Update Country Report Curaçao 04 Apr 2016

• The impacts of the Mossack Fonseca leak will vary considerably, but The Economist Intelligence Unit expects significant political fallout.

• This will largely affect countries that are already politically fragile, or facing institutional challenges.

• Significant emerging markets may face renewed political uncertainty as a result.

• Russia, and other large authoritarian states, will not be heavily affected. The Kremlin will dismiss the allegations as politically motivated.

• The number of resignations directly linked to the leak may be limited. However, the revelations will help to undermine establishment parties.

• There is a possibility of some indirect impacts on the Brexit debate.

Papers seen by the International Consortium of Investigative Journalists (ICIJ), a US-based non-profit organisation, have revealed alleged financial impropriety involving public figures from a large number of countries. There will be significant political fallout from these revelations, with more information expected to be revealed shortly from the leak at the Panama-based law firm Mossack Fonseca.

It will take some time before the full implications are clear; more than 11m documents from Mossack Fonseca's database have been leaked. In many cases, the information revealed may not show that leaders have broken laws. But the revelations of wealth accrued while in public office, and the hypocrisy of storing this offshore in order to avoid domestic taxes, will put pressure on politicians named in the leak. We expect six main areas of impact from the information that has been released so far. These are set out below.

Overall, we expect the political impact on flawed democracies, hybrid regimes and weak states to be more substantive than that in either full democracies or authoritarian regimes linked to the allegations. For those governments that are already facing significant political challenges, the allegations have the potential to be serious. For others, they are likely to be manageable; indeed, we expect most of the impacts of the leaks to be indirect. The potential impacts are as follows:

i) Some leaders might be forced from office

It is possible that some serving political leaders may be forced from office as a direct consequence of the Panama leaks. Iceland's prime minister, Sigmundur Gunnlaugsson, is the likeliest candidate. Mr Gunnlaugsson, who has been accused of impropriety involving an investment vehicle, Wintris, leads a coalition government of the centrist Progressive Party and the centre-right Independence Party (IP). Bjarni Benediktsson, the finance minister and leader of the IP, is also implicated in the leak. A vote of no confidence on April 4th would trigger new elections in which the Pirate Party (PIR) could secure the largest share of the vote.

ii) Political risks will increase in a number of fragile economies

The leaders of several politically fragile states are implicated in the allegations, among which Ukraine and Pakistan stand out. It is alleged that the Ukrainian president, Petro Poroshenko, sought to avoid domestic taxation on the sale of his assets in Roshen, the country's largest confectioner. This is damaging both because of the implication of trying to evade taxes in a time of war and fiscal strain, and because it smacks of the "old" corrupt politics that Mr Poroshenko came to office promising to tackle. More critical is the timing; local media have made much of the juxtaposition of the president approving the details of the offshore restructuring plan and the Ilovaisk incident-the turning point in the war in the south east, in which large numbers of Ukrainian volunteer forces were killed or captured by pro Russian forces. The accusation may do significant damage to the president's patriotic credentials, weakening further his popular support, and probably exacerbating an already serious government crisis. We do not expect him to be removed from office, but the allegations complicate an already fragile domestic environment, where policymakers are focused on managing the departure of the prime minister, Arseny Yatsenyuk.

In Pakistan, it is alleged that the prime minister, Nawaz Sharif, concealed ownership of a number of assets revealed in the disclosures, notably including London property held in the name of family members. The Sharif family has long faced corruption allegations, albeit unproven. This will limit the political fallout from the new revelations. Still, opposition politicians will use the new claims to put pressure on the government (possibly in the form of public protests) and urge the country's anti-corruption agency and electoral commission to take action against the family. We do not expect any change of government as a result.

iii) Government legitimacy may be undermined in key emerging markets

There are a number of allegations affecting leaders in large emerging markets, notably Argentina's new president, Mauricio Macri. Mr Macri has come to office on a reform platform with a commitment to fight corruption. His reformist and anti-corruption credentials are likely to be damaged by the allegations, and there may be an impact on the speed and effectiveness of the reform agenda in Argentina as a result. The context for other major emerging markets is challenging, with impeachment proceedings under way in both Brazil and South Africa, where large corruption scandals affecting political and business leaders are already being investigated. We have recently changed our forecast on Brazil and expect the president, Dilma Rousseff, to fail to see out her term. In South Africa, Jacob Zuma's presidency is already looking increasingly shaky. The Constitutional Court ruled on March 31st that South Africa's president had breached the constitution in relation to the use of state resources to fund improvements to his private Nkandla homestead. Any suggestion of involvement from policymakers in either country could worsen existing political instability.

iv) Another source of volatility in the Brexit debate

The Panama allegations that have surfaced thus far have little direct impact on the UK, and they do not alter our forecast that the UK will vote to remain in the EU in the referendum on June 23rd. However, coming in the wake of significant domestic disruptions-a chaotic 2016 budget and a senior resignation from government-the leaks again highlight the inauspicious backdrop against which the electorate will be voting on June 23rd. Our Brexit call rests in part on an assessment that despite being elevated at present, anti-establishment sentiment in the UK-a country with a broadly conservative political culture-is too inchoate to swing the referendum in favour of those campaigning to leave the EU. Nevertheless, we acknowledge the potential cumulative impact-for example on turnout, which could be crucial to the result-of developments that may intensify discontent with the political status quo. We will therefore be monitoring the reception of the Panama leaks in the UK carefully. And if the leaks lead to any allegations with a more direct focus on senior figures in the UK or the EU, we will review our assessment of their impact on the EU referendum result.

v) Political populists and non-traditional parties are well placed to benefit

The leak comes at a time when establishment political parties are under stress in a number of regions-notably Europe. The critique offered by populist parties of the radical left and right, that the political mainstream is corrupt, is likely to be bolstered by the allegations. This will have resonance in countries such as Italy and Spain (a member of the Spanish royal family has been specifically identified by the ICIJ). The direct impact is unlikely to be large, but if the scandal continues to develop we would expect to see the indirect impact supporting gains for parties such as Italy's Five-Star Movement and France's Front national. In Greece, allegations surrounding the previous New Democracy government could potentially complicate an already fraught political environment, where leaders are struggling to pull together a new deal with the IMF.

vi) Pressure on offshore centres is likely to increase

Pressure on offshore financial centres has been growing for some time, and we expect the leak to exacerbate this. States that in the past have relied on lax oversight and plausible deniability when it comes to the criminal misuse of their financial centres may be unable to resist calls for further reform. States likely to be affected vary by region. In Asia-Pacific, states such as Samoa may be affected. The use of shell companies in jurisdictions such as Samoa has been identified by the Financial Action Task Force (FATF) as the major risk for money-laundering and the FATF stated in its 2015 mutual evaluation report that although there was "little firm evidence" of the proceeds of crime being laundered via Samoa, the lack of due diligence and the inability to detect the misuse of shell companies suggested abuse was likely. The Panama Papers will in Samoa and other jurisdictions provide to some degree the firm evidence that may hasten the improvement of standards. In Europe, we expect further political pressure on Cyprus. The revelations may offer the possibility, through a renewed urge for international co-operation on financial regulation, that the usual pattern of jurisdiction shopping for money-laundering will be curtailed as countries generally improve regulatory compliance.

Authoritarian governments better placed to respond

Much of the commentary thus far has centred on allegations around the Russian president, Vladimir Putin. In practice however, we expect very little meaningful impact in Russia-or other large authoritarian states-from the allegations. Expectations around corruption in larger authoritarian states are, to a significant extent, already "in the price", and governments also have a greater ability to restrict information. In Russia, much of what has been leaked is in line with previous allegations that the government has largely ignored. We expect any political impacts to be de minimis, with the government simply not reporting the allegations directed against it and/or indicating that the claims reflect an ongoing hostile campaign from the West. Similarly, we expect any further allegations about senior Chinese officials to be dismissed, although there has been heightened political nervousness around criticism of senior leaders in recent months.

Overall, it appears likely that the impacts of the allegations are likely to be greatest on weak states and flawed democracies that are already facing very significant institutional challenges, or countries where the political environment is already fragile. However, with further information likely to emerge, the full contours of the political impacts of the leak are not yet clear.