Previous Quarterly Editions
Expropriation Risk: 51 51 51 52 Political Violence Risk: 39 39 39 48 Terrorism Risk: 55 55 55 55 Exchange Transfer and Trade Sanction Risk: 55 55 55 55 Sovereign Default Risk: 66 66 75 66
TREND ▼
With an economy heavily reliant on tourism, Tunisia has been hit hard by the COVID-19 pandemic and the international policy responses to it. National GDP contracted by an estimated 8.8% in 2020, with unemployment rising from 14.9% to 17.4% over the course of the year. This has exacerbated longstanding grievances over government failure to create economic opportunities, especially in historically marginalised central and southern regions.
The country is expected to see a return to growth this year, forecast by the International Monetary Fund (IMF) at 3.8%, but it will take several years for economic activity to reach pre-pandemic levels. Moreover, much is contingent on the speed with which the European travel and tourism industry recovers, and whether the government can entice back foreign investors.
Economic challenges coincide with rising political frictions. In early 2021, protests over unemployment and commercial challenges, and demonstrations of frustration, occurred after the perceived failure that the promises of secure rights and freedoms, which were promised after the 2011 revolution, were not delivered. In large part, the slow pace of reform in this area is a function of perpetual political crises that have hamstrung decision making, and tensions may now be at their most severe since the ratification of the current constitution in 2014.
Many of the present disputes revolve around constitutional prerogatives, pitting President Kais Saied against Prime Minister Hichem Mechichi and the parliamentary leadership. Saied, an independent populist, advocates strengthening the role of the presidency and has on several occasions sought to obstruct Mechichi’s work or that of the legislature, citing procedural concerns. A week-long standoff occurred in early 2021 after Saied declined to swear in ministers appointed by Mechichi as part of a reshuffle, who had already received lawmakers’ endorsement.
In April 2021, the President refused to sign a bill designed to ease the appointment of Constitutional Court justices. The court was formally established in 2014 but has never begun operating, as constant parliamentary gridlock meant only one candidate has ever received the required supermajority in a confirmation vote. Many of the current political contests are aggravated by the absence of this body, being the only institution with the jurisdiction to arbitrate.
TREND ►
Tunisian law allows for expropriation on public interest grounds but requires adequate prior compensation. Although complaints over the manner and scale of compensation are not uncommon, these measures are primarily used for compulsory purchase of land for infrastructure projects and rarely affect foreign parties.
Attracting foreign direct investment has been a priority for successive governments over several decades, and the current technocratic administration has clearly indicated that it has no intention of diverging from that course. Even in the reasonably plausible event that Mechichi is forced from office before the end of the year, any alternative administration would likely take a similarly dovish approach to foreign business interests.
TREND ▲
Expressions of socio-economic discontent in recent months have taken the form of occupations of government buildings and destruction of property (mostly that of the state). In at least one incident in the south, the army was deployed to control the situation.
Meanwhile, demonstrations calling for greater accountability over alleged abuses by the security services were met with a brutal police response in the early months of 2021. This in turn has led to a cycle of deepening distrust and animosity between civil society groups and the authorities.
In circumstances where the government is unlikely to be able to deliver either economic opportunities or meaningful political reforms for the foreseeable future, the trend of increasingly frequent and confrontational protest actions will persist, and in extreme cases may risk riots in more marginalised regions.
Last December (2020), Saied extended for a further six months the state of emergency in place since the bombing of a presidential guard convoy in 2015, which itself followed two attacks earlier that year by Islamist militants that left dozens of foreign tourists dead.
The magnitude and frequency of terrorist incidents have since declined, and the security services’ capabilities have improved significantly. Nonetheless, small-scale attacks still take place every few months and the authorities routinely report the arrest of individuals suspected of terrorism offences or the dismantling of extremist networks. Small militant cells also remain active in the remote mountains in Tunisia’s west.
To some extent, the terrorism risk may be moderated by the improved security situation in neighbouring Libya, where a ceasefire has now held since late last year (2020). A more stable environment there should limit extremist groups’ freedom to operate and help control the clandestine flow of arms and people across the border.
Despite a near total halt in tourism revenues, the country’s foreign currency reserves have grown since the onset of the pandemic. Indeed, the Central Bank of Tunisia reported at the end of the first quarter of 2021 that reserves stood at TND21.7bn (USD7.76bn equivalent) compared with TND20.1bn (USD7.04bn equivalent) at the same point in 2020.
That is partly due to an injection of USD745mn from the IMF in April 2020, to help combat the impacts of COVID-19, supported by a nearly 20% reduction in import costs last year (2020). However, even with the reduced import burden, Tunisia’s current account deficit remains high at 6.8% of GDP and is expected to widen again over 2021.
The government is unlikely to introduce overt controls on capital and currency convertibility, emphasising its commitment to foreign investments (for which more liberal transfer regulations apply than for local business). However, it is possible that the central bank may find informal ways of slowing exchange procedures- which are already sometimes burdensome- in the event of an accelerating outflow of foreign currency.
While the current account deficit has narrowed, the fiscal deficit has widened over the last year, jumping from 3.9% to 10.6% of GDP. Tax receipts have dropped off dramatically, while the government has expanded public-sector employment. The pandemic has largely erased gains made under an IMF-backed programme that concluded in 2020.
Gross government debt had decreased in 2019 after doubling over the previous decade. Yet it has since risen again, reaching a record 87.6% of GDP in 2020 and is forecast to come close to 100% of GDP in the next five years.
If Tunisia is to avoid the risk of sovereign default in the medium term, it will require further financial assistance. Mechichi’s administration is in talks with the IMF over a new support package, but IMF officials have emphasised the need first to secure broad political and social buy-in for a credible reform programme.
Investors may take heart from an agreement signed in March 2021 between the government and the country’s largest labour union to initiate reforms of state-owned enterprises, which is a major source of debt. Reforms in this area were reportedly among the focus items in negotiations in early May 2021, which Finance Minister Ali Kooli has said went positively. Nonetheless, there is no timeline yet for when an agreement may be reached, and in such a fragile political environment, the obstacles to reform remain considerable.
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