Libya: Risk Assessment
Country Rating1
Rating: D
Business Climate Rating1
Rating: D
Risk Assessment2
A tensed political transition
In power for more than 40 years, Mouammar Qadhafi has faced since mid-February an unprecedented popular uprising, in the aftermath of the Tunisian and Egyptian revolutions. The protests against the regime have been brutally repressed in the main cities of the country. Mouammar Qadhafi has become rapidly isolated both at the international and national level. Libya has been ousted from the Arab League and firmly criticized by the international community. On the domestic side, the Libyan leader has lost many political, military and religious support. Key ministers, ambassadors, significant religious leaders as well as the army in the main provincial cities have rapidly expressed their supports to the opposition. The scorched earth policy of the Qadhafi clan and its militia could have deterrent social and economic consequences in the short run. Notwithstanding, an agreement among the tribal chiefs could facilitate the power transition. The religious homogeneity and largely spread national identity should furthermore limit the risk of a civil war.
An activity dependent on political developments in 2011
The activity in 2011 will depend on the rapidity with which foreign oil companies, that manage a significant proportion of resources will resume production. The recovery of oil exports (95% of exports) will also be conditional on the reopening of the main ports. Tourism activity has a potential to grow in the medium term but will not start in 2011. Despite relatively good social indicators (high education rate, low malnutrition rate), unemployment affects about 30% of the population and remains a major challenge. It results in an important frustration feeling within the population, fueled up to now by the appropriation of oil revenues by the Qadhafi clan. In this respect, the setting of a more egalitarian redistribution of oil wealth will be a key challenge.
A financial situation under stress, despite strong fundamentals
The country has recorded fiscal and current account surpluses until 2010, thanks to the revenue from hydrocarbons (95% of exports and 90% of budget revenues). External account should narrow dramatically in 2011, in the wake of the slowdown in the hydrocarbon production, the increase in the food prices (which remain mostly imported), and the cut in custom tariffs on a large range of commodities.
In 2011, the implementation of development programs and the maintaining of public subsidies, particularly on accommodation, on the healthcare and on food commodities will depend on a successful transition in the management of oil resources.
The already very difficult business environment is not expected to improve in the short-term
The institutional and governance problems have continued to weigh during the oil boom (2003-2007) and slowed the diversification of the industrial fabric. Indeed, projects that tended to liberalize the economy and privatize state-owned firms have encountered strong resistance within the ruling class. In this context, non-oil investments have been limited. In the future, the business environment will remain difficult, due to uncertain regulatory and administrative inefficiency, which greatly slows the decision process and can cause long delays in payment and difficulties in collecting debt.
Strengths
- Extensive reserves of oil and gas
- Structural reforms undertaken (modernizing the economy and the banking sector)
- Tourist potential associated with the archaeological heritage
Weaknesses
- Scorched earth policy of Mouammar Qadhafi
- Relatively undiversified and oil-dependent economy
- Inadequate levels of education and training
- Dependence on foreign know-how and workforce
- Economy severely encumbered by bureaucracy
- Difficult business environment