Tanzania: Unpredictable policymaking increases contractual risks

05 July 2018

Tax and regulatory changes introduced by President John Magufuli have undermined investor confidence in Tanzania. While Magufuli is likely to be broadly supportive of projects in the renewable energy sector, his unpredictable policymaking has increased the risk of contract alteration.

Security Environment

Magufuli’s increasingly authoritarian rule may provoke anti-government protests in major cities in the one-year outlook. The risk of unrest is highest in the semiautonomous region of Zanzibar, which has long-standing grievances against the Tanzanian government. Security forces are likely to adopt a hard-line response to dissent, elevating the risk of property damage, death and/or injury. In February 2018, a bystander was killed during clashes between opposition protestors and police in Dar es Salaam. However, assets in the renewable energy sector are unlikely to be targeted by anti-government protesters.

Al-Shabaab militants returning from Somalia pose a terrorism risk in Tanzania, and expatriates in eastern and south-eastern coastal regions of Tanzania including Pwani, Zanzibar and Mtwara may be targeted by Islamist attacks. However, the risk facing the energy sector is relatively low as attacks are most likely to be carried out with bladed weapons or grenades rather than more sophisticated weaponry.

Trading Environment

Tanzania’s economy is growing rapidly due to high levels of infrastructure spending and its expanding retail sector. Real GDP growth has exceeded 5% annually since 2007 and is forecasted at 6.8% in 2018. However, since assuming office in November 2015, President John Magufuli has undermined investor confidence in Tanzania. While he has instigated several high-profile anti-corruption initiatives, including the removal of ghost workers from the civil service payroll, he has also implemented a number of punitive tax and regulatory changes. This is likely to weigh on investment flows in the medium-term, which will be only partially offset by rising levels of domestic demand.

Tanzania is exposed to exchange rate risks, as a high proportion of its debt is foreign-currency denominated. Foreign reserves should be sufficient, at USD 5.15 billion in 2017, and are forecasted to rise to USD 5.76 billion by 2019. However, tax revenue continues to underperform and the fiscal deficit is set to incr ease due to import dependency and high levels of expenditure. Tanzania’s government debt is forecasted to gradually rise from 40.8% in 2017 to 43% in 2020, before declining in the long-term once major infrastructure projects are completed.

Foreign firms operating in Tanzania face relatively few restrictions on capital transfers. However, full capital account liberalisation – which was due to have been completed in December 2017 – has not been achieved. Tighter currency regulations remain a possibility in the one year outlook, as Magufuli asked the central bank to implement more stringent foreign exchange controls in December 2017.

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Investment Environment

There are opportunities in the renewables sector as Tanzania seeks to resolve its intermittent power shortages amid rising demand for electricity. In order to reduce Tanzania’s reliance on drought-susceptible hydropower, demand for solar and wind projects is likely to rise. Non-hydropower renewables are forecasted to account for 2.8% of electricity generation in 2021, up from 2.4% in 2018.

However, the deterioration in the business environment under President Magufuli poses risks for international companies. Magufuli’s attempts to appeal to voters and increase the tax base have brought him into conflict with foreign firms, particularly in the mining sector. In July 2017, Magufuli issued Acacia Mining with a tax bill of USD 190 billion. The dispute remains unresolved and Acacia is reportedly considering selling its stake in its Tanzanian operations.

Tanzania also passed laws enabling the government to renegotiate contracts with “unconscionable terms” in the mining and energy sectors in July 2017. While Tanzania has supported the diversification of its energy mix, policymaking under Magufuli has become more unpredictable, posing risks for the renewable energy sector. Non-payment also poses a risk. US-based Symbion Power is pursuing a claim for USD 561 million against Tanzania’s state electricity utility, which reportedly failed to honour a 15-year Power Purchase Agreement.

Tanzania: Unpredictable policymaking increases contractual risks
* Appetite is limited among some insurers due to large claims and a lack of cooperation from the Tanzanian Ministry of Finance in pursuing recoveries
†† Pricing will vary depending on sector. Underwriters would prefer to avoid mining projects, which are exposed to a higher risk of expropriation

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

Risk Outlook July 2018

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