Tunisia

Tightrope walk

C4

HIGH RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD47bn (World ranking 87, World Bank 2014)
Population 11mn (World ranking 78, World Bank 2014)
Form of state Republic
Head of government President Beji Caid Essebsi
Next elections Presidential and Legislative October-November 2019
  • Political transition has been relatively peaceful compared with Egypt, Libya, Syria and Yemen.
  • A consensual approach to the political transition gives hope for progress, again dissimilar to elsewhere in the region.
  • Although the economy has been affected adversely by recent political/social changes, previous good management provides a solid platform.
  • The IMF is supportive, a 24-month SBA facility expired in December 2015 but an EFF is currently being negotiated
  • Relatively diversified economy.
  • Political system is in transition with inherent uncertainties and risks of untried new systems and untested individuals in power.
  • A root cause of the Arab Spring was the lack of job prospects and Tunisia’s unemployment was estimated at 15% of the workforce before regime change and was much higher among the young. Social tensions remain high.
  • Poor perceptions of regional risk.
  • Textiles and clothing account for 16% of exports and global markets are very competitive. Moreover, over 80% of exports are destined for European markets and weak growth in those economies limits Tunisia’s export growth.

GDP growth has never recovered to past decade levels

After a W-shaped economic cycle (2011 Arab spring, 2015/16 growth slump), growth is progressively recovering, but the acceleration is still very gradual. Despite some improvement in agricultural production and exports, growth was still far below pre-crisis levels in 2017 (+1.9%, compared to +4%). In 2018, growth has accelerated to +2.5%, but should now stabilize to this levels. Two headwinds are acting as bottlenecks to the outlook. First, the high level of the current account deficit (-9% of GDP) is a risk. Second, the political situation is still quite risky, particularly when inflation is on the rise.

Industrial output is recovering only slowly from the political/social disturbances and because of continuing weakness in some key European markets, which are also sources of investment and tourists.  However, job prospects and general living standards have not improved significantly and periodic terrorist activity continue to undermine commercial activity.

Attractiveness for foreign investors was also impacted, as the World Bank Doing Business 2018 survey ranks Tunisia 88 out of 190 economies (77 in 2017) assessed in terms of the ease of doing business in a country, below Morocco, Kenya and Zambia but above Saudi Arabia, Uruguay or India. Relative positives include getting electricity, enforcing contracts and resolving insolvency. However, paying taxes is becoming increasingly more difficult. Starting a business is also quite hard, as well as getting credit, since the banking system ability to deliver credit deteriorated during the last years.

Debt increased to high levels

Debt is following an upward trend (Figure 5). Public debt has increased by +16.5pp over the last two years, to 71.3% of GDP. A new increase is expected in 2018 (74.5% of GDP). External debt followed the same path (+13pp from 2015 to 79% of GDP in 2017). TND depreciation is an additional upward risk: The external debt ratio should increase to 84.5% of GDP in 2018.

 

After years of sizeable current account deficits, the liquidity situation of Tunisia worsened, despite several IMF assistance programs. The country benefitted from a Stand-By Arrangement (SBA) from June 2013 to December 2015 (USD 1.4bn disbursed during the two following years) and has been granted with an Extended Fund Facility (EFF) from March 2016. The current program is not designed to cope with liquidity mismatches problems. The program aims at tackling fiscal imbalances in the medium-run (to end-2020) and the amount drawn is somewhat weaker (USD 0.9bn during the last two years). Moreover, Tunisia is not particularly benefitting from IMF support, since current disbursements are only matching repayment to the IMF of the SBA loans made 5 years ago.

 

Dinar depreciation fueled higher inflation

 

In our view, the deterioration of Tunisia’s liquidity was strong enough during the last two years to reach critical levels (2.3 months of imports currently). The structural balance of payment problem is putting the country’s foreign reserves under pressure, and stable financing is too scarce (FDI covers only 25% of the current account deficit). Moreover, foreign exchange interventions have a detrimental effect on the foreign currency liquidity level. These interventions try to contain Dinar depreciation in order to limit inflation pressures, since price evolutions and purchasing power issues were (and are) explosive for the social cohesion of the country. As a result, the Central Bank had to allow some exchange rate depreciation (-20% over the last two years).

 

The depreciation of the TND finally had an impact on inflation. It accelerated to +7.7% y/y in April 2018 and should decrease only gradually (+6% in 2019). Despite some monetary policy tightening, real rates are still very low given inflation acceleration. This muted reaction can be explained by the fact that domestic credit growth (+13.3% y/y in 2017Q4) was an important driver of the recent growth recovery. In case of any liquidity squeeze, the banking system may well be affected.

Public finance is an issue

Inflation is a sensitive issue in Tunisia, particularly during the Arab spring (increase of the bread price in 2011), along with other problems like structural youth unemployment. In 2018, inflation should reach +7.5% on average, the higher rate since 1991.

Last but not least, fiscal policy showed no adjustment during the last years. The fiscal deficit was stable (-6.1% of GDP) between 2016 and 2017. In a way, it was the impact of a higher share of interest expenditure (2.3% of GDP in 2017, +0.4pp during the last two years). Growing debt levels, as well as increasing interest rates should increase interest expenditure to 3% of GDP by end-2019.

Given high structural twin deficits, the country financing needs are also high. FDI inflows are covering also a small part of it (about 30% of the current account deficit) and the level of public and external debts would imply too high interest rates on the market. As a result, the country is increasingly financed through bilateral loans.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
France 32%
1
15% France
Italy 17%
2
15% Italy
Germany 11%
3
9% China
Algeria 5%
4
8% Germany
Spain 3%
5
4% Turkey

Trade structure by product

(% of total)

Exports Rank Imports
Electrical machinery, apparatus and appliances, n.e.s. 20%
1
10% Electrical machinery, apparatus and appliances, n.e.s.
Articles of apparel & clothing accessories 18%
2
8% Road vehicles
Petroleum, petroleum products and related materials 7%
3
8% Petroleum, petroleum products and related materials
Fixed vegetable oils and fats, crude, refined or fractionated 5%
4
7% Textile yarn and related products
Telecommunication and sound recording apparatus 4%
5
4% Other industrial machinery and parts

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Contact Stéphane Colliac

Senior Economist for France and Africa

stephane.colliac@eulerhermes.com 

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