Early returns released after polls closed showed Hollande with about 28% of the vote to Sarkozy’s 26%, a margin consistent with pre-election polls. Eight other candidates trailed.

The biggest surprise was the strong showing of far-right candidate Marine Le Pen, who received about 20%. That would be the strongest electoral showing her party has ever made — about double the percentage her father Jean-Marie Le Pen received in 2007.

Marine Le Pen knocked left-wing firebrand Jean-Luc Mélenchon into fourth place, becoming the kingmaker in the May 6 runoff between Hollande and Sarkozy. At least half of her voters are expected to support Sarkozy.

During a fiery campaign, Le Pen, a 43-year-old lawyer, relentlessly challenged the “established” candidates and in many ways defined the campaign landscape, forcing Sarkozy to veer to the right.

At Socialist Party headquarters, the atmosphere had been one of tense optimism as supporters waited for the results, with a crowd of young Hollande supporters gathered outside awaiting the news.

Former Socialist Culture Minister Jack Lang called for restraint. “We must not consider that it’s already won. The battle will be difficult. It’s when you believe it’s in the bag that you end up losing,” he said.

Early indications suggested that about 80% of the electorate turned out.

French President Nicolas Sarkozy seems destined to be the next electoral casualty of the euro-zone sovereign-debt crisis. Sarkozy is deeply unpopular at home, but his expected defeat in this year’s presidential elections could be a setback for France.

The likely victor, François Hollande, is a socialist whose policies would create uncertainty in the short term and foment further economic stagnation in the longer run. Like much of the euro zone, France is plagued by diminishing competitiveness, high unemployment, and excessive government spending. Hollande has proposed raising the state’s tab, which could worsen the other problems and punish business.

Sarkozy and Hollande will lead in the first round of voting on April 22, but neither is likely to garner enough votes to declare an outright victory. All polls point to a win for Hollande in the May 6 runoff, but the French have pulled surprises in the past.

Sarkozy, 57, was elected president in 2007, and is paying the price for failing to deliver on his campaign promises amid the worst financial downturn in Europe since World War II. He has earned plaudits for persuading Germany, Europe’s largest economy, to take a softer approach to the euro-zone crisis, but domestic issues matter more to French voters. France is flirting with economic recession, and in January was stripped of its prized triple-A credit rating by Standard & Poor’s.

Hollande, also 57, is a graduate of France’s prestigious École Nationale d’Administration, which boasts presidents and prime ministers among its alumni. But his political experience is limited, encompassing a decade as secretary of the Socialist Party and a stint as mayor of a provincial town. Ségolène Royal, his former partner and mother of his four children, lost to Sarkozy in ’07. Hollande secured the party’s nomination last year, after scandal enveloped the favorite, Dominique Strauss-Kahn.

A pro-European, Hollande is a protégé of former European Commission President Jacques Delors, one of the architects of the euro. To maintain stability and continuity in Europe, he will need to emulate Sarkozy’s cozy relationship with German Chancellor Angela Merkel. But the relationship could be complicated, as they occupy different sides of the political spectrum. At some point, Merkel may need to check Hollande’s soft Keynesian tendencies: Germany doesn’t have the resources to bail out France.

Hollande’s economic policies would do little to boost France’s competitiveness, and his goal of eliminating the budget deficit by 2017 is apt to remain elusive. He aims to kick-start the economy by adding jobs and creating growth, but that means even greater government outlays. Government expenditures currently equal 57% of gross domestic product, one of the highest levels in Europe and nine percentage points more than in Germany.

Following Sarkozy’s lead, Hollande looks to raise taxes, and favors imposing an astonishing 75% tax rate on those earning more than a million euros ($1.32 million). The backlash could be catastrophic, sparking a wealth exodus. After all, London, Frankfurt, and Zurich aren’t far away.

Vania Mareuse, managing director at Bryan Garnier in Paris, worries that Hollande’s spending plans would aggravate France’s budget deficit and hurt the euro, which has been resilient until now. Mareuse is trying to reduce his exposure to the common currency. “If there is a move, it will go to $1.15 or $1.10,” he says. The euro traded last week at $1.32.

HOLLANDE ALREADY HAS TAKENaim at the financial world, declaring it his enemy. He plans to separate banks’ retail and investment operations, and bar French institutions from operating in tax havens. Higher income-tax rates would hit banks and utilities hardest. Other tax changes, such as the cancelation of credits for research, would crimp the aerospace and defense sector and the media industry. Brokerage Cheuvreux identifies potential losers as the bank Natixis (ticker: KN.France), the utilityGDF Suez (GSZ.France), and Carrefour (CA.France), the giant supermarket chain.

French companies such as LVMH Moët Hennessy Louis Vuitton (MC.France),Capgemini (CAP.France) and the catering outfit Sodexo (SW.France), which generate most of their sales in international markets, could fare better. But France’s fortunes, in general, won’t revive until it finds a leader willing to whip its public finances into shape.

]]> http://www.intelligencequarterly.com/2012/04/us-election-presidential-polling/feed/ 0 http://www.intelligencequarterly.com/2012/03/sarkozy-too-many-foreigners-in-france/ http://www.intelligencequarterly.com/2012/03/sarkozy-too-many-foreigners-in-france/#comments Wed, 07 Mar 2012 15:06:35 +0000 admin http://www.intelligencequarterly.com/?p=2587 BRUSSELS - A combative Nicolas Sarkozy during a TV show on Tuesday (6 March) said there are too many immigrants in France and tried to defend his leadership and economic policy.

“Our system of integration is working more and more badly, because we have too many foreigners on our territory and we can no longer manage to find them accommodation, a job, a school,” he said.

Himself the son of a Hungarian immigrant and a former minister of interior, Sarkozy has pursued hardline policing against irregular migrants, such as the ‘voluntary’ repatriations of thousands of Roma travellers to Romania and Bulgaria in 2010 or the push-backs of Tunisian migrants coming via Italy.

He has been accused of adopting a more extreme right-wing discourse in a bid to woo voters from nationalist leader Marine Le Pen because he trailing in the polls behind the Socialist contender in the run up to April elections.

The Tuesday debate, with former Socialist minister Laurent Fabius, confirmed this trend: “Over the five-year term I think that to restart the process of integration in good conditions, we must divide by two the number of people we welcome, that’s to say to pass from 180,000 per year to 100,000,” Sarkozy said.

He also announced new plans to limit some welfare payments for immigrant workers to those who have enjoyed residency for 10 years and have worked for five of those years.

The anti-immigrant stance came the same day as his Prime Minister, Francois Fillon, caused a stir in Muslim and Jewish communities by questioning their way of butchering animals for food.

“These are ways which may have had hygiene reasons a long time ago, but not nowadays,” he said.

The French Council of the Muslim Faith slammed what it said was the use of Muslims as “scapegoats” in the election. The Grand Rabbi of France asked whether this was really France’s number one problem as it struggles with the economic crisis.

The issue was brought up by Le Pen, who last month claimed all meat in Paris abattoirs is prepared using Islamic halal methods and that non-Muslim consumers in the capital are being misled.

Both kosher and halal slaughter methods require the abattoir to kill the beast by slitting its throat rather than stunning it first, as is done in normal slaughterhouses. Sarkozy on Saturday suggested the meat should be clearly labelled.

Merkel in hotels

On other matters, Sarkozy said it has not been easy to win the heart of German Chancellor Angela Merkel, because she grew up “behind the [Berlin] Wall.”

But he claimed the economic crisis – which multiplied their meetings – has brought them closer together.

“We have been together for three years now going from crisis to crisis, staying in the same hotels,” he noted.

He also pledged to visit Merkel first if he wins the election “not because I miss her, but because a woman leading a country of 80 million deserves to be respected.”

A survey by pollster CSA published on Tuesday showed Sarkozy still trailing behind the Socialists’ Francois Hollande by two percent (28% to 30%) in the first round and by eight in a run-off (46% to 54%).

Sarkozy said he never trusts polls anyway.

“In 2007, there were so many saying I would lose in the second round because I was not cut out to be a president – the wrong stature, a bad haircut, no elite school. And still I won,” he noted.

The information wasn’t officially confirmed, but it has already prompted hundreds of comments on the Internet, including on web forums used by pro-jihadi activists.

One has to recall that several rumours about the death of president Bouteflika were spread in the past. Moreover, it is worth mentioning that he hasn’t appeared publicly since September 13. According to various Algerian and French information websites and newspapers, he might have been admitted in Paris’ Val-de-Grâce military hospital for “medical examination”.

Meanwhile, several sources later reported that he received Qatari foreign minister Hamed Ben Jassem Ben Jaber Al Thani in audience earlier today in Algiers.

The credibility of such information is almost impossible to assess given the stiff control exercised by authorities over any information concerning President’s health. Given the extremely tense social climate reigning in the capital and across the country, the reactions in the street and on the Internet should however be followed carefully, especially as such rumours could spark new outbreak of civil unrest incidents in the coming hours.

The incident took place only two months after a ban on wearing clothes and veils that hide the face introduced by Belgian authorities came into force. Meanwhile, according to some estimation at least 300 women inBrussels still wear full-face veils despite the ban.

Stable. Iraq continues to honour its debt commitments, and the Paris Club, Russia and China have agreed to substantial debt write-offs. However, Iraq’s sovereign risk score is still undermined by the slow progress on debt relief with Arab creditors.

Currency risk

Stable. The Central Bank of Iraq oversees the Iraqi dinar’s informal peg to the US dollar, and foreign investors are increasingly seeing opportunities in Iraq, despite ongoing security problems.

Banking sector risk

Stable. Iraq does not have a developed banking sector, and in general banks suffer from poor asset quality and inadequate capitalisation, although recent moves to increase banks’ minimum capital requirements seek to remedy this.
Iraq’s political process has begun to look more certain, and violence targeting civilians is, largely, down. The steady drawdown of US troops may, however, allow some of the insurgent factions to regroup, putting in danger the security improvements of the past two years.Political risk

Economic structure risk

Oil revenue accounts for around 98% of total export earnings and over 90% of budget revenue. This leaves Iraq highly vulnerable to movements in oil prices and to any deterioration in the security situation.

Former U.S. assistant secretary of state David Welch advised the Libyan leader Muammar Gadhafi in August on how to overpower rebels fighting to end his 42-year rule, broadcaster Al Jazeera reported Thursday, citing documents found in Tripoli.

Welch, who brokered a deal to restore diplomatic ties between the U.S. and Libya in 2008, made the advice at a meeting with officials from the Gadhafi regime at a Cairo hotel on August 2, 2011, according to the television report.

It claimed that Welch suggested several “confidence-building measures.”

The alleged document records his advice on how to undermine Libya’s rebel movement, with potential assistance from foreign intelligence agencies, including Israel, according to Al Jazeera.

“Any information related to al-Qaida or other terrorist extremist organisations should be found and given to the American administration but only via the intelligence agencies of either Israel, Egypt, Morroco, or Jordan… America will listen to them… It’s better to receive this information as if it originated from those countries,” the document read, according to Al-Jazeera.

Al Jazeera said one of its correspondents had stumbled upon the document while touring the offices of Libya’s intelligence service in Tripoli after rebels overran it last month.
The Doha-based television reported that Welch purportedly advised the Gadhafi regime to take advantage of the unrest in Syria.

“The importance of taking advantage of the Syrian situation particularly regarding the double-standard policy adopted by Washington … the Syrians were never your friends and you would lose nothing from exploiting the situation there in order to embarrass the West,” the alleged document read.

However, sources close to Welch questioned in remarks published Thursday the validity of the document.

The pan-Arab newspaper Asharq Al Awsat quoted the unidentified sources as saying that Welch stressed at the meeting the necessity of Gadhafi stepping down.

The sources accused the Libyan officials who Welch met of revising the minutes of the meeting to “tell Gadhafi what he wanted to hear.”

The alleged disclosure coincided with the 42nd anniversary of Gadhafi’s coup.

Meanwhile, two of the Libyan leader’s sons have given very different statements to the press on their readiness to surrender, as the rebel forces appeared to have almost defeated loyalists.

Al-Saadi Gadhafi reportedly called for an end to the bloodshed, and was prepared to consider surrender in return for a guarantee of safety, in an interview with Al Jazeera late Wednesday. But his brother Saif al-Islam was quoted by CNN the same evening as calling on the remaining government troops to “attack the enemy wherever they are,” claiming that “victory is near.”

Both men said they were authorized to speak in the name of their father, whose whereabouts were unconfirmed, although al-Islam claimed he was well and living in a suburb of the capital. The rebels have given the remaining pockets of resistance loyal to the regime until Saturday to surrender.

International leaders were to meet Thursday in Paris to discuss the Libyan situation.

ELECTION WATCH: As part of the regime’s official reform programme, proposals for new election and political parties laws were approved by the president in July. The new laws regulate elections through a new independent election commission and legalise the founding of new political parties other than those allied to the ruling Baath party. However, there is currently no parliament to approve these measures as the four-year term of Syria’s parliament, the Majlis al-Shaab, expired in May. Under the current constitution, if a new election is not called within 90 days (August 7th), the old parliament will be recalled. The old parliament will therefore return to pass these measures and fresh elections under the new laws will be held some time in the next six months. Every seven years parliament proposes a presidential candidate who is then put to a referendum. Mr Assad was confirmed for his second term in 2007. Even if he stays in power it is likely that the nature of the presidential electoral process (the unlimited number of terms, the lack of a contest) will come under scrutiny.

INTERNATIONAL RELATIONS: The EU has placed sanctions on 35 regime figures, including Mr Assad, while the US has expanded the existing economic sanctions on Syria to include additional regime members, including the president. Facing growing isolation, Syria will rely on non-Western global allies, such as Russia and China, to veto any resolution condemning Syria’s actions at the UN Security Council. The reaction of Syria’s Arab neighbours to the crackdown had been largely muted owing to their fears of post-Baathist instability, but the regime’s continued violence has prompted a shift. Turkey, which has been frustrated by an inability to influence events despite its recent closeness to Syria, has stepped up its demands for reform, while Saudi Arabia has withdrawn its ambassador and demanded an end to the bloodshed. There is an increased possibility of diplomatic, economic or even military intervention by the Arab League or Turkey, either working together or separately. In contrast Iran and Hizbullah, an Iranian-sponsored Lebanese Shia militia, depend on their alliance with Syria to continue their cold war with Israel, which occupies Syria’s Golan Heights, and will continue supporting Mr Assad. This will include financial assistance, possibly arranged through Iran’s allies in Iraq.

POLICY TRENDS: The recent policy of gradually liberalising Syria’s centrally planned economy has stalled in the wake of the political unrest; its main architect, the deputy prime minister for economic affairs, Abdullah al-Dardari, was excluded from the new government formed in April. Mr Dardari’s successor as economy and foreign trade minister, Nidal al-Shaar, has a record that suggests he is in favour of economic reforms. However, his initial priority has been to quell the unrest by implementing populist state-funded measures, although a complete dismantling of Mr Dardari’s reforms is unlikely.

ECONOMIC GROWTH: Provisional figures from the Central Bank of Syria show that real GDP growth was 3.2% in 2010. Although the economy was boosted by increased oil production, growth in exports to Iraq and an expanding services sector, notably tourism, the continued weakness of the agricultural sector and increased food imports limited growth. With the continuation of political unrest we forecast that growth will drop to 1.1% in 2011, with any growth driven primarily by increased government spending and oil exports. Assuming that disruption will continue into 2012, but that some resolution will emerge in that year, we expect growth to increase slightly to 2.3% in 2012. Foreign investment is expected to drop as a result of the unrest, and the tourism sector will be hit badly. Business activity will be curtailed by disruptions caused by the protests, and the political uncertainty will lower private consumption (despite public-sector pay rises). In addition, any prolonged instability may persuade the Iraqi refugees living in Syria (estimated at between 500,000 and 1m) to return home, depressing consumption further.

INFLATION: Inflation should rise to 7% in 2011, less than initially expected, as early signs show that the increase in global commodity prices and the increase in liquidity resulting from the hike in state employees’ salaries and tax cuts promised during March have not pushed prices as high as some feared. Average inflation will drop to 5.5% in 2012, as commodity prices stabilise and the number of Iraqi nationals in Syria declines, lowering demand.

EXCHANGE RATES: The Syrian pound has been loosely pegged to the IMF’s special drawing rights since October 2007 and is tightly managed by the Central Bank. The authorities are unlikely to let the pound float freely, as they value exchange-rate stability. Recent unrest reportedly led to a temporary 15% depreciation of the pound against the dollar on Syria’s black market. (The black-market pound:dollar rate is usually in line with the official rate.) Concerns about the euro in 2011 will lead to a slight depreciation of the pound against the dollar, and we forecastthat the official rate will average SP47.3:US$1 in 2011-12. Before the current crisis, the Central Bank had healthy foreign-exchange reserves (equivalent to about 12 months of import cover), leaving it relatively well placed to defend the currency.

EXTERNAL SECTOR: High oil prices pushed export earnings up to US$14bn in 2010, but we expect them to drop in 2011-12 to an average of US$12.5bn, despite even higher oil prices, as non-oil exports decline as a result of political unrest. Oil production, which is increasing at small fields but declining at the larger, mature fields, rose by 2.9% in 2010. Several major oil companies have reported that production has been unaffected by the unrest, although there are reports of increased insurance premiums on tankers transporting oil from Syria’s ports, and acts of sabotage against some pipelines, which might cause some delays in delivery. Output will pick up further in 2011-12, averaging 392,000 barrels/day. The impact of changes in oil prices on the trade balance is limited, because Syria’s imports of refined products are about equal in value to its exports of crude oil. Higher production in 2011, augmented by a rise in international oil prices to an average of US$101.5/barrel in 2011-12, will push up crude oil export revenue to an average of US$5.3bn in 2011-12, from US$4bn in 2010. We forecast that the trade deficit will narrow to an average of US$1.4bn, or 2.3% of GDP, in 2011-12, as imports are expected to drop owing to the continued political unrest.

SOURCE: Country Outlook

ELECTION WATCH: A parliamentary election is due in 2012, and the next presidential election is scheduled for 2013. These will no doubt be closely watched given the protests that followed the disputed presidential election of June 2009. However, keen to prevent another repetition of those protests, the organs of the state, in particular the Guardian Council (which is responsible for vetting candidates), will ensure that the parliamentary election passes off with as little disruption as possible–and with only minimal debate and competition. Nevertheless, the elections may be a trial of strength between several competing regime factions. There may be subtle pressure from Iran’s supreme leader to strengthen parliament as a counterweight to the presidency, with some of Mr Ahmadinejad’s political foes receiving a boost. The reformist Green Movement appears to have lost much of its momentum in the wake of the 2009 presidential election and small-scale social unrest early in 2011.

INTERNATIONAL RELATIONS: The US administration has since toned down its overtures to Iran and from 2010 has worked hard to strengthen UN sanctions against the Islamic Republic, introducing a fourth round in June 2010. In response, Iran’s approach has been to stress repeatedly its “rights” under the Nuclear Non-Proliferation Treaty, while seeking to win the sympathy of non-aligned countries. This tactic has enjoyed mixed success: Turkey and Brazil voted against the fourth round of sanctions, but China and Russia supported the resolution. We expect Iran’s courting of non-aligned states to yield ever-decreasing returns over the forecast period, as Iran struggles to match the economic and diplomatic clout of the major powers.

POLICY TRENDS: With Western companies increasingly avoiding Iran because of the tightening of sanctions and pressure from their governments, the second-term Ahmadinejad government will instead attempt to source much-needed investment (especially into its hydrocarbons sector) from Asia. However, with South Korea and Japan also imposing their own sanctions on the country, Iran’s list of potential investment partners is diminishing, although China is likely to maintain a strong interest in its hydrocarbons sector. These trends will only reinforce the government’s penchant for economic self-sufficiency, which will lead to increased pressure on domestic banks to provide greater project finance, including by finding buyers for bonds issued by Iranian energy firms. However, with the fiscal position weakening and the government’s tendency to favour local over foreign firms where possible, especially in the energy and petrochemical sectors, Iran’s oil production capacity target of 5.3m barrels/day (b/d) by 2015, up from around 3.6m b/d at present, will not be met. If the nuclear dispute were to worsen markedly–leading to an eventual embargo on Iranian oil exports or a drastic decline in Iranian output, or worse, military action–the impact on economic policymaking and domestic industry would be severe.

ECONOMIC GROWTH: Iranian real GDP growth is likely to remain modest (and far below potential) over theforecast period, with subsidy cuts introduced late last year taking their toll. Although the subsidy reductions had been trailed in advance, the unexpected scale of the changes is likely to depress private consumption (the largest single component of GDP) in the first half of the forecast period especially, despite compensatory cash handouts by the state. Exacerbating this situation, industry is also likely to be hard hit, although it is earmarked to receive 30% of the savings accrued by the government in compensation. Real GDP growth, having recovered to 2.9% in 2010/11, will slip to just 2% in 2011/12, before slowly recovering over the remainder of the forecast period (as the impact of the subsidy cuts begins to fade).

INFLATION: The removal of subsidies has led to a sharp increase in fuel, electricity and flour prices. However, the impact will be minimised by the fact that the availability of such heavily subsidised items was probably restricted in any case. Inflation had reached 19.7% year on year in the Iranian month of Farvardin (ending April 21st), and we still expect a sharp increase in consumer price growth this year, to an average of over 20% (compared with an average of 10.1% in 2010). With the phased removal of subsidies planned to occur over almost the entirety of the forecastperiod, we expect inflation to average 16.3% in 2012-14, but to fall back in 2015 following the completion of the subsidy-reduction programme.

EXCHANGE RATES: We expect Bank Markazi (the central bank) to continue to try to maintain tight control over the exchange rate, with the objective of managing a gradual depreciation. This effort faced a stiff challenge in the second quarter of 2011, as a wide differential opened up between the official rate and the parallel market rate. The central bank responded with a snap devaluation on June 8th, which was reversed over the next few weeks, mainly as a result of the central bank’s readiness to pump foreign reserves into the market. The devaluation (and subsequent revaluation), indicates that Bank Markazi is willing to use a number of instruments it has at its disposal to support the local currency. However, the central bank has also indicated that some of the depreciation reflects fundamentals. Consequently, we project that the official rate will fall from an average of IR10,254:US$1 in 2010 to IR11,992:US$1 in 2015.

EXTERNAL SECTOR: With oil production stagnant and non-oil exports dampened because of sanctions, we estimate that the trade surplus stayed level in 2010/11, at around US$26bn. We expect the trade surplus to narrow markedly over the forecast period, declining to US$14.6bn in 2015/16. However, Iran’s external position will benefit from high oil prices in the first few years of the forecast period. The non-merchandise deficit is expected to remain relatively steady. The stagnant import bill is likely to suppress growth in services debits, and income debits should be depressed by reduced foreign participation in the Iranian economy. We expect the current-account surplus to narrow from an estimated US$31bn (6.5% of GDP) in 2011/12 to US$5.3bn in 2015/16, largely reflecting the country’s deteriorating trade position.

SOURCE: Country Outlook

The Labour Party continues to garner the backing of two-in-five decided voters in Britain, a new Angus Reid Public Opinion poll has found.

The online survey of a representative sample of 2,002 British adults also shows that the approval rating for Ed Miliband has reached the highest level of his tenure.

Voting Intention

Across Britain, 41 per cent of decided voters and leaners (unchanged since March) say they would support the Labour candidate in their constituency in the next General Election.

The Conservative Party is second with 34 per cent (+1), followed by their coalition partners—the Liberal Democrats—with 10 per cent (=).

The United Kingdom Independence Party (UKIP) is next with six per cent, followed by the Scottish National Party (SNP) with three per cent, the Green Party also with three per cent, and the British National Party (BNP) with two per cent.

Labour remains dominant in the North (50%) and holds a six-point lead over the Conservatives in London (44% to 38%) and Midlands and Wales (41% to 35%). The Tories are first in the South of England (40% to 31%). In Scotland, Labour holds a nine-point advantage over the SNP (44% to 35%).

Approval

Throughout 2011, the approval rating for Prime Minister David Cameron has remained at 41 per cent, while Deputy Prime Minister Nick Clegg dropped another point and is now at 29 per cent—his lowest numbers since the coalition formed the government in May 2010.

Conversely, the approval rating for Ed Miliband increased by two points since March to 35 per cent, the best showing he has posted since becoming Labour’s leader.

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ELECTION WATCH: The popular uprising against Colonel Qadhafi’s rule has brought his jamahiriya system of governance to an end. The Economist Intelligence Unit expects Libya to hold elections within the forecast period, either following an outright victory by the opposition or as part of a negotiated deal with the incumbent regime. The opposition movement has said that it will seek to establish a representative democratic system in the post-Qadhafi era.

INTERNATIONAL RELATIONS: The Qadhafi regime’s attempts to violently suppress the revolution have met with near-universal condemnation. The West, led by NATO, has imposed a no-fly zone over Libya. The military intervention, authorised under Security Council Resolution 1973, is aimed at protecting civilians. As of July 18th NATO said that it had conducted 15,669 sorties, of which 5,902 were strike sorties, since March 31st. In addition, the UN, the EU and the US (as well as other individual countries) have imposed sanctions on senior members of the Qadhafi regime and on Libyan state institutions that represent a source of funding for the government.

POLICY TRENDS: Following the departure of Colonel Qadhafi, it is likely that a new government would introduce drastic changes to economic policy, increasing the pace of liberalisation and reform and eliminating excessive bureaucracy. The TNC has not formally outlined its future policies in this area, except to say that it will endeavour to create “effective economic institutions to eradicate poverty and unemployment”.

ECONOMIC GROWTH: We have revised our economic forecast to reflect the effects of the ongoing conflict on the oil sector. We expect real GDP to contract by 28.2% (previously 26.1%). This remains a fairly optimistic forecast, which is based on the assumption that the political situation will be resolved before the end of the year, allowing oil production and exports to resume gradually. We expect GDP growth to average 2.4% in 2011-15. Renewed activity in the hydrocarbons sector will depend heavily on the return of foreign oil service companies, which have withdrawn from the country amid security concerns.

INFLATION: According to figures from the Central Bank of Libya, inflation averaged 2.5% in 2010. It is forecast to rise to an average of 6.1% in 2011, based on the assumption that Libya, which imports 75% of its food, is facing significant shortages owing to the ongoing conflict. In addition, higher international food and non-oil commodity prices will push up the cost of imports. Upward inflationary pressure may be mitigated by a shortage of local and foreign currency. However, it is possible that the Qadhafi regime could access additional funds by liquidating direct investments by Libyans in foreign assets, particularly in Sub-Saharan Africa. In the medium term inflation will be sustained by a revival in consumer confidence and higher oil revenue, leading to greater domestic liquidity. It is likely that government subsidies under any future regime will be maintained, which will ensure that prices for many staple goods, particularly housing and healthcare, are kept in check.

EXCHANGE RATES: The Libyan dinar is pegged to the IMF’s special drawing rights (SDR) and is tightly managed. As a result, we do not expect a significant change to the official dinar rate, despite severely restricted access to foreign-exchange reserves. However, a parallel market has emerged with the unofficial exchange rate weakening from the official 2010 average of LD1.27:US$1, providing further evidence that foreign exchange is already in short supply. A new government is unlikely to come under pressure to devalue the dinar. Once sanctions are lifted and oil revenue recovers, Libya will again have access to billions of dollars of foreign reserves, which will provide ample support to the currency. We therefore expect the peg to the SDR to remain in place in 2011-15.

EXTERNAL SECTOR: The current account is dominated by hydrocarbons exports. Earnings from goods exports are expected to fall sharply in 2011, to US$8.8bn from US$46.3bn in 2010. Goods exports will resume growth as the political situation becomes clearer, rising to US$47bn in 2015 and averaging US$32.3bn a year in 2011-15. We expect imports to decline in the short term owing to the effects of sanctions and the disruption caused by the political and security crisis, which will dampen private consumption. As a result, we forecast that the trade surplus will average US$13.1bn in 2011-15.

SOURCE: Country Outlook

ELECTION WATCH: The Supreme Council of the Armed Forces dissolved the National Democratic Party-dominated parliament following Mr Mubarak’s resignation in February. In mid-March a majority voted in favour of a package of amendments to the constitution in a referendum, paving the way for a legislative election to be held in September and a presidential election to follow. However, following a new outbreak of mass protests, the army council decided to postpone the parliamentary election, although it is still scheduled to go ahead before the end of the year.

INTERNATIONAL RELATIONS: In the wake of the revolution, Egypt received pledges of political and economic support from key international players seeking to facilitate its transition to a more democratic system. The US, the World Bank and the IMF committed to providing Egypt with billions of US dollars of financial assistance. Egypt’s subsequent decision to turn down help from the IMF and the World Bank will not have an adverse effect on its relations with the multilateral organisations and they are likely to come to its aid again in the future if required. Separately, Gulf countries, including Saudi Arabia, Qatar and the UAE have announced multi-billion-dollar investments in Egypt, and Saudi Arabia has also offered direct budget support.

POLICY TRENDS: Political instability will delay the implementation of planned economic reforms and liberalisation. Before his resignation, Mr Mubarak dismissed the liberal cabinet that oversaw a period of strong, investment-led, economic growth between 2005 and 2008, and was planning to enact further reforms aimed at developing the capacities of the private sector and pushing growth up towards 9%. The interim government has recognised the need for further reform but says that it does not have the mandate to implement it. The budget for fiscal year 2011/12 (July-June) demonstrates an aspiration to achieve greater social equality. The budget includes significantly larger allocations to subsidies and higher government investment compared with the current budget. The additional costs will be financed through higher taxes, grants and domestic borrowing. The previous government had set ambitious targets for investment in infrastructure through awarding public-private partnership contracts. In its economic programme for 2011/12, the interim administration has announced its intention to restart this initiative. If the transition period culminates in the election of a civilian president, there is a chance of some of the liberal economic policies of the recent past being revived. However, this will be complicated by ongoing legal challenges to a series of deals completed under the Mubarak regime, including much of the privatisation portfolio.

ECONOMIC GROWTH: The Economist Intelligence Unit expects real GDP growth to have slowed to 1.2% in 2010/11 owing to the ongoing disruption caused by the political crisis. Official estimates put growth in the first nine months of the fiscal year (July-March) at 2.3%, with the economy contracting by 4.2% in the third quarter. Political upheaval will have continued to affect growth in the fourth quarter, and private consumption and exports, particularly of services, are likely to have been significantly affected. The 2011/12 budget assumes that growth will accelerate to 3.2% in the new fiscal year. However, we forecast a more robust recovery predicated on a helpful base effect in the second half of the fiscal year. We have lowered our growth forecast for 2011/12 to 3.9% (previously 4.6%) to reflect the government’s decision to revise down its expenditure target for the new fiscal year. In addition, the government’s rejection of US$3bn in assistance from the IMF is likely to curtail spending.

INFLATION: Having peaked at an average of 18.3% in 2008, the year-on-year rate of inflation fell steadily thereafter, averaging 11.1% in 2010. However, rising food and fuel prices created inflationary pressures towards the end of 2010, and these factors will be exacerbated by the depreciation of the Egyptian pound as a result of the political crisis. We expect inflation to peak at 16.2% in 2011 before slowing gradually, averaging 10.4% over the forecastperiod, as the exchange rate stabilises and global commodities prices ease.

EXCHANGE RATES: The exchange rate is driven in large part by capital flows and developments with the US dollar. Egypt’s robust economy and high interest rates compared with much of the rest of the world had attracted substantial carry-trade inflows in recent years. The trend has now reversed and the Egyptian pound slipped to a five-year low against the dollar in late October 2010, possibly with some help from the Central Bank of Egypt. Since the January revolution, the pound has continued to depreciate. In light of ongoing political uncertainty, we expect the pound to weaken further, averaging EP6.10:US$1 in 2011. The currency is expected to strengthen as the political situation stabilises, but will remain weaker than in recent years, as the euro is forecast to fall gradually against the dollar. It will average EP6.07:US$1 in 2011-15, compared with an EP5.63:US$1 in 2010. The pound will depreciate less against the euro, averaging EP7.69:€1 in 2011-15 (compared with the 2010 average of EP7.46:€1, but down from a peak of around EP8:€1 in late October 2010).

EXTERNAL SECTOR: The trade deficit will widen in 2011 before recovering slightly in 2012-13, driven partly by strengthening external demand, before widening again over the remainder of the forecast period. Import growth will slow in 2012 on the back of lower commodities prices, before picking up gradually up to 2015. The non-merchandise surplus will narrow significantly in 2011 as service exports, namely tourism, will be affected by the political crisis. It will recover gradually over the remainder of the forecast period, as domestic stability is restored. The transfers account will maintain a solid surplus, and the income balance will remain negative throughout theforecast period. The current account will remain in deficit until 2014, when it will move into surplus as the services and transfers surpluses strengthen.

SOURCE: Country Outlook

A series of moves by China indicate that it is exploring new options in its relationship with India, including a policy of engagement.

By Rupakjyoti Borah for ISN Insights

The June visit of an eight-member Indian military delegation to China for defense talks marked a welcome resumption of contact between the two countries after a nearly year-long hiatus. Regular defense exchanges between the two Asian giants had been suspended since July 2010, when China refused a visa to Lieutenant-General BS Jaswal, then-head of the Indian Army’s Northern Command, because he was in charge of what the Chinese termed the ‘sensitive region’ of Kashmir, compounding already existing tensions. For years, China has been issuing ‘stapled visas’ to the people of the Indian provinces of Arunachal Pradesh and Jammu and Kashmir as opposed to regular visas for people from other parts of India.

Toward a Chinese policy of engagement?

In another important development, representatives of China’s Foreign Policy Advisory Group (FPAG) recently indicated the country will look to recalibrate ties with India and strive to balance its relations with India and Pakistan during the next Five-Year Plan period (2011-15). The FPAG was also in favor of an early settlement to the festering border dispute with India. While this may not indicate a complete reversal of China’s attitude towards India, it does suggest that China is exploring new options, including a policy of engagement.

There are many reasons for it to do so.

First, as the United States and NATO prepare to withdraw from Afghanistan, China wants to fill the inevitable power vacuum in the region. Without India’s benign acquiescence, this will not be possible and Beijing knows it.

Second, at a recent summit meeting in Astana, Kazakhstan, India kicked off its quest for full-membership in the Shanghai Cooperation Organization (SCO. The firm backing for India’s membership by countries like Russia and Kazakhstan shows how difficult it will be for China to diplomatically sideline India.

Third, India’s improving defense ties with the US has China worried that it might be pushing India closer to the US in general. India decided to purchase 10 C-17 Globemaster III heavy-lift transport aircraft from the US in recent months under the Foreign Military Sales route (government-to-government) in a deal worth approximately $4.1 billion. The India-US civilian nuclear deal in 2008 already had the Chinese worried, and US President Barack Obama pledged US support for India’s bid for a permanent seat on the United Nations Security Council (UNSC) during his country visit in November 2010.

However, many areas of friction remain between China and India. China’s decision to dam the river Brahmaputra (Tsangpo) has raised concerns inside India. China has never openly backed India’s bid for a permanent seat on the UNSC. Many Indian observers also point out that China has adopted a so-called “string of pearls” strategy to encircle India by building naval bases in Pakistan, Sri Lanka, Bangladesh and Myanmar.

Building on a firm foundation

It is worth noting, however, that disagreements in these areas have not precluded the two countries from cooperating in others. Economic relations between the two countries have neared a high point and continue to improve. While most of the world’s major economic powers have been weakened by the ‘Great Recession,’ China and India have bucked the trend. During Chinese Premier Wen Jiabao’s visit to India in December 2010, the two countries agreed to a $100 billion target in bilateral trade by 2015. China and India have already concluded several high profile joint ventures and many more are in the works – in areas such as power generation, consumer goods, steel, chemicals, minerals, mining, transport, IT and telecommunications.

For example, one of India’s biggest IT companies, Tata Consultancy Services (TCS), has a joint venture with China’s Foreign Exchange Trade System (CFETS) to provide IT services to China’s huge domestic market, as well as the US, Europe and the rest of Asia, while India’s leading automotive forgings maker Bharat Forge has a joint venture with one of China’s biggest auto makers, FAW Corporation.

The increasing cooperation between the two neighbors was perhaps most visible during the December 2009 Climate Change summit in Copenhagen.Sporting what has been dubbed the “Copenhagen spirit,” the two countries decided to set up a Beijing-New Delhi hotline last year.

India and China also share an interest in fighting Islamist terrorism in Central Asia, Afghanistan and Pakistan. Though China has close ties with Pakistan, it also worries about links between separatists in its restive Xinjiang province and Islamist militants based in Pakistan.

The two Asian giants have also been cooperating in the energy sector. In 2006, the Gas Authority of India Limited signed MoUs with the China Petrochemical Corporation and the China National Offshore Oil Corporation, laying the groundwork for cooperation between India and China in energy exploration both within the two countries and across the globe. Joint military exercises have also been conducted on a regular basis.

China and India have decided to cooperate in some areas while agreeing to disagree in others. One expects both countries to continue testing the chinks in each others’ armor.

Activists said Saturday that forces moved into a Damascus suburb and opened fire on civilians. The Associated Press says a similar raid took place in the eastern town of al-Boukamal.

On Friday, rights groups and witnesses said security forces killed at least seven people during anti-government protests across the country.  

They said many of the deaths occurred in the seaside town of Latakia. However, a state-run media report said “masked saboteurs” fired shots and threw dynamite at security forces and civilians in the town.

Overall, tens of thousands of protesters rallied for President Bashar al-Assad’s departure on Friday in what has become a weekly ritual.