Tunisia’s Jasmine Fragrance Fumes

As Egypt completed presidential elections and moved to secure billions of dollars in bilateral and multilateral lines to address its post-revolution economic emergency extending MSCI outperformance, Tunisian shares were flat through August in the run-up to polls early next year following interim government disputes over policy direction to tackle “urgent reform,” in the IMF’s view. After 2011’s recession Q1 statistics showed 5 percent GDP growth on better tourism and FDI on inflation above that figure on higher food costs. The external position, after a 7 percent of GDP current account deficit, was fragile as reserves were $6.5 billion or 3 months’ imports, and on deficit spending public debt is at 45 percent of output, raising flags for a May sovereign ratings downgrade. The central bank head, who was a long-serving World Bank executive, quit his post under relentless demands for monetary easing to spur credit and employment which translated into benchmark rate and reserve requirement reductions and refinancing equal to 6 percent of GDP, while headline nonperforming loans held at almost 15 percent of the total under classification forbearance. The authority supplied massive liquidity and also mounted $700 million in exchange rate intervention though April for a minor depreciation against the euro. A benign scenario where $3 billion in outside budget support materializes and the European and Libyan situations stabilize could bring 2-3 percent growth this year, but bank solvency must still be addressed “adequately and rapidly,” according to the Fund’s Article IV report. With wage hikes and unadjusted energy subsidies the fiscal gap will exceed 7 percent of GDP, and the analysis urged tighter monetary policy and greater institutional independence and statistical reference in establishing targets. In the banking sector recapitalization of state-owned units has begun but measures must go further in unraveling the web of interest and credit controls accumulated over decades of the previous regime. Capital markets are paltry at only 2 percent of the economy with banks dominating stock exchange listings and pension fund investors and a bond yield curve absent. The limited financial depth constrains startup company potential for educated youth as former industry allocations went to low-skill manufacturing and services. Outside Tunis and other major cities access is even narrower foster regional income disparities with large rural poverty incidence.

Libya which just had its own landmark post-Gadhafi legislative elections in July won by the hodgepodge National Forces Alliance has reopened the oil taps and 25 percent growth this year will recover half 2011’s contraction as inflation also steadies at 10 percent and the dinar stays in the 1.25 to the dollar range. Restrictions on deposit and currency withdrawals will be lifted soon as the system there looks to an initial commercialization phase by global as opposed to Green Book standards.