Tunisia’s Establishment Tribute Tangle

Tunisian shares showed relief after the second round presidential contest was won by the secular coalition candidate who served in the waning days of the Ben Ali regime three years ago as his opponent first contested and then endorsed the 10 percent margin outcome. Government formation will likely entail an Islamic party alliance as the focus turns again to the “challenging” economic agenda after IMF program targets on bank restructuring and investment overhaul were missed according to the latest review.  With 30 percent youth unemployment GDP growth will finish 2014 at just 2.5 percent with inflation double that number. Fiscal and current account deficits are at 7 percent of GDP and could be aggravated by further social unrest and spillovers from the Libya and Eurozone crises. Lower oil prices should aid incrementally but the budget remains saddled with a subsidy range and costly civil service. Domestic bonds have absorbed the slack from official lending delays and 2015 borrowing envisions a return to external commercial markets without guarantees with the 50 percent of output debt level considered manageable. Interest rates have gone up but are negative in real terms as the central bank continues to inject liquidity to support state-owned banks with 15 percent average NPL ratios. It has reduced currency intervention with a crawling peg in place and net international reserves just above three months imports at $5 billion, with the Fund putting overvaluation at 5-10 percent and criticizing proposals to impose temporary trade controls. Regulatory forbearance for public banks will extend to mid-2015 as private shareholders object to management and recapitalization plans. A central asset disposal arm will handle bad loans one-third from the vital tourism industry as an overall resolution and deposit insurance scheme is finalized. The new parliament will debate a full package of business reforms on bankruptcy, competition, and labor treatment and the ailing pension system must also be tackled, the report advises. Next year Eurobond and sukuk issuance is put at $600 million, but security risks at home and next door in Libya loom large it warns.

In contrast Maghreb neighbor Morocco has stressed the lack of terror threats despite its longtime occupation of the Western Sahara in defiance of the UN. Officials have touted the relative safe haven status in regular trips to financial capitals, as Gulf aid continues to pour in with the comfort of a Fund precautionary line. The King still holds power with legislative consent and has managed faster pension and subsidy changes than Arab Spring peers. Banks have increased penetration to two-thirds the population as the benchmark rate was just cut to 2.5 percent, the same as the post-crisis GDP growth norm. Moroccan bonds have been firm with the global oil price plunge, as opposed to GCC conventional and sharia-compliant ones bringing losses. Bahrain and Oman paper has suffered in particular, and Saudi Arabia’s ratings outlook was downgraded despite the stock market upswing seen with foreign investor invitation.

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