of the Muslim Brotherhood, which enjoys strong grass-roots support and remains the most organised political group in Egypt (apart from Mubarak’s discredited National Democratic Party). Although not monolithic (consisting of liberals and conservatives), fears persist that the Brotherhood may become a powerful political force in the form of the newly established Liberty and Justice Party. Critics fear that it may seek to reduce Egypt’s strong political, economic and commercial ties with the West and will shift the balance of power in the Middle East.

* The ability of other MENA countries to honour business contracts and agreements will also depend on the manner in which they emerge from the current crises. Whilst Egypt has a relatively formalised bureaucratic structure, countries such as Libya face a more acute risk of disruption owing to the influence of powerful tribes. Although constituting a risk, the potential for extreme conflict between Libya’s tribes in a post-Gaddafi era may have intentionally been exaggerated by the current regime. In late-February, the inhabitants of Libya’s second largest city, Benghazi, said they rejected the tribal power structures that have long been manipulated by Gaddafi to stay in power. Anti-establishment figures in the city, which remains under rebel control, have acted in unison in their drive to force the Libyan leader from power. That said, countries such as Libya have a much weaker and more idiosyncratic governmental structure which may make it more difficult to conduct business following Gaddafi’s departure.

* Protests threaten to disrupt supply chains and business in general over the coming months. Demonstrations by workers and union members in Tunisia and Egypt following the removal of Ben Ali and Mubarak underline the risk that protests will persist in individual states irrespective of the pace of political change and the concessions made by the holders of power. Workers who dared not oppose the status quo under the former regimes now feel that they can demand change both at macro and micro levels (at the workplace). Continuous worker strikes not only make it difficult for individual economies to recover from turmoil and political disruption, but also prevent a recovery of investor appetite.

* Distrust of the current holders of power in countries where the head of state has been toppled will also account for persistent demonstrations. Protestors in Tunis, for instance, have continued to camp outside the prime minister’s office in central Tunis, alleging that members of the old guard are refusing to relinquish power. Fears persist that the old ruling elite are trying to preserve their interests, meaning that political protests could continue throughout 2011.

* The risk of complicity in human rights violations for companies with interests in the MENA region is high. The brutal crackdown being witnessed in Libya (and to a lesser degree witnessed in Bahrain and Yemen) is not only adding to the combustible atmosphere in the region. It is also leading to high levels of media scrutiny of companies that have business dealings with regimes that are accused of actively suppressing their people. Risk of export licences being reviewed and/or revoked will concomitantly rise and disrupt business. Trade embargoes and sanctions could also be installed (Libya is a case in point). This risk is most relevant to high-tech arms companies at present, though this could extend to companies in the oil and petrochemical industry.

* The high levels of corruption associated with regimes in the MENA means that companies are at greater risk from reputational damage should their dealings with corrupt individuals or entities be exposed. Libya and Yemen, for instance, are classified as ‘extreme’ risk countries in Maplecroft’s Business Integrity and Corruption Index. There is also an elevated risk of restrictions being imposed under the United States Foreign Corrupt Practices Act or similar legislation in other countries. Such restrictions could limit the ability of firms that are concerned about maintaining their reputations as responsible businesses from doing business with regimes in the MENA region.

* The susceptibility of MENA countries to food price hikes will continue to act as a trigger for social unrest and pose risks to businesses. Countries in the MENA region are at risk from high global food prices and this has been the cause of much social unrest since prices began to climb at the end of 2010. In March 2011, the Food and Agricultural Organisation (FOA) revealed that world food prices had reached a record the previous month due to a spike in dairy, grain and meat costs. This may stoke further unrest in the MENA region, adding to the sense of frustration amongst the poor and unemployed and increase calls for a more accelerated pace of reform. The need for governments to placate protesters by increasing subsidies for foodstuffs means that there is less money to spend on other areas of pressing need such as health, education and infrastructure.

* The same rationale applies to states in the MENA region that import oil and gas. The level of unrest and bloodshed in Libya, which is the world’s 12th largest exported of oil, forced US Brent Crude to hit US$118 a barrel on 24 February (although it came down to US$113 a barrel in late February). Concerns abound that Saudi Arabia, which sits on close to 20% of the world’s proven reserves according to BP, will face greater contagion. That may cause oil prices to break the 2008 record of US$147 per barrel. Greater contagion in other MENA oil producing states, such as Kuwait (which sits on 7.6% of the world’s proven reserves according to BP), could also place further pressure on supplies. Inflationary pressure from high oil and gas prices will make economic reform more difficult in countries that import the bulk of their fossil fuels.

www.maplecroft.com

•Date: 4th March 2011 • Region: M.East / Africa •Type: Article •Topic: Op risk



How to advertise How to advertise on Continuity Central.

To submit news stories to Continuity Central, e-mail the editor.

Want an RSS newsfeed for your website? Click here