Monthly Risk Spotlight: August 2022

Domestic Spending and Global Factors Force Economic Crisis on Argentina
On 28 July it was announced that Argentina was about to swear in its third Minister of Economy in less than a month. The announcement comes after the original minister resigned citing a lack of political support and the second was removed just three weeks into the job. The shakeup takes place as Argentina faces high and rising inflation and a looming insolvency crisis. If allowed to go unchecked, the situation promises to either radically de-value the Argentine peso, raising prices and slashing citizen savings, or force a foreign debt default with long-reaching consequences for Argentine participation in the global economy. Swift and radical changes in how the Argentine economy operates today requires an avoidance of each of these situations. Decreases in public spending and subsidies have historically risked political destruction and mass unrest, but if the current path does not diverge these things are absolutely guaranteed. This is where President Alberto Fernández and the ruling Frente de Todos coalition hope the new Minister of Economy Sergio Massa can make a difference.

Argentina is no stranger to economic crises, especially those related to inflation, but the current situation is looking particularly dire. Argentina has been facing acute rising inflation for over a year now. This has been driven by a combination of high government spending (and aggressive printing of currency to finance it) and global supply/demand fluctuations which have seen high global food prices (Argentine export) but even higher global energy prices (Argentine import). The value of consumer goods has risen 64% in the past year with the Argentine peso trading on the global market at 133 to the US dollar. This exchange rate is the official rate, but in the communities of Argentina, the “black market” rate (unofficial currency trades, often to avoid government currency controls) is much worse, is reported to be as high as 293 pesos to the US dollar. The significant gap between the official and black market exchange rate is due to ongoing efforts by the Argentine central bank which currently is spending an average of 60 million USD per day in foreign currency to buy Argentine pesos and prevent the currency from devaluing further. Should the central government cease such efforts the official exchange rate would devalue and track down to the black-market exchange rate. This would cause a spike in inflation, and an estimated 30% increase in consumer goods. Impacts would be particularly acute for goods imported to Argentina like fuel.

Argentina does not have a limitless reserve of foreign currency and thus cannot sustain this purchasing of Argentine pesos indefinitely. At the end of July, Argentina reported 38.2 billion USD in foreign currency reserves, but most estimates have Argentina’s net reserves (total foreign currency reserve minus money owed) at just over 2 billion USD. Argentina’s total foreign currency reserves got as low as 37 billion USD in March 2022 prior to a renegotiation of IMF loan payments, but with no new infusions from the IMF or elsewhere apparent, it’s becoming an open question as to how long the government can keep this up.

This is the situation the new Minister of Economy Sergio Massa must solve. Option one, which may appear obvious, is to cut public spending and cease the printing of money. This is a solution pushed by the former Minister of Economy Martín Guzmán, who resigned because of political leadership (namely Vice President and Peronist Cristina Fernández de Kirchner who is a former President and has fought vehemently to prevent cuts to subsidies). Option two is to keep buying pesos until the foreign currency net reserve runs out after which the peso would quickly devalue to match the black market exchange rate. This would result in a rapid spike in consumer prices, particularly for imported goods like fuel, and additionally slash the value of any savings held in pesos. Option three is to keep buying pesos irrespective of net reserve and instead default on foreign debt. This would severely impact Argentina’s ability to get foreign loans in the future and would still make critical imports like fuel exceedingly more expensive. While Option one faces significant hurdles to endorsement by the political leadership and would likely be unpopular with voters, Options two and three represent true economic crises and would likely lead to mass unrest and the end of the current political leadership.

New Minister of Economy Sergio Massa has taken several steps to address the situation. First, and critically, he has promised to stop printing money, pause treasury extension transfers to pay for government programs, freeze government hiring, and has also promised to rework anti-poverty/fuel subsidies. The promise to cut subsidies is critical and has reportedly received at least temporary support from all political factions. This includes Vice President Cristina Fernández de Kirchner, a significant divergence from the situation in late June. First moves to cut public spending were observable in the firing of the energy secretary and reports energy subsidies would be immediate targets for cutbacks. Additionally, Massa has emphasized plans to continue paying foreign debt payments. Whether the government will continue to spend aggressively to buoy the peso remains (as of writing) unclear, but as long as net reserves remain positive, continuation of the strategy is both possible and probable.

While it does not guarantee avoidance of a significant peso devaluation or foreign debt default, measures put in place so far by Massa are a step towards closing Argentina’s public budget deficit and moderating inflation. Variables that should indicate an improved chance of avoiding a potential Option two or three include: a stabilized/improved black market exchange rate; decreased global energy prices; execution of public spending cuts and continued support from political leadership; and no coordinated and sustained protest movement against the subsidy cuts and the already elevated cost of living.

Should any of these variables be observed moving in their opposite direction, it could quickly spell disaster for the Argentine economy. Avoidance of major protests is of particular importance. Given the current conditions, undeniably already extremely difficult for the Argentine people, sporadic protests have and are likely to continue occurring. On  9 July there were  large protests in Buenos Aires and other cities about the cost of living increases and there have been brief and intermittent roadblocks of federal roads. The key is that so far, these protests and related disruptions have not been coordinated and sustained. Should sustained protests across multiple urban areas take place, the inevitable disruptions to general production may just push the already highly vulnerable Argentine economy towards full crisis.

Tunisia Approves New Constitution, Raising Concerns for the Future
On 25 July, Tunisia voted on a new Constitution—94.6% of Tunisians voted yes with an overall voting turnout of 30.4%. It was widely expected that the referendum would have a low turnout after months of opposition groups encouraging a boycott of the vote. The new constitution will provide President Kais Saied additional powers, raising concern that enacting the new constitution is the end of Tunisia’s democratic development that began during the Arab Spring protests in 2011. While the constitution preserves many of the clauses from the Constitution in 2014 regarding rights and liberties, it significantly reduces Parliament’s capability to regulate Presidential powers. President Saied will have full power to elect the Prime Minister, cabinet members, and judges. Additionally, President Saied can declare a state of emergency without any time limits or additional government oversight. Nor is there anywhere in the constitution that discusses parliament’s ability to remove a president from power.

President Saied declared a state of emergency on July 25, 2021, and simultaneously fired the prime minister, froze the work of parliament for thirty days, and took full control over the government. He justified his actions through Article 80 of the 2014 constitution which allows the President to take any actions necessary if the country is facing imminent danger. However, President Saied never discussed the state of emergency with the head of government or Parliament. Since Saied’s implementation of the state of emergency and firing of the Prime Minister, he replaced the cabinet members whose sole role is to only assist Saied. Additionally, Saied continued to suspend parliament until the vote that took place on July 25, which removed all legislative powers, leaving Saied to rule in all areas until the vote.

Over the past year, Tunisia has seen high inflation that is crippling Tunisian families, high unemployment levels, and a continuation of political corruption which led many Tunisians to overlook President Saied’s unconstitutional actions. Many hoped that Saied would get COVID-19 under control and fix the high inflation and unemployment situation. However, a year later, Saied lost much of his support after ruling by decree for a year. Additionally, concerns about Tunisia’s democratic stability are on the rise as President Saied further consolidates his one-man rule.

Overall, Tunisia has seen a wide political divide, economic crisis, and a struggle to manage COVID-19 over the past year. Many Tunisians are more concerned with the economic challenges they are facing daily, while there is still wide opposition to the new constitution. This could result in a larger political divide, creating more political and economic instability throughout the country.

What Zawahiri’s Death Uncovered
The United States killed Ayman al-Zawahiri, the leader of al-Qaeda, in a drone attack in Afghanistan on 31 July. Zawahiri and Osama Bin Laden plotted the attacks on 11 September together, and was one of the US’ most wanted terrorists. Zawahiri, who had taken over al-Qaeda in 2011 after the death of Bin Laden, remained a visible symbol for the group.

The al-Qaeda leader was sheltering in downtown Kabul with his family and was killed during a precision tailored airstrike, approved by President Joe Biden after months of planning. According to officials, Zawahiri was on the balcony of the safehouse when the drone fired two missiles at him. Reports state that although his family members were present, no civilians were killed in the attack.

As the United States’ Government celebrates the latest strike against Bin Laden’s successor, accusations arise from both countries, accusing the other of violating previous agreements. The Taliban has condemned the drone strike by the US, calling it a clear violation of the Doha Agreement, a 2020 pact signed by the US and Taliban that facilitated the withdrawal of international troops from Afghanistan. The attack was carried out in a residential area of Kabul where many Taliban leaders live and is the first known US strike inside Afghanistan since US forces left the country in August 2021.

Antony Blinken, US Secretary of State also accused the Taliban of violating the Doha Agreement, by hosting and sheltering Zawahiri. It is believed that senior Taliban figures were aware that he was in the area and even took steps after the strike to conceal evidence of his presence by restricting access to the safehouse and relocating members of his family.

The strike highlights what many experts have already suspected, the Taliban has allowed terrorist groups to exist freely within the country despite their pledge to the US to keep Afghan territory from becoming a haven for terrorists. Although the Taliban claim to be adhering to the Doha agreement, and now allowing Afghanistan to become a base for attacks on other countries, Pakistani officials stated that since the Taliban seized power, cross-border attacks launched by the Pakistani Taliban from Afghanistan have more than doubled. Despite the Taliban’s unwillingness to abide by their commitments, Blinken states that the United States will continue to support the Afghan people and advocate for the protection of their human rights.

A Look at Boko Haram and Islamic State West Africa Province (ISWAP) in Nigeria
The existence of Islamic militancy in Nigeria goes back to the 1990’s and it continues to pose significant threats to regional stability. Militants have expanded and established their positions throughout northern Nigeria, often moving unrestricted through neighboring countries Cameroon, Chad, and Niger.

Boko Haram is an organization based in Northeastern Nigeria and was formed in the town of Maiduguri. The organization is officially known as Jama’atu Ahlis Sunna Lidda’awati Wal-Jihad which means “People Committed to the Propagation of the Prophet’s Teaching and Jihad” and its goal is to rid Nigeria of Western influence and secularization. Maiduguri locals nicknamed the group Boko Haram after first experiencing the terror that they inflicted. The word “Boko” is a Hausa word meaning “western education” and “haram” is an Arabic word that means “sin” or “forbidden.” In 2013, the organization morphed from one with a mainly Nigerian agenda to one with an international jihadist agenda after announcing it had taken foreign hostages for ransom. Up until then, the organization had never said it had taken hostages. The organization drew significant international attention in 2014 after kidnapping over two hundred schoolgirls in the Borno state. Since its founding, Boko Haram has conducted terrorist attacks targeting local police, military, and civilians. Methods often include armed assaults and suicide attacks.

In 2015, Boko Haram leader Abubakar Shekau pledged allegiance to the Islamic State of Iraq and Syria (ISIS) and changed the organization’s name to Islamic State West Africa Province (ISWAP). ISIS spokesperson Abou Mohamed al Adnani accepted the pledge and released an audio message directing individuals who could not enter Iraq or Syria to travel to West Africa. At the same time, the United States boosted its military assistance to Nigeria while sending three hundred troops to the region. In 2016, ISIS leadership appointed Abu Musab al-Barnawi as the de factor leader of ISWAP. Shekau refused to accept the appointment which resulted in infighting and ultimately split the group into two factions. Shekau’s faction is now Boko Haram and al-Barnawi’s faction is now ISWAP. Both factions have similar tactics and goals. Like Boko Haram, ISWAP tends to target local police, military, and civilians. Since its formation, ISWAP has conducted numerous terrorist attacks in Nigeria.

The stability of the country is important to regional security and foreign economic interests as Nigeria is Africa’s largest oil producer. In 2014, the Multinational Joint Task Force of the Lake Chad Basin Commission (MNJTF) was created to fight militants in the countries in Lake Chad Basin including Nigeria, Cameroon, Niger, and Chad. The MNJTF has approximately 11,000 troops and aid workers. Continual regional cooperation is essential to combat Boko Haram, ISWAP, and other militant groups. In addition to the MNJTF, countries including Burkina Faso, Mali, Niger, Chad, and Mauritania set up a regional force of soldiers to fight terrorism along the border regions.

Boko Haram and ISWAP take advantage of the widespread poverty in the region and facilitate recruitment by offering employment, basic services, and law enforcement in the area. Both groups have aligned with local communal conflicts and their leaders in  efforts to facilitate recruitment. The recruitment and radicalization process for the next generation of jihadists is ongoing and the cycle continues to highlight the government’s inability to contain it.

The Dissolve of Draghi’s Government
Mario Draghi submitted his resignation as Prime Minister of Italy on 14 July. Draghi made this announcement after the elimination of a proposed cost-of-living package, alongside rumors of anti-establishment populists within the government. President Sergio Mattarella rejected Draghi’s resignation at first but after pressure from several opposing parties, he later accepted it. On July 22, Draghi officially resigned and new elections were called for September 25. Campaigning began immediately after the election date was set. At the request of President Mattarella, Draghi will remain as temporary Prime Minister until the new coalition forms after the elections.

Draghi, former president of the European Central Bank, was widely viewed as having made a positive impact on the Italian economy despite numerous political and global economic roadblocks. Many of those roadblocks remain, such as transportation strikes, and COVID-19 impacts on tourism. With Draghi’s departing government there is increased economic uncertainty for the continuation of a positive economic trajectory, especially because the call for new elections is likely to disrupt the adoption of the 2023 budget. The collapse of a government is expected to lead to an economic downturn, whether slight or drastic.

Expected energy shortages, an ongoing refugee crisis from the mass exodus of Ukrainians, and a major increase in regional security have thrust the European Union (EU) into intense diplomatic talks. The EU (which includes Italy) has been trying to remain a united front on all decisions. Draghi’s coalition was supportive of this cooperation within the European Union, but the next government may not be.

The current frontrunner in the September elections is Giorgia Meloni, with the Brothers of Italy, and has already expressed frustration with the EU for interfering with the sovereignty of the people. Meloni campaigns for the securing of Italy’s borders against mass immigration, defending Europe’s Christian roots, and battling the L lobby. Meloni is running with the leader of the far-right League, Matteo Salvini, and the head of the conservative Forza Italia, Silvio Berlusconi. Specifically, regarding the Russian invasion of Ukraine, Meloni originally opposed sanctions on Russia for invading Ukraine. Berlusconi is known to have diplomatic relations with Russian President Vladimir Putin and Salvini has voiced opposition to sending weapons to Kyiv, as well as recently gaining negative public opinion for having a trip to Russia paid for by the Russian government.

The resignation of Draghi and the potential establishment of a far-right government could mark the beginning of a sharp shift in Italian policy, specifically the European Union’s coordinated response to Russia, employing the question; where will Italy’s loyalty lie? Though the dissolution of Draghi’s government did not provoke any major unrest, the risk lies with long-term economic and political turmoil.



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