Previous Quarterly Editions
Expropriation Risk: 51 51 52 62 ▲ Political Violence Risk: 39 39 48 59 ▲ Terrorism Risk: 55 55 55 53 ▼ Exchange Transfer and Trade Sanction Risk: 55 55 55 55 ► Sovereign Default Risk: 66 75 66 75 ▲
TREND ▲
The risk temperature has risen sharply following President Kais Saied’s announcement on July 25 that he was invoking emergency powers, claiming that political dysfunction represented an imminent threat, which entitled him to freeze parliament and sack the prime minister. Initially declared for a 30-day period, the president has since extended the exceptional measures indefinitely.
Saied had been at loggerheads for months with Prime Minister Hichem Mechichi and parliament. He now appears determined to overhaul the constitutional system to secure greater powers for the presidency. He has also vowed to clean up what he describes as rampant corruption in politics and business.
After years of political paralysis and sluggish economic performance, the actions of the president (himself a political outsider) have been welcomed by much of the population, seeing an opportunity to remove an unpopular elite.
However, rights groups are concerned that Saied’s moves to centralise power are growing increasingly authoritarian. Dozens of parliamentarians, activists, businesspeople and public officials have been subjected to house arrest or travel bans; many have not been provided with a justification for these measures.
Although Saied has made his ambitions clear in broad terms, he has not articulated a concrete plan. Actions have been piecemeal and decision-making opaque. Moreover, after sacking Mechichi on July 25, Saied has yet to appoint a replacement; civil servants have also been removed and key ministries placed under the control of ‘interim’ heads.
Uncertainty extends to the economic sphere. Aside from calls for retailers to reduce prices and banks to lower interest rates, Saied has not shown interest in fiscal policy or signalled plans to implement economic reform beyond eliminating ‘corruption’ and tax evasion.
There are no indications that foreign businesses are being targeted as part of the ongoing ‘clean-up’ operation. Rather, the greatest expropriation risks to foreign investments in the country are likely to arise from joint ventures with local firms.
Indeed, it is probable that a continued ‘anti-corruption’ campaign will lead to further arrests as well as possible asset freezes or seizures, which may also ensnare those of foreign partners. The lack of transparency surrounding ongoing investigations and prosecutions increases the difficulty for foreign companies in determining the safety of investments, and may make it harder to recover lost funds and assets via judicial channels.
Protests driven by socio-economic discontent were on the rise prior to July 25. However, such incidents have declined since Saied’s assumption of sole control, likely because many blamed the government rather than the president for their grievances and are giving Saied a chance to deliver on promises of change.
Despite initial demonstrations against the president’s actions in late July, his opponents appear to have since adopted a strategy of de-escalation and caution, reducing the risk of violent confrontations with the security services. In the longer term, this risk may rise if the president shuts down all legal avenues for opposition, and critics see no other means for political engagement than popular mobilisation or even targeted violence.
For their part, the president’s supporters have stepped up accusations against foreign governments of malign interference in domestic affairs. This mostly relates to Turkey and Qatar, who are seen as close to Ennahda -- the largest party in the now-suspended parliament. Rising animosity may increase the risk of violence or destruction of property belonging to foreign businesses associated with these countries.
TREND ►
No significant terrorist incidents have taken place in Tunisia for around a year, although a state of emergency remains in place. Small militant cells remain active in the remote mountains in the west of the country and the security services continue to report arrests of extremist elements on a regular basis.
The prevalence of weapons and weak state control over large areas of territory in neighbouring Libya continues to pose an escalated risk of cross-border operations by extremist elements. Fresh attacks are possible at any time, although they would likely be directed at the security services rather than commercial targets. In August, police reportedly arrested an individual for plotting to assassinate Saied.
Foreign currency reserves slipped from TND21.7bn (equivalent to USD7.8bn) at the end of the first quarter to TND19.7bn (USD7.1bn equivalent) by mid-August. According to the central bank, the current level would fund 123 days of imports.
The downward trend is set to continue, with an expected current account deficit of 6.5-7% in 2021. The tourism industry, on which Tunisia relies for a significant proportion of foreign currency earnings, is unlikely to recover this year.
There has been no serious discussion of new capital controls. However, Saied has indicated that controlling prices of certain consumer goods is a priority, which may point to a heightened risk of (formal or informal) exchange transfer obstacles in areas deemed ‘non-essential’. On the other hand, the prospects of an imminent crunch may be offset by the International Monetary Fund (IMF)’s allocation of a new tranche of Special Drawing Rights (SDR) in late August, with Tunisia receiving the equivalent of USD776mn.
Despite possibly constituting a coup, foreign governments have avoided condemning Saied’s actions and prioritised good relations with his administration. Nonetheless, his authoritarian drift could eventually lead to more serious discussion of sanctions, especially if accompanied by egregious rights violations.
Tunis has repaid over USD1bn in loans in recent months, but still has a USD5bn gap to plug to fund its budget deficit and further debt repayments this year.
Mechichi’s government had been in talks with the IMF to secure a three-year support package worth USD4bn to avert a balance of payments crisis. These talks have come to a standstill following the dismissal of the prime minister and finance minister in July. The country thus remains vulnerable to a potential increase in world interest rates.
The IMF had demanded broad political support for a reform programme as a precondition for a new support package. In the current circumstances, Tunis will struggle to demonstrate that it can meet this criterion. Moreover, there are question marks over whether an interim cabinet would have the authority to sign a major loan agreement, raising the default risk.
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