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STRATEGIC OUTLOOK 2017


CONTENTS STRATEGIC OUTLOOK 2017 A VOLATILE WORLD ORDER

3

GLOBAL GEOPOLITICS THE YEAR OF THE AUTOCRAT

4–5

EUROPE SURVIVING A FAR-RIGHT RESURGENCE

6–9

EURASIA DISRUPTION & DETENTE SPECIAL FOCUS: TURKEY MIDDLE EAST REFORMING THE ARAB STATE SPECIAL FOCUS: ISLAMIC STATE NORTH AFRICA GRASPING THE NETTLE

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SIAS: STRATEGIC OUTLOOK 2017

10–13 14

15–18 19–20

21–24

SUB-SAHARAN AFRICA SUCCESSIONS & REGRESSIONS

25–27

SOUTH ASIA STRATEGIC COMPETITION & UNINTENDED CONFLICTS

28–31

ASIA PACIFIC PIVOTING OUT

32–35

LATIN AMERICA POPULISM DIES HARD

36–39

ABOUT RISK ADVISORY RETHINKING PROTECTIVE INTELLIGENCE

40

CONTACT GET IN TOUCH

41


STRATEGIC OUTLOOK 2017 A VOLATILE WORLD ORDER We are pleased to present Strategic Outlook 2017. This is our third global forecast for corporate security leaders. It represents the joint assessments of our SIAS analysts across all regional desks.

Threats from sub or non-state actors have dominated security affairs since the end of the Cold War. This too is changing. Terrorism and civil unrest will remain prolific security issues. But higher-impact political risks that may seem anachronistic for some countries are moving back up the agenda. These include interstate conflict, coups and economic nationalism.

The world in 2017 looks set to be even more uncertain and volatile than 2016. An unstable multipolar global order has been emerging in recent years. This trend will probably accelerate in 2017. Such change carries with it a growing potential for conflict and crisis.

Forecasting has obvious limitations. But it is nonetheless an essential exercise for security and crisis planning. It enables businesses to get a sense of where to focus, and it allows us to identify priorities for intelligence collection and reporting. Forecasts are also not static; they change as the intelligence picture changes. We therefore flag early warning indicators, trends and developments we will be watching as we look out for, support and advise our clients.

It now seems clear that authoritarian populism and nationalism will be important political forces in 2017, particularly in the West. Brexit and the election of Donald Trump were two major surprises in 2016. Both showed that liberalism and its institutions are losing political currency in Western societies, evidently more so than most – including us – foresaw. The rise of authoritarian nationalism is a key theme in our forecasts. As is growing mistrust between states and competition for regional spheres of influence. These two trends are liable to become mutually reinforcing and increase the risk of conflictual international relations.

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SIAS: STRATEGIC OUTLOOK 2017

If there can be any certainty in 2017, it is that the best informed businesses will enjoy the greatest advantage. Through SIAS, Risk Advisory provides security leaders with a unique intelligence capability. The number of global businesses using SIAS has almost doubled year on year. We believe this is due to the personalised support we provide our clients as we help them navigate a volatile world.

INTRODUCTION

Henry Wilkinson Head of Intelligence & Analysis Risk Advisory editor@riskadvisory.net

For the past six years, through SIAS, Risk Advisory has been providing a unique intelligence capability to many of the world’s leading businesses.


LEADER: THE YEAR OF THE AUTOCRAT Greater volatility and a weakening of liberalism are likely to be defining themes in global risks in 2017.

USA Today Network/PA

The remarkable rise in reactionary and often authoritarian populism in Western countries in 2016 is likely to make its impact felt 2017. This rise appears to have been a response to a growing perception that liberalism, its elites and institutions, are no longer the solution, but the problem. Populists argue that liberalism is failing to insulate societies from the myriad external threats that come with globalisation – from fewer job opportunities and widening wealth gaps, to migration and international terrorism. And they argue that distant elites – be they international institutions or corporations – are more in control of their destinies than their governments.

AP/PA

Xinhua/SIPA/USA/PA

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We forecast in previous Strategic Outlooks that we are heading to a more unstable, multipolar world order – driven in part by the United States retrenching and ceding influence to global competitors and regional powers. We forecast that this trend towards multipolarity will probably accelerate in 2017 and drive a rise in more authoritarian and nationalist styles of politics.

SIAS: STRATEGIC OUTLOOK 2017

The electoral success of Donald Trump and the Brexit vote were two major surprises that signalled that the

LEADER

West – the bastion of liberal democracy – will see change in 2017. Arguments to bring down the shutters and take back control appeal to nationalist and nativist instincts, and are likely to prove powerful political currency in Europe in 2017, as they did in the US election in 2016. Elections in France, the Netherlands and Germany will define whether this will have a passing or seismic impact on the institutions and consensus that have underwritten peace in the West since 1945. However those elections play out, the political debates in the United States and Europe – not just in their substance but tone – are making Western states, societies and alliances turn in on themselves. Disrupted and disunited, the West will probably become a much weaker champion of the rules-based international order and of liberal democratic governance. This will create greater long-term opportunities for authoritarian powers – not least Russia and China – to shape world affairs and pursue their interests with fewer constraints. In emerging economies, it will probably also encourage more autocratic politics, or at least weaken democratic reform. Such changes matter substantially in terms of business risk. Rule of law is invariably weaker in nationalist autocracies, as are checks and balances in the political system. There is less transparency,


and corruption and cronyism are also far more common. State intervention in the economy tends to increase, pushing up confiscation, expropriation and nationalisation risks for foreign businesses. A lack of representation tends to breed dissent, which can culminate in unrest, instability, and suppression. Autocracies are also more prone to civil war, coups and going to war with each other. Under President Trump, the United States is very likely to continue to retrench. Yet it will remain the centre of geopolitical gravity: American power influences the behaviour of all states in the international system. Uncertainties around how the new president will wield this power – at least in military and diplomatic terms – compounds the potential for crises. In 2017, we face the unprecedented situation of an incoming US president of whom little is known in terms of his specific intentions or competence in international affairs. From what we can observe so far, Trump’s personal style suggests that sudden policy changes and crises in relations are very likely to define his time in office. We doubt his stated ambition to improve relations with Russia will last the full year and expect that relations with China will deteriorate, feeding mistrust and upping the risks of miscalculation and crises.

AP/PA

anticipate this stimulating the growth of non-US led agreements and blocs such as the China-led Shanghai Cooperation Organisation, ECOWAS and the Saudiled Islamic Military Alliance. And more immediately, fueling defence spending and creating a classic security dilemma in Eastern Europe, the Middle East and East Asia that will increase the risk of military confrontation in disputes.

Trump’s various statements concerning nuclear risks in East Asia, Muslims and NATO suggest relations with some traditional US allies will probably also become fraught early in his presidency. A waning commitment to safeguarding alliances and security guarantees will erode the credibility of US-sponsored deterrence that underpins global stability. We

Such trends will probably unfold over a longer period beyond 2017. But the Trump administration will almost certainly face one if not several potentially imminent or near-term crises. These include North Korea testing nuclear weapons and ballistic missiles, Russia testing NATO deterrence in Eastern Europe and possibly deploying nuclear weapons in Kaliningrad, a collapse of the Iranian nuclear deal, and small-scale military exchanges between nuclear rivals India and Pakistan. How the new US president performs in such crises will be instructive about whether 2017 will be as volatile as we forecast. It seems unlikely there will be a long wait to find out.

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LEADER

SIAS: STRATEGIC OUTLOOK 2017

Trump’s various statements concerning nuclear risks in East Asia, Muslims and NATO suggest relations with some traditional US allies will probably also become fraught early in his presidency.

AP/PA


EUROPE: WEATHERING A FAR-RIGHT RESURGENCE Europe’s political and economic resilience will come under pressure in 2017, partly as a consequence of wider geopolitical risks. Far-right parties are highly likely to increase their vote share at elections in Netherlands, France and Germany. We do not think that they will get into government, but they will have a greater influence on policy. This will be particularly noticeable on immigration, as centrist parties across much of the continent push populist policies in an attempt to regain the support of disaffected voters. However, greater risks to political and economic stability come from developing economic crises in Europe’s southern states. We forecast that the growth in far-right support will have most impact in the Netherlands. The anti-Islam Partij voor de Vrijheid (PVV) looks set to become the largest party in parliament after a general election in March. With just under a quarter of parliamentary seats, and no other parties willing to join it in a coalition, PVV will remain in opposition. But opinion polling indicates that mainstream parties are also going to struggle to form a coalition government with a parliamentary majority. So the most likely scenario is one with a weak minority centre-right government, which will often have to take into account the demands of PVV.

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SIAS: STRATEGIC OUTLOOK 2017

SUMMARY OUTLOOK IMPROVING Austria, Ireland, Spain WORSENING Greece, Italy, Netherlands, Portugal, UK

AP/PA

The far right in France and Germany are unlikely to gain such influence. The nationalist Alternative für Deutschland poses little threat to Angela Merkel winning a fourth term as chancellor in the autumn, and it will remain a fringe party in the Bundestag. While in France, we anticipate that Marine Le Pen, the leader of the anti-immigration Front National (FN), will lose in the second round of the presidential poll in May. The legislative elections in June will prove a better opportunity for FN to gain more direct political influence. While the French and German elections will almost certainly attract more media coverage, we think that political currents in Italy, Greece and Portugal will

EUROPE

CONSISTENT Belgium, France, Germany, Sweden

Political currents in Italy, Greece and Portugal will pose greater risks to Europe’s economic and political stability.


MONITORING POINTS CONFLICTS IN THE MIDDLE EAST AND AFRICA Far-right parties have grown their support by campaigning against refugee flows from the Middle East and North Africa. The progress of conflicts in Iraq, Syria and Libya, as well as those further afield in Ethiopia, Somalia and Sudan, will influence whether migration remains a prominent issue on the minds of the European public. And in turn, this will be one of the major factors determining the level of far-right support in 2017 and beyond. ECONOMICS The performance of European economies is diverging, with strong growth and low unemployment in some and the reverse in others. Further divergence – particularly between northern states and those in the south and east – will make political and economic cooperation more difficult. Persistently high unemployment and sluggish growth would also lead to greater support for populist politicians. TERRORISM The threat of terrorism will probably remain severe across much of western Europe in 2017. This threat stems primarily from Islamist extremists, but there does appear to be a small but emerging threat from far-right and far-left groups. Attacks will probably create further social division, and we expect populist anti-immigration parties will continue to try to exploit public concerns about Islamist militancy.

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SIAS: STRATEGIC OUTLOOK 2017

pose greater risks to Europe’s economic and political stability. A weakened caretaker government in Italy is having to avert a liquidity crisis in the banking sector. We expect that it will manage to do so. But we doubt that it can survive until scheduled elections in 2018. Early elections are probable in mid to late 2017. There is little sign that the Italian government can reverse the country’s economic slump or reduce the high unemployment rate. Persistently low economic growth in Italy will play into the hands of the populist Movimento 5 Stelle and the far-right Lega Nord parties, making elections a close race. Italy’s sluggish economy, alongside economic stagnation and unsustainable debt levels in Greece, is also a major factor that we think will increase the longer-term likelihood that the Eurozone splits into two – ‘hard’ and ‘soft’ – currency blocs.

European governments and the EU will continue to muddle through in the coming year, doing little to address their underlying structural weaknesses.

Portugal also poses a problem for the Eurozone. With its high debts levels and low growth prospects, it is at risk of having its credit rating downgraded to junk status in April. This would add to economic instability in the Eurozone, and shift the political mood gradually closer to a break-up of the single currency. Such large-scale changes to the political and economic union in Europe are still far off, however. European governments and the EU will continue to muddle through in the coming year, doing little to address their underlying structural weaknesses. But with growing social divisions, and several weakened or minority governments on the continent, governance and legislation at a national and EU level is likely to be less effective and less predictable.

EUROPE

PA


SUPPORT FOR POPULIST PARTIES IN EUROPE

KEY

19.1%

12.9% 13%

% based on recent elections

Norway 21.1% Denmark 12.7%

Far-right influence in government

UK

Czech Rep 16.6%

29.4%

3%

46%

24.5%

Austria

Spain

38%

Hungary

15% 42.5% 16.4% Croatia

EUROPE

65.1%

Romania

Italy

SIAS: STRATEGIC OUTLOOK 2017

8.8% Poland

6%

Slovakia

Switzerland

Latvia

5.4%

Germany

20%

Belgium

France

16.6%

14% Lithuania

Netherlands

1.5%

8

9.1% Estonia

Far-left influence in government

27%

Finland

Sweden

% based on opinion polling

Bulgaria

Greece 8.1% Serbia

8.7% Cyprus


UPDATE UPDATE MAP

FORECASTS AND TRENDS BREXIT The UK government is likely to invoke Article 50 in the first quarter of 2017, starting the process of leaving the European Union. But substantive progress on talks is highly unlikely, at least until after the French and German elections. We do not anticipate much greater clarity about the future form of UK-EU relations after Brexit to emerge in the coming year. Nor what this means in terms of risk. But a febrile and divisive political climate in the UK is creating a perceived legitimacy among a minority for public displays of racism and xenophobia.

SWEDEN AND NATO Perceived Russian aggression will drive debate in Sweden about whether it should join NATO. We expect this to remain a largely academic debate in the coming year. Only with a change in government following the 2018 general election, is Sweden joining NATO a credible scenario.

HUNGARY AND POLAND We forecast that relations between the European Union and the governments of Hungary and Poland will become increasingly antagonistic during 2017. Both governments are pushing nationalistic policies, which are bringing new risks of expropriation and nationalisation to foreign businesses. These are at odds with EU law and liberal values, but the EU appears unable to respond effectively. We doubt this will lead to a crisis in 2017, but it will further weaken the EU.

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SIAS: STRATEGIC OUTLOOK 2017

EUROPE


EURASIA: DISRUPTION AND DETENTE SECURITY OUTLOOK IMPROVING Uzbekistan, Ukraine WORSENING Turkey, Kazakhstan, Azerbaijan, Armenia CONSISTENT Russia, Belarus, Tajikistan, Turkmenistan, Kyrgyzstan, Moldova, Georgia

Relations between the US and Russia worsened sharply in 2016. This should reverse in the first months of 2017.

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SIAS: STRATEGIC OUTLOOK 2017

We anticipate the major powers in Eurasia – Russia and Turkey – will continue attempts to bolster their international standing in 2017. The principal dynamic of these efforts will probably be Russia trying to secure an easing of sanctions, while not giving up its goals of hegemony in its near abroad and maintaining influence in eastern Ukraine. To achieve these goals, Russia will seek a rapprochement with the US. But also attempt to divide the EU, and to disrupt countries that advocate sanctions and increased NATO deployments in eastern Europe. Relations between the US and Russia worsened sharply in 2016. This should reverse in the first months of 2017 as the Trump administration works to improve bilateral communication and collaboration. It seems likely that this will focus on trade and counter-terrorism. But the foremost near-term objective for Putin will be to ease EU and US sectoral sanctions over Ukraine and Crimea. We think he will probably succeed in getting some US and EU sectoral sanctions over Donbass lifted by the end of the year. But those related to Crimea, are unlikely to be lifted in 2017. That is unless President Trump decides to issue a decree unilaterally or EU states refuse to extend them.

EURASIA

AP/PA

Adversarial relations with the US have fueled Russian nationalism and helped Putin sustain domestic support. So a detente with the Trump administration would mean that Putin will have to adapt this strategy. Gradually increasing oil and gas prices in 2017, combined with the lifting of some sanctions should provide the Russian government with an opportunity to do so. We assess it is unlikely that any such detente will last the year. Deeper strategic divides, mistrust and sharply adversarial relations between Russia and the US pose an obstacle to a sustained improvement in relations. Trump’s foreign policy orientation appears


MONITORING POINTS RESHUFFLE IN RUSSIA The demotion of senior officials this year suggests that the Russian political landscape is transitioning. It seems that the Kremlin is forming a new elite to take over in government after presidential elections in 2018. On current indications, FSB officers and young security officials close to the president are the new Kremlin favourites. This appears to be at the expense of economic liberals and competent technocrats.

TERRORISM IN RUSSIA Islamic State claimed eight attacks in Russia in 2016. Although most were against security forces in the North Caucasus and suggest low capabilities, the intent to mount mass casualty attacks in large cities appears to persist. The authorities have been successful at preventing these so far, but FSB counter-terrorism operations in Moscow and Saint Petersburg suggest that the threat is probably rising.

at odds with longstanding US strategy towards Russia. And it is unclear how long or how effectively Trump will be able to maintain that policy in the face of opposition from the public and within state institutions over Russia – particularly in light of recent hacking scandals. Moscow’s long-term goal of challenging America’s global dominance is another potential stumbling block for USRussia relations later in 2017. Further attempts by Russia to assert its influence in its near abroad would probably sour any Putin-Trump honeymoon. Destabilising activity directed against the Baltic states could prove the tipping point, although we think this unlikely in 2017 and not a strategic priority for Russia unless relations with the US do not thaw as planned. We warned last year that Russia would continue to buildup its military capabilities in Crimea and Kaliningrad, as it has. These deployments will almost certainly persist in 2017 and strain relations with the US, the EU and NATO.

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ARMENIA-AZERBAIJAN Mixed economic outlooks in both Armenia and Azerbaijan mean that the countries’ leaders could well seek to escalate the frozen conflict in Nagorno-Karabakh again to boost domestic support. Any flare-up in fighting is unlikely to extend beyond Nagorno-Karabakh or last over a few days. Three regional powers – Russia, Turkey and Iran – all have an interest in maintaining the status quo.

We expect Russia to deploy missile defence systems and nuclear-capable missiles to Kaliningrad. And a halt in bilateral nuclear-reduction cooperation looks increasingly probable in 2017. We also anticipate a continuation of large-scale military exercises near Russia’s western frontiers as the Kremlin develops new military divisions as part of its modernisation programme. The US, EU and Russia are also unlikely to find a groundbreaking agreement on Ukraine. The Ukrainian government has successfully resisted implementing a peace deal that goes against its interests and the conflict looks likely to become frozen with Russia firmly entrenched in Crimea and Donbass. Despite this, the number of EU states intent on restoring full trade relations with Russia is likely to grow. As a result, it will become increasingly likely that the EU will fail to reach unanimity on prolonging sanctions at the end of 2017, rather than this summer when the EU is next due to vote on their prolongation.

EURASIA

We expect Russia to deploy missile defence systems and nuclearcapable missiles to Kaliningrad. And a halt in bilateral nuclearreduction cooperation looks increasingly probable in 2017.


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EUROPEAN SECURITY ORDER

KEY Estonia

A2/AD capabilities in Kaliningrad Coastal Defence K-300P Bastion Kalibr cruise missiles S-400 (non-permanent) Iskander missiles (non-permanent)

NATO members

6 Aspire to join NATO Latvia

6 Germany

3

11

New NATO member (2017)

9 6

Lithuania

7

New NATO headquarters

Poland

NATO missions & deployments Ukraine 1 Spain

6

NATO ballistic missile defence

39 Romania

Bulgaria

1 2

Georgia

2

Russian military bases Russian early-warning radar

Greece

Slovenia

Russian Territory

Bosnia-Herzegovina Macedonia

Montenegro

Turkey

Albania Kosovo Sources: NATO, IISS

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SIAS: STRATEGIC OUTLOOK 2017

A2/AD capabilities in Crimea Coastal defence K-300P Bastion S-400 surface to air defence missile system

EURASIA

Areas with reinforcements and large-scale military drills


FORECASTS AND TRENDS RUSSIAN ACTIVE MEASURES IN EUROPE We anticipate that Russia will attempt to influence the electorate during upcoming elections in major EU states. Most likely through media propaganda, disinformation tactics, the sponsorship of populist parties, and cyber attacks – as it appears to have done in the US. In particular, Russian efforts to isolate Germany and disrupt its politics already seems highly likely, as does ongoing efforts to swing Balkan states away from joining the EU or NATO.

UKRAINE A stalemate in the peace process means that Russia will probably continue to use its military capabilities in Crimea and the conflict in Donbass to pressure the Ukrainian government to implement the Minsk agreements.

KAZAKHSTAN We expect to see elite groups jostling for power in anticipation of the demise of President Nazarbayev. This will risk undermining a stable transition if the aging president does die or become incapacitated this year. Two terrorist attacks and small protest activity in 2016 have put the government under stress to ensure a peaceful transition amid a prolonged economic slowdown.

UZBEKISTAN Following the death of President Karimov, there are still uncertainties around how President Mirziyoyev will shape the country’s policies. An agreement between the elite has allowed the political transition to take place peacefully. But there are no guarantees that Mirziyoyev will not turn against his new allies once he consolidates his grip on power and resources.

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SIAS: STRATEGIC OUTLOOK 2017

EURASIA


SPECIAL FOCUS: TURKEY An increasingly authoritarian leadership in Turkey will sustain ongoing security challenges and the risk of political unrest in 2017.

FORECASTS CONSTITUTIONAL VOTE A public referendum on changing the constitution from a parliamentary to a presidential system, scheduled for 9 April, is likely to pass in the government’s favour.

President Erdogan emerged from the failed coup attempt with greater political power and a strengthened popular mandate. He is now poised to rival Turkey’s founder Kemal Ataturk in terms of influence over institutions, since he looks set to realise his goal in 2017 of changing the constitution from a parliamentary to a presidential system. This will give him near total control of all branches of government, and allow him to serve as head of state for up to 12 more years. However, increasingly centralised power, combined with a negative security and economic outlook, will make Turkey more vulnerable to future crises. We do not anticipate another military intervention in politics in the coming year, and the government’s authoritarian purges have rendered the opposition ineffective. But the president’s enemies are becoming more numerous, and political and social polarisation is deepening. With the economy unlikely to improve, this will probably compound instability.

TERRORISM The threat of terrorist attacks will continue to rise in major cities this year, and PKK terrorist attacks are likely to intensify in southeastern Turkey in the spring.

AP/PA

With President Erdogan emboldened after the July coup attempt, he will almost certainly keep asserting

Turkish interests in conflicts in Iraq and Syria through a deepening military intervention against Islamic State. We also anticipate more direct confrontations with Syrian Kurdish fighters in 2017. As a result, Turkey’s ties with Europe and the US will remain strained, but it will probably continue a flexible approach to relations, including with Russia, lessening the risk of confrontation between the two.

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EURASIA: SPECIAL FOCUS: TURKEY

SIAS: STRATEGIC OUTLOOK 2017

EU RELATIONS Relations between Ankara and the EU will almost certainly remain strained through 2017. Turkey may well pull out of the EU membership process, and further diplomatic spats over human rights and refugees are likely. ECONOMY Turkey’s economic outlook is poor, but the government is likely to continue to pursue policies favourable to growth. However, a rapid depreciation of the lira would increase the risk of the government taking more drastic measures, such as capital controls.


MIDDLE EAST: REFORMING THE ARAB STATE We forecast that deepening social and economic reforms across the Middle East will be a growing source of unrest risk and regime instability.

SUMMARY OUTLOOK IMPROVING Israel, Iran, Qatar, Iraq

Since 2015, both oil exporters and importers across the region have been facing widening budgetary shortfalls. These are not just the result of low oil prices, or political and security risks, but also the product of decades of overspending, a trend that intensified in the aftermath of the Arab Spring. States such as Saudi Arabia, Kuwait, Lebanon, Jordan and Oman spent heavily on security and to varying degrees bought quietude from their subjects.

DPA/PA

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SIAS: STRATEGIC OUTLOOK 2017

WORSENING Saudi Arabia, Kuwait, Palestinian Territories, Lebanon, Oman, Bahrain

PA

These governments are coming to terms with their unsustainable fiscal situation. But their problems are embedded in what the UN has called the ‘flawed Arab model of development’ that puts the state at the centre of economic ‘intervention and redistribution’. To cut costs, governments will have to start unravelling this system of state intervention in the economy. This will in turn require them to ignore the concerns of citizens who benefit from state spending or enter into a period of negotiation with them, delaying reform. Both approaches bring stability risks, particularly social unrest, labour activism and anti-government agitation.

MIDDLE EAST

CONSISTENT Jordan, Syria, Yemen, UAE

The governments of Iraq, Iraqi Kurdistan, Syria and Yemen are already struggling to pay public sector salaries – a lifeline for many.


MONITORING POINTS INTERNATIONAL AID Many Arab countries are dependent on external financial aid, but with Gulf countries cutting their own budgets they are less able to support other countries. Jordan and Iraq are particularly likely to turn to the IMF or World Bank for loans. These will come with conditions like more cuts. SAUDI ARABIA FALTERING ON REFORM There have been signs that the authorities are nervous about the public response to economic reforms. With deeper cuts planned in 2017, backtracking on Prince Salman’s Vision2030 is probable. This would weaken the confidence of international markets in the reforms. ELECTIONS IN LEBANON Parliamentary elections are due for May/June 2017. This will be the first major test of public opinion in eight years. The chances of a disputed or fractious outcome are high, so government formation will probably be lengthy. Important economic reforms will be further delayed.

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Bahrain, Qatar, Oman and the UAE are the least likely to need to pay regard to the views of their citizens. This is because they are more authoritarian, but also have small populations and have been able to redistribute wealth to segments of these populations, resulting in greater public satisfaction. Of the four, Bahrain is most likely to see public anger at service cuts, but this will almost certainly be tempered by the successful repression of opposition movements across the sectarian and political spectrum. The ageing Sultan in Oman and young Emir in Qatar are least likely to cut deeply, with the former focused on his legacy and the latter sheltered by a sovereign wealth fund. Other countries in the Gulf, specifically Kuwait and Saudi Arabia, are likely to see reform being negotiated by parliament and trade unions or social media and tribal intercession. For both countries, the need to placate a citizenry – particularly the middle classes – which has become used to state handouts, will probably result in a slower, more disruptive and partial reform process. In both countries, the risks of social unrest are growing, but are not as great as in Lebanon, Jordan and the Palestinian territories, where social unrest and organised political protests are more probable, particularly in response to cuts, corruption scandals and other signs of serious state incompetence. In the Levant, the budgetary pressures facing states are even greater than in the Gulf, but these are problems that these countries have faced for many years. As a result, Lebanese and Palestinian citizens are less reliant on the state. This makes these societies more resilient to government reforms and

MIDDLE EAST

cuts. But their dysfunctional political systems will also remain prone to crisis. The governments of Iraq, Iraqi Kurdistan, Syria and Yemen are already struggling to pay public sector salaries – a lifeline for many. Serious shortfalls in state revenue are also likely to weaken already damaged states, as political power seeps away from their capital. In all three countries, civil conflict will almost certainly continue beyond 2017. NurPhoto/SIPA/USA/PA


ASIA PACIFIC: POLITICAL AND ECONOMIC STABILITY INDICATORS, MIDDLE EAST CHINESE SLOWDOWN PUTS PRESSURE ON GOVERNMENTS KEY Syria

Lebanon

Oil importer Independent

$49.2 45%

17%

$

Kuwait

Israel 41%

$84 17%

Jordan

Palestinian territories

$51.8 11% $62.6 30%

Qatar

%

Iraq $69.1 19% $107.5 67%

UAE

-10 to -15 %

-15 to -21 %

Population in public sector employment

Planned economic reforms 2017:

Public sector salary cuts/freezes

Saudi Arabia $96

SIAS: STRATEGIC OUTLOOK 2017

-5 to -10 %

Energy price rises for consumers

$94.8 38%

17

1 to -5 %

Introducing VAT

Bahrain

Sources including: US Energy Administration Authority, African Development Bank, OPEC, European Training Foundation, United Nations Arab Development Reports, various international and national news outlets, and regional government data.

Fiscal break-even oil price (2015)

Fiscal deďŹ cit (2015) (% of GDP)

Iran 22%

Oil exporter

Oman $305 25% A net oil importer in 2015 and 2016. Usually an exporter but the conflict has changed this.

MIDDLE EAST

Yemen

Subsidy cuts to other consumer goods (All latest available data)


UPDATE MAP

FORECASTS AND TRENDS IRAN Rouhani will probably win presidential elections in June, bringing more certainty for businesses. We anticipate that Iran will begin to reap the economic rewards of the nuclear deal. Despite US president Trump’s opposition to the agreement, it remains in the interests of the EU and Iran to stick to the JCPOA. So we think it will hold.

ISLAMIC STATE Islamic State will probably lose most of Mosul in Q1. In Syria, disputes over Kurdish autonomy mean an offensive on the city of Raqqa is unlikely before the summer. But IS foreign fighters will probably either start to return home, defect to other Syria-based groups, or seek out new strongholds in Libya and Yemen. Splinter groups are also likely to emerge.

SYRIA AND YEMEN We do not expect a resolution to civil wars in Syria or Yemen in 2017, not least because both the Syrian government and the de facto government in Yemen will probably face increasing opposition from their constituencies. And the actions of intervening regional and international powers will remain a source of geopolitical risk.

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SIAS: STRATEGIC OUTLOOK 2017

MIDDLE EAST


SPECIAL FOCUS: ISLAMIC STATE Islamic State has probably passed its apex. But it will most almost certainly remain the most influential and dangerous terrorist organisation globally this year. By year end, we anticipate that it will have been largely driven off the battlefield in Iraq – and to a lesser extent Syria – and have morphed once again into a largely underground more diffuse movement. Its intent to mount attacks around the world will almost certainly remain high. But organisationally we forecast that its priorities will soon include regrouping in other conflict zones and unstable regions – particularly Libya and Yemen.

FORECASTS & TRENDS

Screenshot from an Islamic State propaganda video released by the groups Amaq media agency in October 2016

DRONES IS has adopted drone technology with growing accomplishment, not only for reconnaissance but attack purposes as well. The proliferation of IS propaganda on drone use and weaponising drones or using them as improvised weapons is liable to become a key tactical development in 2017 that extends beyond conflict zones, making counter-measures and appropriate legislation an ever more urgent requirement.

As IS loses ground, the core question of what threat it poses will persist, not only in Syria and Iraq, but globally. This is particularly its capability to mount attacks itself as well as to incite followers to carry out attacks on its behalf. The collapse of IS in Syria and Iraq would increase the probability that these countries will go from being net importers of violent extremists to net exporters. The Middle East, North Africa, Turkey and Western Europe are the most exposed to the returnee threat. This mainly reflects IS demographics and the ability of IS extremists to move across borders. Screenshot from an Islamic State video released in January 2017 that shows the group using armed drones

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As its capabilities to plan, fund and execute attacks from Syria and Iraq diminishes, we expect an even greater emphasis in IS propaganda on improvised or simpler forms of attack, such as using vehicles, bladed weapons, arson and firearms. Recent trends suggest that the group will also become much more specific in giving instructions on both tactics and targeting, over and above generalised incitements.

MIDDLE EAST: SPECIAL FOCUS: ISLAMIC STATE


The group’s leader, Abu Bakr Al-Baghdadi, has in his messaging identified Russia, Philippines, Yemen, Saudi Arabia, Egypt, Algeria, Tunisia, Libya and Nigeria as ‘the main supporters of Islam on the Earth and the pillars of the Caliphate’. As IS-held territory continues to recede in Iraq and Syria in 2017, and the group struggles to maintain its current status, it seems likely that IS will increase its efforts to promote – if not actually support – affiliated groups globally, and call upon them to mount attacks. This will probably remain a priority over calling on supporters to join the group in Syria, as was the case until 2016.

is is unclear if can adapt its ideology or claims to legitimacy so effectively if it loses any semblance of a state. But the likelihood of it splintering is liable to grow as it diminishes, and we anticipate some level of relative resurgence among Al-Qaeda affiliates in Syria and Yemen.

Our data shows that in 2016 IS was behind more attacks in more countries than any time previously. Last year, attacks in at least 29 countries were either claimed or attributed to IS or IS sympathisers, including at least 22 attacks in Western countries. We anticipate that despite the sustained intent to carry out attacks, its capabilities will wane. This means that the previously high level of international activity will also probably lessen slightly as the group sustains ever greater losses in Syria and Iraq. The threat of mass-casualty attacks from IS in the most exposed regions will remain high, however. Territorial control and the immediate establishment of a caliphate has been central to the IS ideology and its action-oriented appeal. It is unclear whether losing ground will therefore diminish its appeal in jihadist circles, or whether the death or capture of Al-Baghdadi would erode its claim to absolute obedience under his authority as ‘Caliph’. IS has proven effective at spinning its narrative as circumstances change. It

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Screenshot from an Islamic State propaganda video released by the groups Amaq media agency in 2016

MIDDLE EAST: SPECIAL FOCUS: ISLAMIC STATE

Territorial control and the immediate establishment of a caliphate has been central to the IS ideology and its action-oriented appeal.


NORTH AFRICA: GRASPING THE NETTLE SECURITY OUTLOOK IMPROVING Sudan WORSENING Mali CONSISTENT Algeria, Morocco, Chad, Niger, Djibouti, Tunisia, Mauritania, Egypt

There is growing potential for civil unrest, but we do not expect a return to protests anywhere near the intensity, frequency or scale of the 2011 uprisings.

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Countries in North Africa are likely to implement much-needed, though unpopular, economic reforms in 2017. More than five years on since uprisings swept the region, governments from Algeria to Egypt will be increasingly careful in balancing the need for economic reform with maintaining legitimacy and control. This means that there is growing potential for civil unrest. But we do not expect a return to protests anywhere near the intensity, frequency or scale of the 2011 uprisings, nor any serious threats to incumbent governments. These dynamics are increasingly visible in Algeria, where unsustainable spending and political uncertainty have continued to converge over the past year. It is unclear whether Bouteflika will live to the end of his term in 2019. A leadership transition may weaken the legitimacy required to put through tough reforms. Amid still low oil prices, the Algerian government is looking to balance its books by increasing taxes and reforming subsidies. But there are signs that it will try to provide some policy concessions to limit unrest ahead of legislative elections in May. We anticipate protests to remain largely concentrated in the interior and the south – including over environmental issues such as shale gas production.

NORTH AFRICA

Egypt will face similar challenges in 2017, as Egyptians feel the impact of structural economic reforms and budgetary cuts mandated by an IMF loan obtained late last year. We anticipate sustained public discontent, but President Sisi is unlikely to be ousted through popular revolt or any other means. Restrictions on expressing dissent tightened through 2016, and there was little organised political opposition. Both trends are likely to continue this year, so protests will probably remain disorganised, issue-specific and reactive. Terrorism in upper Egypt and the Sinai will most probably remain the main challenge to government authority. Unlike Egypt, Tunisia’s commitment to democratic transition after the 2011 uprising means the government will probably remain more receptive to dialogue with opposition parties and labour and civil society actors. But this, along with internal political disputes that will probably continue well into 2017, suggests that the implementation of meaningful reforms, including in the key security sector, will be slow. Protests and disruptive strikes over unemployment and local development – including in the extractives industry – will probably become more frequent, but we do not foresee sweeping political changes in the coming year. In Libya, the chances of political stability are the most remote in the region. The UN-backed


MONITORING POINTS ALGERIA SUCCESSION President Bouteflika’s health reportedly remains poor. In the event of his death, le pouvoir (Algeria’s political and military elite) would probably manage a fairly smooth transition. But this will probably result in the government being more cautious in its reform program. Such delays will simply store up and increase the associated risks in the longer term. ATTACKS AGAINST TOURISM SECTOR Mass-casualty attacks against the tourism sector in Egypt, Tunisia and Morocco would almost certainly negatively impact prospects for economic growth and international investor confidence in these countries. IS militants have shown that they remain intent on targeting foreign interests, including the tourism sector, across the region, as well as state targets. OIL PRICES Despite a slight projected increase in oil prices for 2017, still low energy prices will probably continue to be an indicator of the budgetary pressures that oil-exporting and importing countries will face in the coming year. ORGANISED OPPOSITION In Egypt and Algeria, repression means that there is currently little effective political opposition able to mobilise widely against poor living conditions. Therefore, any signs of activist or opposition groups becoming more organised would push up the unrest and political risks associated with economic reform.

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government will probably fail to gain domestic popular support or fulfil promises of economic recovery in 2017. Libyan oil exports resumed in late 2016 and there have been some encouraging signs since. But we do not expect production to rise enough to guarantee a significant increase in government revenues, at least not in the first half of 2017. This is partly due to rivalries between competing armed factions, as they each seek to take control of these resources.

AP/PA

In this context, the government’s prospects of survival until 2018 are slim. With few alternatives to a viable government and little prospect of consensus, we assess that the most powerful factions are likely to pursue their interests through armed conflict, rather than political settlement. More positively, Morocco will almost certainly remain more stable than its neighbours. The government looks likely to implement fairly bold reforms gradually. Following parliamentary elections in October, when the incumbent PJD party maintained its political lead, major policy shifts in the coming year appear unlikely. In the past year, we have seen increasingly visible signs of the monarchy’s influence on domestic politics. It seems that the monarchy will continue to prioritise policy continuity over liberal economic reform, as well as countering the terrorism threat from jihadist groups such as Islamic State.

NORTH AFRICA

Xinhua/SIPA/USA/PA

Morocco will almost certainly remain more stable than its neighbours. The government looks likely to implement fairly bold reforms gradually.


POLITICAL AND ECONOMIC STABILITY INDICATORS, NORTH AFRICA KEY

21% Morocco

23% Tunisia

$96 24%

Oil importer

Egypt

$

$196.9 50%

Oil exporter

Fiscal break-even oil/ barrel price (2015)

Fiscal deďŹ cit (2015) (% of GDP)

Libya

1 to -5 %

-5 to -10 %

-10 to -15 %

-15 to -21 %

-22 to -35 %

% $109.8 40%

Population in public sector employment

Planned economic reforms 2017:

Algeria

Introducing VAT Energy price rises for consumers

19% Sudan

Public sector salary cuts/freezes Subsidy cuts to other consumer goods (All latest available data)

Sources including: US Energy Administration Authority, African Development Bank, OPEC, European Training Foundation, United Nations Arab Development Reports, various international and national news outlets, and regional government data.

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NORTH AFRICA


FORECASTS AND TRENDS LIBYA We expect that the UN-backed Libyan government (GNA) will probably collapse this year. This, along with remote chances of improved security in Libya in 2017, means that terrorist groups such as IS and other extremists will probably continue to move freely through ungoverned spaces in the country and across borders. Given this, Libya will almost certainly remain at the centre of security risks in the region.

SECURITY IN MALI AND SAHEL The security outlook is worsening once again. Jihadist and local militant groups will probably sustain a high frequency of attacks in northern Mali, particularly against French, Malian and UN forces. This will allow them to expand their operational capabilities further into central and southern regions, as they started to do in the past couple of years. We do not expect that French intervention in the Sahel or associated risks to foreign interests will decrease anytime soon.

CHAD/NIGER We expect that cross-border terrorist attacks by Boko Haram into Chad and Niger will become less frequent in 2017. Regional counter-terrorism efforts against the group in the Lake Chad region have proven effective and are likely to limit the group’s ability to return to a high frequency of attacks in that area.

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NORTH AFRICA


SUB-SAHARAN AFRICA: SUCCESSIONS & REGRESSIONS The sub-regions that make up the length and breadth of Sub-Saharan Africa face mixed fortunes in 2017. Incumbent governments are well placed to remain stable in Senegal, Kenya and Rwanda. These countries, as well as Nigeria and Burkina Faso, will present improving security environments. The main theatres of political instability and crisis in 2017 will most probably be CAR, South Sudan, Zimbabwe, Somalia and Ethiopia. All of these countries face a high or growing risk of coup attempts and insurgencies. Southern and West Africa stand out as sub-regions that are largely managing to improve political stability and encourage foreign investment, despite Jesper Cullen

a challenging macroeconomic environment. Positively, the security environment in Nigeria looks likely to improve. The government will probably be able to contain insurgent groups in the Niger Delta region, most likely by co-opting them. Boko Haram faces diminishing prospects of increasing the frequency or scale of its attacks in the coming year. This will make the business environment in Nigeria more conducive for foreign investors. Sitting presidents in Kenya, Rwanda and Senegal currently look likely to win presidential elections in 2017. Continuity in government means that the relatively business-friendly operating conditions in these countries will continue. But elections may present short-term security problems. In Kenya, we assess that the potential for electoral violence between rival political and ethnic groups is greater at the election in August 2017 than it was leading into the 2013 poll. Some of the most stable countries in the region are likely to move backwards in 2017. South Africa and Ethiopia are the clearest examples of this. Factions in the ruling ANC party in South Africa will probably succeed in removing President Zuma from office late next year. But there is no sign that the party has a strategy to stop the country’s economic decline, so a change in leadership will probably have little tangible effect. Meanwhile, the Ethiopian government’s

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SUB-SAHARAN AFRICA

SUMMARY OUTLOOK IMPROVING Benin, Burkina Faso, Côte d’Ivoire, Gabon, Ghana, Nigeria, The Gambia WORSENING Angola, DRC, Ethiopia, Guinea-Bissau, Kenya, Mozambique, South Africa, Zimbabwe CONSISTENT CAR, Cameroon, Guinea, Liberia, Republic of Congo, Rwanda, Senegal, Somalia, South Sudan, Tanzania, Uganda

Some of the most stable countries in the region are likely to move backwards.


MONITORING POINTS SUPPRESSION OF THE OPPOSITION Government suppression of opposition groups in countries such as Angola, DRC, Ethiopia, Tanzania and Zimbabwe is an effective measure for preventing protests in the short term. But increased suppression will add to existing structural weakness, pushing up coup and insurgency risks.

AP/PA

unwillingness to reform means that we forecast opposition protests to resume and intensify, probably in mid-2017. This will push up the risk of an extra constitutional transfer of power as the year progresses. CAR, South Sudan, Zimbabwe and, to a lesser extent, DRC are all vulnerable to coup attempts in the coming year. A common trigger point is unclear presidential successions. A deterioration in the health of the South Sudanese president, who is long rumoured to have been unwell, would significantly increase the risk of coups and a return to civil war. In Zimbabwe, support from the army and the influential veterans association for Robert Mugabe has been fraying. This means that the longer Mugabe lives, the more likely a coup becomes. This is particularly as he tries to position his unpopular and divisive wife as his successor.

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STR/AP/PA

SUB-SAHARAN AFRICA

COMMODITIES Oil and copper prices look likely to rise slightly in 2017, although they will both probably remain at about half of the 2011 prices. These low prices will continue to put budgetary pressure on several Sub-Saharan African governments, including Angola, Equatorial Guinea, Nigeria, South Africa and Zambia.


UPDATE

FORECASTS AND TRENDS BURKINA FASO We forecast political stability and security to continue to improve in Burkina Faso over the next year. After an election in 2015, the government has consolidated its hold on power and seems to have the broad backing of the military. The authorities also appear to be more effective at mitigating the terrorism threat in the capital, and the south and central parts of country. The terrorism threat will probably remain substantial in areas that border with Mali.

ETHIOPIA Opposition protests will almost certainly resume next year in Ethiopia. And in a significant escalation of tactics, it seems likely that opposition groups might attempt to challenge the government’s authority using hit-and-run type insurgent tactics in Amhara and Oromia. The government would almost certainly respond to such attacks with force, and it would probably crack down even harder on opposition protesters.

SOMALIA Al-Shabaab will in all probability expand its territory in central and southwestern Somalia, filling power vacuums left by troops withdrawals by Ethiopia and Uganda. However, we do not anticipate that Kenya will withdraw its troops from Somalia in 2017, despite growing domestic pressure to do so. This means that central Somalia is more vulnerable to Al-Shabaab expansion than southern Somalia.

MOZAMBIQUE Lower export earnings, public expenditure and foreign investment mean economic growth in Mozambique will slow in 2017. But it looks likely that the country will be able to renegotiate the terms of its debt conditions in the coming months. This would be a positive development and ease its isolation from capital markets. Gas prices also look likely to rise in the coming year, providing some much-needed revenue for the government.

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SUB-SAHARAN AFRICA


SOUTH ASIA STRATEGIC COMPETITION AND UNINTENDED CONFLICTS SUMMARY OUTLOOK IMPROVING Pakistan WORSENING Afghanistan CONSISTENT Bangladesh, India, Maldives, Bhutan, Nepal, Sri Lanka

An ongoing nuclear arms race between the neighbours will probably continue in 2017 and carries with it a risk of unintended escalation.

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Competition for resources and influence is likely to grow between regional powers in 2017, bringing with it greater strategic uncertainty in South Asia. After a year of deteriorating ties between India and Pakistan, we anticipate that relations will remain tense and crisis prone, and may deteriorate even further. Both countries look likely to take a firmer stance against the other, at least in part due to domestic political challenges. Competition between the two over influence in Afghanistan will probably also increase as that country’s security and political situation worsens through the year. Both prime ministers, Nawaz Sharif and Narendra Modi, are likely to face domestic pressures that will probably restrict their ability to seek better relations with the other. And in any case, the Indian premier does not appear interested in thawing relations. New Delhi is likely to remain obdurate on several fronts, particularly in relation to sharing water from the Indus basin. With key state elections coming up in India, and Kashmir continuing to experience unrest, Modi’s Bharatiya Janata Party is likely to use a tougher stance against Pakistan to rally people behind nationalism.

SOUTH ASIA

AP/PA

Without avenues to re-engage in dialogue, the risk of some form of conflict between India and Pakistan will probably rise in 2017. While a full-blown war seems unlikely – another flare-up along the Line of Control appears most probable – an ongoing nuclear arms race between the neighbours will probably continue in 2017 and carries with it a risk of unintended escalation. Pakistan recently tested a nuclear submarine and continues to stockpile one of the largest number of tactical nuclear weapons in the world. The risk of a naval incident between India and Pakistan is now another potential trigger for a crisis, as well as terrorist attacks in Indian cities and


military activity along the LoC. Pakistan’s vertical nuclear proliferation also increases the opportunity for terrorist groups to try to steal poorly-secured nuclear material, as has been tried repeatedly since at least 2007. Security advisors to Donald Trump have said the risk of Pakistan’s nuclear weapons falling into hostile hands is one of the major global threats. With this particular risk in mind, it is likely that the Trump administration will remain diplomatically engaged in South Asia, possibly also as a counterweight to China’s growing influence in Pakistan. It is unclear, however, to what extent the Trump administration will choose to maintain or increase military engagement in Afghanistan. This is particularly as the Afghan security forces will almost certainly continue to suffer from high attrition rates and continue to require assistance from US forces. If the US does reduce its presence much further in Afghanistan, then Russia, China, Pakistan, India and Iran will probably increase their already active efforts to fill the power vacuum. The increasing number of strategic players in Afghanistan, particularly Russia, has high potential to further destabilise the country. An internal power struggle between the Afghan president and the chief executive officer, which has lasted since the national unity government formed in September 2014, will continue in 2017. Amid the ongoing uncertainty, President Ashraf Ghani will probably attempt to reconcile with former warlords, as he did with Gulbuddin Hekmatyar. And with uncertainty around the stability of his administration, we forecast that he will probably try to restart peace

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talks with the Taliban this year – although a reduction in insurgent and terrorist violence is unlikely. Indeed, the security situation across the country will probably worsen.

MONITORING POINTS WIDER STRATEGIC COMPETITION A potential pull back from the Asia Pacific region by the US will probably lead to increased competition for strategic influence between India and China. Beijing has already invested heavily in economic projects in Pakistan and Sri Lanka, and potential disengagement by Washington will likely force India to be more assertive against China.

Security advisors to Donald Trump have said the risk of Pakistan’s nuclear weapons falling into hostile hands is one of the major global threats.

GROWTH OF IS IN THE REGION Islamic State claimed responsibility for several large attacks in Afghanistan, Pakistan and Bangladesh last year. The group was able to widen its appeal and work with local militant groups last year. Foreign fighters fleeing operations against IS in Iraq and Syria will probably return to the region. And so this cooperation will probably increase in 2017, with affiliates and sympathisers seeking to carry out attacks in all the above countries, as well as India. UNOPPOSED GOVERNMENT IN BANGLADESH Without a viable opposition in Bangladesh, the ruling Awami League government will probably continue to clamp down on dissenting voices. Although the government has been able to address the security threats in the immediate aftermath of the 1 July attack, the broader political and security risks will not improve in 2017. AP/PA

SOUTH ASIA


STRATEGIC COMPETITION IN SOUTH ASIA KEY China–Pakistan Economic Corridor (CPEC) Chabahar trade route

$ China

Russia

$ $

$

$ $

Afghanistan

US

Money to Taliban

Weapons to Taliban

$ India Estimated nuclear weapons: 110–120 Submarine: INS Arihant – missiles Nirbhay (1000 – 1500km) K–15 (750 – 1900km)

$ Pakistan

Estimated nuclear weapons: 130–140 Submarine: Khalid – missiles Babur III (450km)

Sources: Arms Control Association; Government of Pakistan; China Pakistan Economic Corridor; NATO and UN reports on Afghanistan; various international and national news outlets

SIAS: STRATEGIC OUTLOOK 2017

Money to Government

Weapons to Government

Iran

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Afghanistan:

SOUTH ASIA


FORECASTS AND TRENDS NEPAL The Nepalese government will continue to face difficulties getting all political factions to agree on a new constitution, although it will probably push through with constitutional amendments. With provincial and general elections due in 2017, Nepal is likely to witness further political instability and political protests.

SRI LANKA Public goodwill towards President Maithripala Sirisena is likely to dissipate further in 2017. His government will continue to struggle to address corruption, a weakening economy, post-war grievances within the Tamil community and political pressure from former president Mahinda Rajapaksa.

MALDIVES The Maldivian government and regional think tanks estimate that between 50 to 200 Maldivians are fighting for Islamic State in Syria and Iraq. With these fighters potentially trying to return to the archipelago as the group loses territory in the Middle East, the threat from Islamist extremism is likely to rise in the Maldives in 2017.

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SOUTH ASIA


ASIA PACIFIC: PIVOTING OUT SUMMARY OUTLOOK IMPROVING Vietnam WORSENING North Korea, South Korea, China, Malaysia, Papua New Guinea, Philippines, Taiwan CONSISTENT Japan, Thailand, Singapore, Indonesia, Myanmar, Laos, Cambodia, Hong Kong

It is at this geopolitical level that we expect to see the most change and potential for crises in 2017 and beyond.

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With President Trump taking office, the outlook for his predecessor’s ‘pivot’ to Asia appears bleak in 2017. The policy, intended to advance Washington’s regional strategic and economic interests in ‘America’s pacific century’, has long stalled. The Philippine president Rodrigo Duterte said last year that ‘America has lost’ in the region. It is a remarkable statement and clearly an exaggeration. But the perception that the regional balance is tilting further and faster from the US is still likely to become a reality under the Trump administration. It is at this geopolitical level that we expect to see the most change and potential for crises in 2017 and beyond. The US president’s commitment to quitting the Trans-Pacific Partnership trade deal on his first day in office weakens, at a stroke, the US presence and cedes space to China. In doing so, it will reinforce a growing perception, even amongst its allies, that the US no longer has the same commitment to the region as it once did. Despite this, we do not think that America’s longstanding regional relationships will break down this year. Duterte insists that the Philippines is simply trying to ‘rebalance’ its foreign relations. Most ASEAN states – who often fail to find consensus on

ASIA PACIFIC

key policies within the institution – seem keen to pursue a model that similarly balances ties with US and China. This will not mean that regional states turn their backs on the US. It works both ways: balancing China’s influence was a key part of Myanmar’s decision in 2011 to open up. The incoming Trump administration is also less likely than the last one to alienate countries through criticism of their domestic policies. This will please Duterte, and some other governments, such as those of Thailand and Malaysia that are moving in a more autocratic direction. But should the US attempt to disengage from the region in 2017, as Trump has indicated he might, this would have far deeper

Xinhua/SIPA/USA/PA


implications for strategic relationships across the region – particularly with long-standing partners like Japan, South Korea and Singapore, and a developing relationship with Vietnam. We think it unlikely that the US would be able to pull away altogether even if it wanted to – not least because further tests of nuclear weapons technology by North Korea and naval incidents in the contested South China Sea look likely this year. But Trump has already undermined confidence in the US alliances and defence guarantees that have underpinned the post-Second World War regional order. Uncertainty over how he will respond to high-probability crises and provocations may cause regional powers to reassess their options. We anticipate increased regional military spending, particularly by Japan and South Korea, who are likely to feel less certain of protection under the US security umbrella.

AP/PA

US Navy

CNP/PA

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New policy approaches also mean less predictability. This is likely to create greater scope for misunderstandings as assertive, opaque and sometimes volatile autocratic personalities – from Beijing and Manila, to Washington and Pyongyang – interact over sensitive issues like Taiwan, the North Korean nuclear programme, maritime territorial claims, and China’s trade and monetary practices. This not only poses challenges for the stability of relationships, but also makes higher impact crisis events – such as the use of force during naval encounters in the South China Sea or shooting down a North Korean test missile – more likely in 2017.

ASIA PACIFIC

New policy approaches also mean less predictability. This is likely to create greater scope for misunderstandings.

MONITORING POINTS US POLICIES The Trump administration’s policies towards the region remain unclear, despite signs of a hawkish stance on China. A major break with the past policies – not least on Taiwan, the US military presence in South Korea and Japan, and trade policy towards China – risks having a profoundly destabilising effect.

RULING PARTY APPOINTMENTS IN CHINA Five members of the seven-strong Politburo Standing Committee are due to stand down in 2017. Whether President Xi Jinping is able to stack the body – and other senior posts – with allies at the Party Congress will be a strong indicator of his authority. How far he has the upper hand in internal power struggles will in turn help determine whether Xi continues to centralise power.

CHINESE CONSTRUCTION After a period of construction in the South China Sea that was unprecedented in its speed and scale in 2015 – 16, China is likely to undertake further developments and deployments. This has the potential to disrupt closer ties with littoral states, notably the Philippines, and encourage reciprocal actions.


ASIA PACIFIC: DEFENCE SPENDING 18.4%

13%

China

South Korea

% change in defence spending since 2014

3.5%

-10–0

1–15

Japan 5.9% Taiwan 13.1% Thailand

16.2%

56%

Vietnam

Philippines

-6.5% Malaysia 54.5% 12.7%

Indonesia

Singapore

21% Australia

Sources: IISS / SIPRI / Official data (in local currency)

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ASIA PACIFIC

16–30

31–45

46–60


FORECASTS AND TRENDS REGION Islamic State will continue to try to inspire, incite and direct terrorist attacks by networks and sympathisers in regional states, particularly Indonesia, Malaysia, the Philippines and Australia. IS-linked groups are likely to develop further regional and international connections, and attempt more ambitious plots.

SOUTH KOREA Whether through impeachment or resignation, it is now unlikely that President Park Geun-hye will serve until the scheduled December election. A mid-year poll is now likely. Domestic political uncertainty risks undermining a joined up approach to the ongoing North Korean nuclear and weapons programmes.

THAILAND Following the succession of a new king in December 2016, we think a recurrence of political unrest is unlikely in 2017, even if – as is probable – parliamentary elections are further delayed. We warn of more terrorist attacks outside the Deep South.

HONG KONG There is an increased risk of unrest before and after the March 2017 Chief Executive election. Beijing and its local allies are likely to continue to push back against pro-independence and democrat lawmakers, casting further doubt on the survival of ‘One Country, Two Systems’.

MALAYSIA The prime minister, Najib Razak, looks likely to call an early election in 2017 (with one not due until the following year). Despite a long running scandal, Najib and the ruling coalition would almost certainly beat a divided opposition in any polls.

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ASIA PACIFIC


LATIN AMERICA: POPULISM DIES HARD SUMMARY OUTLOOK IMPROVING Argentina, Colombia WORSENING Venezuela, Brazil, Mexico, Haiti CONSISTENT Chile, Ecuador, Peru, Cuba

The region will remain prone to political crises, unexpected election results, and protectionist economic policies.

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Several leading countries in Latin America will continue to face a high risk of political instability and civil unrest next year. Commentators have made much of the apparent retreat of populism in Latin America. In our judgement, such analysis is hasty. The conditions that feed populist politics in the region remain. Public disaffection with corruption, a poor economic outlook and weak institutions mean that populist politics and governments in Latin America are highly likely to endure in 2017 and beyond. The region will remain prone to political crises, unexpected election results, and protectionist economic policies. Dilma Rousseff’s impeachment has not improved political stability in Brazil; further upheaval beckons in 2017. Corruption revelations will almost certainly continue, which will probaby force high-ranking ministers to resign. Accusations of wrongdoing mean that efforts by MPs to shield themselves from prosecution will probably prompt demonstrations in major cities throughout the year. President Temer currently seems to have the support to survive any congressional or judicial attempts to oust him. But this could change if new damning evidence appears. Ahead of the 2018 general election, corruption, economic stagnation and high crime rates will fuel public disaffection with traditional choices of candidates. Populists like Jair Bolsonario are probable beneficiaries.

LATIN AMERICA

AP/PA

The pull from populists is also high in Mexico. In 2017, President Pena Nieto will have to juggle a deteriorating security situation with potential economic upheaval following Donald Trump’s election. He will probably fail. The federal government appears to have neither the resources nor strategy to address intensifying turf wars between organised crime groups. Associated risks of kidnap, extortion and violent crime for business operations will persist in 2017, if not worsen. Andres Manuel Lopez Obrador, a radical left-wing candidate, is highly likely to perform well in the 2018. Populism remains deeply rooted in Venezuela and makes it the most likely scene for a major crisis in Latin America in the coming year. We forecast that President Maduro and his government will survive in


2017. But political, economic and humanitarian crises are just as likely to prompt a refugee crisis as a period of violent protests. Power grabs by the government – such as dissolving the opposition-controlled congress – are probable triggers for large-scale protests. But ongoing scarcities of food, medicine and basic services are highly likely to prompt isolated protests and incidents of looting throughout the year. If Maduro resigns or is removed from office after 10 January, his vice president will complete his term, due to end in January 2019. Towards the end of 2016, Maduro appeared weakened and it appeared that he would face internal pressure to stand down this year. However, he seems to have be able to consolidate power within the ruling socialist party (PUSV). His appointment of a hardline sympathiser as vice president on 4 January makes it less likely that he will resign in 2017. In contrast, the outlook in Colombia is positive. President Santos appears to have recovered since unexpectedly losing a referendum on the peace deal with FARC. Congress’ approval of a revised agreement means that the incidence of terrorist attacks will remain low by historical standards. But the manner in which the referendum campaign was conducted points to a populist streak in former-president Alvaro Uribe’s Democratic Centre party, which will probably be in a good position to regain the presidency in 2018 using similar campaign tactics. Despite a probable beginning of formal talks with the ELN, that group will continue to pose a threat, particularly to security forces and oil infrastructure in borderland departments.

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MONITORING POINTS PLEA BARGAINS IN BRAZIL Executives at Obrebrecht, a Brazilian construction firm that was heavily involved in corruption at Petrobras, signed a plea bargain agreement with prosecutors in November. They are due to provide statements in the coming months. Brazilian press reports suggest that up to 200 deputies could be incriminated. If deputies perceive that President Temer is unwilling to protect them, the support he currently enjoys is likely to wane.

Populism remains deeply rooted in Venezuela and makes it the most likely scene for a major crisis in Latin America in the coming year.

ECONOMIC CONDITIONS IN VENEZUELA The main source of instability in Venezuela remains the economy. Reforms easing price and currency controls currently look unlikely this year, meaning that isolated protests and lootings will probably continue. An economic collapse, involving acute shortages of food and water, remains a credible scenario. This would also probably prompt an escalation of violent protests against the government. CRIMINAL LEADER ARRESTS IN MEXICO The government has maintained a strategy of arresting criminal leaders to tackle organised crime. Groups have attacked security forces in cities to free those arrested. Captures have also contributed to the fragmentation of crime groups, and in turn turf wars between rival organisations. The government is unlikely to change its strategy, and arrests will probably feed further violence. States on both coasts and along the northern border are highly likely to remain particularly high-risk areas.

Xinhua/SIPA/USA/PA

LATIN AMERICA


UPDATE UPDATE MAP

FORECASTS AND TRENDS CUBA The death of Fidel Castro is unlikely to have a substantive impact on the government’s policy agenda, at least not until Raul Castro stands down as president in 2018. Substantive political reform still seems unlikely. Despite US President-elect Trump’s promise to renegotiate the recent rapprochement with Havana, we doubt that he will reverse Obama’s easing of the trade embargo. Economic liberalisation will continue, albeit slowly, with most foreign investment through joint ventures with the Cuban state.

ECUADOR The presidential election will be a barometer for the supposed retreat of populism in the region. President Rafael Correa, in power since 2006, is not running. Polls currently suggest that his party’s candidate, Lenin Moreno, is likely to win the first-round poll in April. But Correa’s seemingly low levels of public support suggests that the electorate will vote for change.

CHILE The presidential election is likely to bring about a change in government. President Michelle Bachelet has struggled with low public approval ratings throughout much of her term in office. Recent polls suggest that her predecessor, Sebastian Pinera, currently leads the polls. But a recent win for a left-wing outsider in the Valparaiso mayoral election suggests that non-establishment candidates are also likely to perform well.

ARGENTINA President Macri has been able to make Argentina a more business-friendly environment in his first year in office, despite his party’s weak position in both houses of congress. But in the run-up to mid-term elections in October, he is less likely to be able to count on opposition support for bills to kickstart economic recovery. If the public does not start to feel the material benefit to his economic reforms before the polls, he is likely to find himself in a weaker position.

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LATIN AMERICA


POPULIST ELECTION SWINGS IN LATIN AMERICA

Venezuela Nicaragua

Chavistas remain in power for now, but look unlikely to retain the presidency in 2018.

Mexico

Columbia Ecuador Lenin Moreno, of Rafael Correa's Alianza Pais party, currently leads polls to win the first round of the presidential election in February 2017.

Populist Election Swings 2017–18

Brazil

Established left-wing populist movement

Bolivia

Emerging left-wing populist movement Established right-wing populist movement Emerging right-wing populist movement

Chile

Populist government in power

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LATIN AMERICA


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Strategic Assessments Country Profiles Quarterly Snap Forecasts

Strategic Assessments Annual Strategic Outlook

IMMEDIATE

IMMINENT

NEAR TERM

MEDIUM TERM

LONG TERM

WITHIN 2 DAYS

WITHIN 2WEEKS

2–12 WEEKS

3–12 MONTHS

12 MONTHS–3 YEARS

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SIAS: STRATEGIC OUTLOOK 2017

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Risk advisory strategic outlook 2017  

The Strategic Outlook is primarily for those tasked with managing risks in international businesses and organisations. It attempts to interp...

Risk advisory strategic outlook 2017  

The Strategic Outlook is primarily for those tasked with managing risks in international businesses and organisations. It attempts to interp...