Risk drivers and outlook

After the fall of the Ben Ali regime in early 2011, Tunisia’s political transition has advanced steadily, despite at times serious turbulences. At the start of 2014, the country succeeded in calming down the spiralling political tensions that were seen in 2013 by agreeing on a new constitution and on a new technocratic government. This government will govern the country until the parliamentary and presidential elections planned for later this year.

The revolution and the subsequent political transition have impacted political risk and are creating significant challenges for the country. But by and large, political risk classifications have remained rather resilient, thanks to solid macroeconomic buffers prior to the revolution. While increasing current account deficits and weak foreign direct investment in the country have impacted both liquidity and external debt over the past few years, these have remained at manageable levels. Moreover, Tunisia concluded a Stand-By Arrangement with the IMF in June last year and can count on multilateral and bilateral financial support, which helps to overcome the most pressing financing needs.

Systemic commercial risk – which gives an indication of the business environment Tunisian companies are working in – is being affected by uncertainty, below potential growth and a slowdown of credit growth (particularly to struggling economic sectors such as tourism, communications and transportation). Over the past few years, Credendo Group’s payment experience with Tunisian debtors has been very volatile and payment delays increased significantly during the second half of last year. In recent months however, payment experience has greatly improved.

Improved political stability in 2014 should restore confidence in the country and support the financial and economic situation, but risks have certainly not disappeared. After all, both the current and the next (elected) government will face tough challenges, like the reduction of fiscal and external deficits, boosting employment and inclusive growth and attacking the security situation.

Facts & figures

Pros

  • Diversified economy
  • Location: close to the European market
  • Despite divisions, the political class has shown ability to make compromise in order to continue democratic transition

Cons

  • Financial economic situation impacted by the political transition
  • Implementing reforms is challenging in a period of high unemployment and inequalities
  • Divisions between secular and Islamist political parties may still hamper consensus
  • Escalation of security problems could hinder recovery of tourist and investor confidence

Main export products

  • Machinery and transport equipment (18% of current account receipts), clothing (12.5%), net transfers (8.5%), tourism (8%), chemicals and related products (7.5%)

Income group

  • Upper middle income

Per capita Income

  • USD 4,150

Population

  • 10.8 M

Description of electoral system

  • National Constituent Assembly was elected in October 2011, and approved a new constitution in January 2014
  • First presidential and parliamentary elections under the new constitution expected end 2014

Head of government

  • Prime Minister Mehdi Jomaa

Head of State

  • President Moncef Marzouki

Country risk assessment

Political transition advances, despite turbulences

Tunisia is currently going through a historic political transition after the fall of former President Ben Ali’s regime in January 2011. Over the past few years, this transition has advanced steadily, despite serious turbulences. Particularly in the course of 2013, the political situation turned increasingly difficult, as the coalition government that had been elected in October 2011 faced increasing challenges. These included a deteriorating security situation (including growing Salafist radicalisation and the assassination of two members of the opposition, in February and July), frustration among the population over the lack of significant economic improvement and increasing polarisation between secularists and Islamists. The events forced two prime ministers to resign within 12 months. However, despite growing difficulties last year, Tunisia’s main political forces, who were under pressure from the country’s powerful UGTT trade union, managed to break the political deadlock by agreeing on a long awaited constitution and appointing a new technocratic government last January.

On 27 January, after more than two years of debate, Tunisia’s National Constituent Assembly (NCA) approved the new constitution by 90%, indicating strong support. This constitution is seen as one of the most progressive in the MENA region. Moreover, important concessions by the NCA’s largest party (the moderate Islamist Ennahda) on the country’s new power structure indicate the political scene’s ability to find consensus. That being said, it remains to be seen how effective governing will be under the new semi-presidential system, in which both the president and the prime minister will share significant powers. After the adoption of a new electoral bill last month, it is now expected that parliamentary and presidential elections will be held in October and November this year. Under the new electoral law former members of Ben Ali’s political party are now, somewhat controversially, again allowed to participate in the elections, which is expected to benefit the secular conservative Nidaa Tounes party. Nidaa Tounes and Ennahda both enjoy substantial support under the electorate, but neither of them are expected to win an overall majority. As a result, the next elected government is likely to be another coalition government, possibly between both parties.

Until the elections, the country is run by caretaker prime minister Mehdi Jomaa’s government. While the formation of this technocratic government should bring some stability to the country and reassure foreign investors and creditors, the challenges of this (and the next) government remain enormous. Even if a return to political stability could herald a recovery of Tunisia’s economy, financial and economic challenges have only grown over the past few years. Implementing reforms that address fiscal and external imbalances will therefore be difficult, as large parts of the population still see their high hopes of economic improvement after the fall of the Ben Ali regime largely unaddressed.

Growth to pick up, but remains below potential

Despite an economic recovery in 2012 after the 2011 recession, growth slowed again last year, to 2.6%. This is well below the 4.4% average annual growth Tunisia had seen in 2000-10. The supply side of the Tunisian economy suffered in particular from a poor harvest and disruptions in the mining sector. On the demand side, a fall in public investment and negative growth in the Euro Area – Tunisia’s most important export market – were the main sources of economic slack.

Tunisia_Graph1EN

Leaving behind the chaotic 2013, a modest acceleration of economic growth is expected this year, mainly driven by improved investor and tourist confidence, but depending on the evolution of security and political stability. However, it may take at least until 2016 before growth can recover to its long-term average and even if it does, questions remain about whether this will be sufficient to bring down unemployment and absorb new entrants to the job market in the coming years. Official unemployment is currently around 15%, a figure that even reaches more than 30% among the highly-educated. Taking into account that high unemployment and inequality levels were among the top grievances voiced by the anti-Ben Ali protests early 2011, this is of particular concern for the country’s stability. Stronger – and more inclusive – growth is thus a priority to increase employment and reduce economic and social regional disparities. The private sector will have an important role to play. Therefore, implementing reforms that improve competitiveness and the business climate will be required. Taking into account that many Tunisian youths have obtained higher degrees in recent years, it will also be important to further tackle the skills mismatch on the labour market, where low value-added and labour-intensive industries continue to play an important role.
Tunisia_Graph2EN

Meanwhile, inflation, another possible source of public discontent, remained high in 2013, at 6% (compared to an annual average of 3.3% in 2000-10) and food prices increased even more. By last April, inflation had come down somewhat, to 5.1% (y-o-y), as a result of a raise in policy rates by the Central Bank and more moderate food price inflation.

Increased twin deficits to come down

The challenging political and economic environment over the past few years resulted in growing external and fiscal imbalances. As the country’s imports of goods and services grew stronger than its exports, the current account deficit has been steadily increasing, from 5% of GDP in 2010 to more than 8% last year. The tourist sector’s revenues last year remained 20% below 2010 levels and almost 30% below the peak year 2008. Meanwhile, Tunisia has been facing weak demand from Europe, its largest exports market. Imports increased particularly due to increasing food and energy imports. Net energy imports have almost quintupled between 2010 and 2013, as energy consumption has increased while oil and gas production fell and domestic refinery capacity is insufficient.

The current account is expected to improve this year, as somewhat stronger economic activity in the Euro Area (particularly in important export markets France and Italy) should increase demand for Tunisian exports. This, together with more domestic political stability, should also benefit tourism receipts and remittances from Tunisians working abroad. The current account deficit could fall further in the coming years, but will remain much higher than the average deficit of around 3% of GDP in 2000-10.

Tunisia_Graph3EN

Public finances have also been affected over the past years. Last year, public expenditure was 50% higher than  in 2010, at around 30% of GDP. Most spending increases are related to higher public salaries (+40% since 2010) and to transfers and subsidies (mostly for food and energy), which more than doubled. The increases were a reaction to social economic demands raised during the revolution. Though tax revenues have increased as well, this has not been sufficient to keep the deficit under control. As a result, the public deficit has grown from 0.5% of GDP in 2010 to 6% last year. In order to halt this deterioration, wage freezes and reforms of energy subsidies have been announced for this year. These include raising electricity and fuel prices while targeting subsidies to the poor. Nevertheless, the deficit is expected to rise further this year and the public debt ratio is expected to reach 50% of GDP at the end of this year, up from 40% in 2010.

The further rise of the public deficit this year is mainly due to the recapitalisation of public banks, which is budgeted to cost 1.2% of GDP, though this may not suffice, as the IMF estimates that an amount equal to 2.6% of GDP would be required. Tunisia’s banking sector has indeed seen its vulnerabilities increase, as the economic downturn impacted the quality of the banks’ assets portfolio. The sector saw non-performing loans go up, downward pressure on profitability and declining capital adequacy ratios, pushing the government to recapitalise a number of banks and take action to improve governance in public banks. Over the past few years, the growth of credit to the economy slowed down significantly, particularly to struggling economic sectors such as tourism, communications and transportation.

International support helps to keep external debt manageable

Due to the increasing current account deficits and to weak foreign direct investment in the country – particularly in 2011 and 2013 – Tunisia’s liquidity and financial situation has been on a downward trend.

Foreign exchange reserves are rather tight and covered approximately 3 months of imports last March, down from an import cover of 4.2 months before the revolution. While this level remains acceptable, liquidity has been rather volatile over the past three years. Without USD 500 million in deposits from the Qatar National Bank – which is partly owned by the Qatari sovereign wealth fund QIA – at the Tunisian central bank they would have fallen below the common 3 months import cover threshold, leaving Tunisia more vulnerable to external shocks.

External debt ratios have been on the rise, from 50% of GDP in 2010 to an expected 58% of GDP (130% of current account receipts) at the end of this year, which is still a manageable level. What’s more, Tunisia concluded a Stand-By Arrangement with the IMF in June last year and has access to significant financial assistance from bilateral and multilateral partners. More than half of the country’s external debt is due to official creditors. As a result, the country benefits from low interest rates, which keeps debt servicing manageable as well, at below 10% of current account receipts.

Tunisia_Graph4EN

Analyst: The Risk Management Team, s.vanderlinden@credendogroup.com