On The Brink Of Civil War

BMI View:   Prospects of a return to full-blown civil war in Libya are high. As a result, we have lowered the country's Short-Term Political Risk Rating. The economic situation will remain dire, and lawlessness in the country will contribute to increasing risks to regional security.

Recent political developments in Libya reaffirm our view that there is a high risk it will return to full-blown civil war in 2014 ( see 'Risks Of Civil War Increasing Steadily', May 23). More than 200 people have been killed in the recent fighting in the capital Tripoli and the city of Benghazi, in the eastern region of Cyrenaica. Militias have been battling at the country's main international airport near Tripoli. Rocket attacks and shelling reportedly damaged or destroyed 90% of the planes as of the beginning of August, while the control tower was struck and fuel storage tanks set ablaze. On one side of the ongoing battle are the Zintan brigades, based in the city 130 km southwest of Tripoli, and their political allies, united by their claim to be a bulwark against Islamist extremists. Opposing them are Islamist fighters loyal to militias from the western port of Misrata, allied with the Justice and Construction party - an arm of the Muslim Brotherhood - and other groups who claim they are fighting against elements tied to former long-time Libyan ruler Muammar Qadhafi. 

At the end of July, Islamist fighters from the Ansar al-Sharia group and former anti-Qadhafi rebels overran the main base of the Saiqa Special Forces Brigade in Benghazi, a group loyal to renegade general Khalifa Haftar - a former Libyan army officer who has pledged to defeat Islamist militias. Haftar denied claims by Islamist militias that they have taken control of the eastern city, and we expect the general to seek to retake Benghazi over the coming weeks.

Total Lack Of Government Control
Libya - Short-Term Political Risk Rating

On The Brink Of Civil War

BMI View:   Prospects of a return to full-blown civil war in Libya are high. As a result, we have lowered the country's Short-Term Political Risk Rating. The economic situation will remain dire, and lawlessness in the country will contribute to increasing risks to regional security.

Recent political developments in Libya reaffirm our view that there is a high risk it will return to full-blown civil war in 2014 ( see 'Risks Of Civil War Increasing Steadily', May 23). More than 200 people have been killed in the recent fighting in the capital Tripoli and the city of Benghazi, in the eastern region of Cyrenaica. Militias have been battling at the country's main international airport near Tripoli. Rocket attacks and shelling reportedly damaged or destroyed 90% of the planes as of the beginning of August, while the control tower was struck and fuel storage tanks set ablaze. On one side of the ongoing battle are the Zintan brigades, based in the city 130 km southwest of Tripoli, and their political allies, united by their claim to be a bulwark against Islamist extremists. Opposing them are Islamist fighters loyal to militias from the western port of Misrata, allied with the Justice and Construction party - an arm of the Muslim Brotherhood - and other groups who claim they are fighting against elements tied to former long-time Libyan ruler Muammar Qadhafi. 

At the end of July, Islamist fighters from the Ansar al-Sharia group and former anti-Qadhafi rebels overran the main base of the Saiqa Special Forces Brigade in Benghazi, a group loyal to renegade general Khalifa Haftar - a former Libyan army officer who has pledged to defeat Islamist militias. Haftar denied claims by Islamist militias that they have taken control of the eastern city, and we expect the general to seek to retake Benghazi over the coming weeks.

Total Lack Of Government Control
Libya - Short-Term Political Risk Rating

Political violence in Libya will continue in the coming quarters, and we cannot preclude that protracted instability could result in a de-facto fragmentation of the country along regional lines. Most Western governments pulled out their diplomatic staff from Libya as a result of the recent uptick of instability. On August 4, the British Embassy in Tripoli closed, one of the last to do so following the evacuation of the US Embassy and UN office. Governments also sought to evacuate their citizens by ship or across the land border with Tunisia. We have decreased Libya's Short-Term Political Risk Rating to 29.8 from 31.0 out of 100 previously, owing to a deterioration in the 'social stability' subcomponent.

Government Unable To Control Militias

Political authorities will be unable to re-establish basic security in Libya any time soon. The House of Representatives, the country's new legislature, replaced the previous parliament - the General National Congress (GNC) - following elections which took place on June 25. The vote reportedly eroded the political dominance that Islamist factions had in the legislature, and on August 4, lawmakers held their first formal session in the eastern city of Tobruk. However, Islamist politician and former GNC president Nouri Abusahmain called for a rival parliamentary session in the capital, and some Islamist-leaning members of the new parliament did not attend the Tobruk session. The Libyan government will be unable to rein in the militias, particularly as the army is divided and lacks resources and training to fight the insurgents.

No Resolution To Crisis In Sight
MENA - Political Risk Rating

Instability Detrimental To The Economy...

The ongoing political crisis will worsen the already dire economic situation in the country. We forecast Libya's GDP to contract by 12.0% in real terms in 2014, and an extended period of instability will likely lead to slow growth in the domestic economy in 2015. We also forecast Libya's budget to experience a deficit of 25.3% of GDP in 2014 and 14.5% in 2015. Protracted violence could decisively hinder the political and monetary authorities' ability to finance spending, which would likely trigger a full-blown fiscal crisis and in turn worsen the political crisis.

Instability will continue to undermine the recovery in Libyan oil output, while export volumes will remain critically low. We project oil exports averaging 225,700 b/d (barrels per day) in 2014 and 587,800 in 2015, from 868,200 b/d in 2013. The recent exodus of foreign workers leaves a deficit of skilled technicians able to manage production operations, and rise in violence, will prevent key maintenance work on pipelines and pumps, which have been severely damaged by the repeated shut-ins. That said, ample global supply and weak demand will see the impact on Brent limited over the shorter term ( see 'Rising Instability, Falling Production', August 1).

...And Risks To Regional Security Increasing

The political crisis in Libya will contribute to increasing security risks in North Africa over the coming quarters. Ministers of foreign affairs from Tunisia, Algeria, Sudan, Egypt, Chad, and Niger, as well as Libya's ambassador to Tunisia, led delegations to the Tunisian coastal city of Hammamet on July 13-14 to discuss a regional response to the political crisis. Despite efforts at regional coordination, foreign governments are highly unlikely to change the situation in Libya. Conversely, the proliferation of arms in the country will increase potential for radical Jihadist groups to carry out high-profile attacks in neighbouring states, particularly in Algeria and Tunisia.

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