Turmoil threatens to blow Tunisia off track

By:
Matthew Turner
Published on:

The assassination of an opposition politician and deepening deadlock risks destabilising Tunisia’s economic reforms, and prompts a downgrade from S&P

Rising political tensions following the assassination of secular opposition politician Chokri Belaid have thrown the country’s transition towards a stable democracy and functioning economy into turmoil, analysts say.

A proposal by Prime Minister Hamadi Jebali to dissolve his cabinet and appoint a temporary administration of non-partisan technocrats was thrown out by his own party. And talks between the country’s main political parties on the formation of a new government failed on Tuesday.

Adding fuel to the fire, deepening divisions between liberals and Islamists are undermining the prospect of political compromise and creating a power vacuum for radical elements to capitalise on.

Things are so bad, increasing unrest is expected and there is even the possibility of a military coup, according to a special report by intelligence firm Exclusive Analysis.

“Likely failure to agree a new cabinet will increase unrest and trigger Army imposition of a technocrat government and fresh elections,” the report said.

Marwan Barakat, chief economist at Bank Audi and one of ECR’s expert contributors, said the political turmoil would negatively affect all aspects of an economic recovery. “This will lead to a strain on economic growth until the crisis is resolved,” he says.

The events have negatively affected the country’s credit outlook with Standard and Poor’s (S&P) downgrading Tunisia to BB- from BB today, with a negative outlook. The rating agency cited higher political risks as the main reason for the decision.

“We believe that risks to Tunisia's transition to democracy have increased markedly in recent weeks, and particularly since the assassination of opposition leader Chokri Belaid in early February,” S&P said. “We think the prime minister's recent proposal to dissolve the transitional government has highlighted deep divisions within the coalition, which have hampered its ability to take proactive corrective measures against a weakening economic and financial backdrop.”

Tunisia’s risk profile has been unscathed since the eruption of political violence this month: The country’s overall ECR score improved by 0.8 points, to 45.9 in 2012. And with a position of 73 in the ECR global rankings, the sovereign remains the eight safest economy in the MENA region; ahead of Egypt and Morocco.

However, the escalating political crisis presents a real challenge to the government’s financial strength. The fiscal deficit increased to 3.9% from 1.1% in 2011, while Moody’s rating agency expects the fiscal deficit to almost double to 7.5% of GDP in 2012. Greater political uncertainty will make it difficult for the country to tap into its foreign currency reserves, which only cover three months of external payments at the current rate, according to Fitch.

It remains hard to predict to what extent political violence will impact on investor sentiment. But political deadlock and rising tensions between liberals anxious to defend hard-won liberties and Islamists threaten economic and political progress.

This article was originally published by Euromoney Country Risk. To find out more: register for a free trial at Euromoney Country Risk.