The past couple of weeks have seen a rise in political risks in Kuwait, Senegal and Algeria. International markets have boycotted Ivory Coast’s cocoa sales because of regulatory issues, and Papua New Guinea witnessed an attempted military coup, which saw its credit rating downgraded.
Here’s a map and an article on the increasing governance and business environment risks in Papua New Guinea by Maplecroft:
An attempted military coup on 26 January 2011 failed in its objective of restoring former prime minister Sir Michael Somare to power, but intensified the political crisis which has troubled Papua New Guinea (PNG) since August 2011. The coup was headed by retired Colonel Yaura Sasa, who led a group of 20-30 soldiers in temporarily imprisoning the head of the PNG armed forces and calling for the resignation of current prime minister Peter O’Neill. The coup plotters eventually surrendered peacefully to troops loyal to O’Neill’s government. Colonel Sasa has been charged with mutiny, but his troops have received an amnesty in exchange for their weapons.
Although it ended peacefully, the attempted coup marks a dangerous escalation in the long-running battle for power between Somare and O’Neill, and a worrying sign of political instability for investors, resulting in Standard and Poor’s downgrading PNG’s credit rating from B+ to B-. However, it is unlikely to have any short-term adverse effects on any of the major extractive projects currently underway, and the regulatory environment for foreign investment will stay stable in the run-up to the 2012 elections.
Long-running political crisis between rival prime ministers
The origins of the current crisis lie in the August 2011 replacement of Somare by O’Neill, which was a dramatic and unexpected development, even in the context of PNG’s often-turbulent political sphere. Somare has been the leading figure in PNG politics since independence from Australia in 1975. Known as the “Grand Chief”, he had been prime minister from 1975-1980, 1982-1985 and again from 2002-2011 as leader of the National Alliance (NA) party. However, Somare’s failure to declare his personal finances and business dealings from 1992 onwards, in violation of the leadership code, resulted in him being suspended from office for two weeks from 1 April 2011.
Matters became worse for Somare when in late April 2011 he became seriously ill while in Singapore for medical checks. Somare’s absence sparked an intense round of lobbying for support amongst contenders for the prime minister’s office, exposing major divisions in the NA party. O’Neill, the ultimate winner of the contest, had served as Works Minister in Somare’s government, but defected to the opposition on 2 August 2011 with a group of other NA party MPs, forming a new government with himself as Prime Minister.
However, Somare challenged the legality of the parliamentary coup on the grounds that he had not resigned and that there was no vacancy for the role of prime minister. On 12 December 2011, the Supreme Court found that Somare was still the prime minister under the constitution. O’Neill’s government retaliated by passing legislation in parliament disqualifying Somare from the position of prime minster and removing him from his parliamentary seat. The parliament, civil service, police and military tended to support O’Neill, but Somare continued to campaign for reinstatement.
Political deadlock stalls government reform programme
As Somare’s supporters have boycotted parliament, the current government has struggled to push forward its planned reform programme ahead of the June 2012 elections. The government had hoped to consolidate its rule through a populist programme, which included a new supplementary budget worth US$353m, which will fund free education for all children up to grade 10, as well as improving health services and infrastructure. In addition, an independent anti-corruption body has been established. However, the political crisis has diverted attention away from the reforms and hampered O’Neill’s ability to concentrate on effective governance.
The competition for power is expected to intensify with PNG’s patronage politics set to be transformed by the huge financial rewards of the major resource projects underway, such as the US$15bn ExxonMobil PNG LNG project. As such, the investment climate will stay positive for foreign firms, as such investments provide significant leverage for PNG politicians. O’Neill leads a coalition government, and as no single party has won enough seats to govern alone since independence it is likely that a coalition government will rule after the 2012 elections. The current government represents a shift in power from the northern supporters of Somare, who are generally from the political generation which saw PNG’s independence, to O’Neill’s highland and southern support base, who tend to be from a second generation of post-independence politicians.
Furthermore, even at the best of times, PNG remains prone to political tensions during electoral campaigns and it is likely that localised violence, possibly between O’Neill and Somare’s supporters, will impact upon 2012 parliamentary elections. Widespread chaos and violence arose between supporters of rival candidates during the 2002 and 2007 elections. The proliferation of guns, particularly in the central Highlands area that witnessed most of the electoral violence in 2007, is likely to pose a serious challenge to the conduct of free and fair elections in 2012. Although there has so far been no violence between supporters of the rival O’Neill and Somare camps, the attempted coup raises the possibility of splits within the security forces and further heightens tensions.
There is no question of the crisis jeopardizing current investments, and any future PNG government is likely to maintain a regulatory environment which is exceptionally welcoming to foreign investment. In addition, there has been no decline in security conditions at any of the major extractive project sites, and no labour disputes or strikes. However, as a result of the coup, Standard and Poor’s downgraded PNG’s credit rating from B+ to B-, noting that the incident was likely to lead to a loss of donor support and to deter investment. However, although PNG is known for its volatile politics, the main danger of the crisis could be the damage done to the legitimacy of the constitution and the courts, which are now being used as tools for political advantage. The constitution and courts had long been the mainstay of PNG’s democratic system, and the fear that their standing is being eroded by the conflict between Somare and O’Neill calls into question PNG as a country under the rule of law. In addition, the current crisis may set an unfortunate precedent, as politicians may be more likely to turn to the military, or ignore court or parliamentary decisions, in future.