Somalia: Hijacking suggests that piracy threat remains

31 March 2017

The recent hijacking of a bunkering tanker off the Somali coast indicates the persistent threat posed by piracy in the Gulf of Aden, despite several years of reduced activity. Whilst newly elected President Mohamed Abdullahi Farmajo is expected to pursue a reformist agenda, economic risks will remain significantly elevated. Regulatory inconsistencies and we ak contract enforcement create a poor operating environment for foreign investors.

Security Environment

The successful hijacking of the MT ARIS 13 by pirates around 14 nautical miles off the coast of northern Somalia may indicate a resurgence in piracy in the country’s waters. The incident was the first successful hijacking of a merchant vessel since 2012. The Sri Lankan-flagged vessel, which was carrying eight crew members, was boarded by pirates on 13 March 2017. Following an exchange of fire with the Puntland Maritime Police Force (PMPF), the hijackers, believed to be from the Puntland autonomous region’s Majerteen clan and Siwakron sub-clan, departed the ship and released the crew on 16 March 2017. It has been reported that no ransom was paid, but that hijackers found USD 90,000 in the ship’s safe.

Whilst levels of piracy off the Somali coast have dropped significantly in recent years, the MT ARIS incident demonstrates that pirates maintain the ability to hijack vessels in Somali waters. Pirates also hijacked a fishing vessel on 24 March 2017. The Yemeni crew members were released unharmed, but the boat is reportedly being used as a mothership to target larger vessels. The threat posed by piracy will be exacerbated in 2017 by continued political instability and clan rivalries throughout Somalia. In the most recent cases, pirates likely capitalised on reduced defence capabilities in Puntland, where the maritime forces’ wages are currently eight months in arrears.

Given the ongoing drought in Somalia, in which 2.6 million people are estimated to be experiencing food insecurity, the recent hijacking may inspire other groups to return to piracy – particularly fishermen who have suffered due to illegal fishing in  Somali waters. As a result, vessels operating in the Gulf of Aden should take adequate security measures and implement comprehensive crisis management strategies.

Trading Environment

The unexpected election of former Prime Minister Mohamed Abdullahi Farmajo as president of the Federal Government of Somalia in February 2017, has raised hopes of economic and political reform in the country. During his tenure as prime minister, Farmajo introduced a series of institutional reforms, including measures to ensure that the Somali National Army was paid on time. It is expected that

Farmajo will implement similar measures to strengthen institutions, which should support efforts at economic reconstruction. Relations with the International Monetary Fund restarted in 2013, and a staff-monitored program is in place to support macroeconomic stability and policy management. In the near-term, economic growth will be driven by remittances from the Somali diaspora and foreign aid. Real GDP growth is forecasted at 2.1% in 2017.

However, headwinds persist. The economy is reliant on agriculture, exposing it to fluctuating weather conditions. Somalia has exploitable offshore oil reserves, but these are unlikely to attract much interest from foreign investors, unless the security and institutional environment materially improve.

Investment Environment

Inconsistencies in the legal and regulatory environment create a poor operating environment for foreign investors. Regional and federal authorities often dispute who has authority to grant licences, significantly elevating the risk that contracts will be altered or cancelled. In June 2015, Canada-based Africa Oil Corp and Range Resources withdrew from Puntland due to conflicting claims to concession granting authority by Puntland and federal authorities.  Puntland also requires that companies deal exclusively with its authorities, prohibiting petroleum operations in its territory if a permit has been given by the federal government.

Clan-based politics weaken contract enforcement in Somalia, as commercial disputes are often referred to a traditional legal system known as xeer. Under xeer, contracts are subject to political influence, with adverse rulings likely where a company is not affiliated with the dominant local clan.

Image of risk pricing table for Somalia

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Turkey, Peru, Argentina and Jordan, all of which have been the subject of recent enquiries from JLT's client base.

Spider chart of JLT World Risk Review |Ratings April 2017

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com

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