Tunisia’s Smothered Spring Scent
Approaching the seventh anniversary of its Arab Spring leading dictator ouster and restoration of competitive democracy as a standout regional example, Tunisia with a rare initial public offering topped MSCI indices with a near 40% gain through the third quarter despite splintering of the longtime ruling coalition and International Monetary Fund criticism of fiscal, monetary and investment policies. The Fund agreed to release another $250 million under its latest program to bring the total disbursed to half the $3 billion committed in 2016, and the World Bank chipped in another $500 million on its own. The infusion should allow issuance of a delayed sovereign bond, which have featured partial guarantees from the US and Japan development agencies. Washington also launched a dedicated “enterprise fund” for the country, following an earlier post-communist transition model, with the aim of stimulating broader capital markets and private sector development. It may be absorbed or modified in the new development finance corporation Congress recently authorized with $60 billion in available lines, as proponents struggle to justify the track record to date and future prospects.
For the past five years the so-called veteran politician “two sheikhs” from the Islamic Ennahda and secular Nidaa Tounes parties headed a fractious unity government, before their pact dissolved in September over chronic economic policy discord and the unlikely rival popularity of appointed Prime Minister Yousseff Chahed, who holds a doctorate in agribusiness. He and allies moved to form their own “National Coalition” grouping ahead of presidential and parliamentary elections next year, as the two previous parties in charge field their own candidates vying for support from the powerful labor union federation. It opposes Fund nostrums from public finance reform to state enterprise selloff, with large scale strikes scheduled for October and November. They follow protests earlier this year in poorer regions over tax hikes, which were met with harsh security force response as tens of thousands of youth flee for Europe amid 25% unemployment.
Prime Minister Chabed promised this year would be the “last difficult one,” with gross domestic product growth just 2.5% and inflation triple that level in August. The 2019 draft budget foregoes additional individual taxes and halves them for tech, textiles, and drug companies, while raising charges on luxury items and bank profits. The Fund urges fiscal discipline with the deficit at 5% of GDP, and monetary tightening with the benchmark rate negative in real terms. Officials have moved slowly to curb energy subsidies and civil service spending, and the central bank continues to refinance commercial credit expanding at a double-digit pace. Tourism rebounded with a $1 billion 25% revenue jump through September, but it is only two-thirds the 2014 sum before the Tunis Bardo Museum and Sousse beach resort terror attacks. Public debt is now 70% of GDP, and next year servicing will come to over $3 billion, almost double the amount in 2016 with the dinar’s 20% depreciation against the dollar the past two years, according to Finance Minister Ridha Chalghoum. Occasional intervention stemmed the tide, but international reserves are under four months imports against the backdrop of an almost 10% of GDP current account gap.
Despite a 20% export rise through August driven by agricultural, manufacturing and electrical shipments, the trade deficit hit a 60-year high at $4.5 billion with the currency trading at half the 2010 dollar level. Officials spurn Fund recommendations for more “flexibility” fearing outright collapse, as they imposed temporary import limits and introduced more competitive foreign currency auctions. Bad loans in the state-dominated banking system were close to 15% of the total in the first quarter, and new capital adequacy and collateral rules were recently finalized despite the inability to resolve failed institutions and pass anti-money laundering laws. Credit bureau and payment systems upgrades are pending and a Qatar-owned Islamic bank acquired a local counterpart. Corruption suspicions continue to plague these transactions as the Prime Minister and Anti-Corruption Agency declare “war” on the scourge, with the Energy Minister dismissed in August following an investigation. The tiny $10 billion Tunis bourse was admitted to the World Federation of Exchanges along with outperformance this year, but awaits breakthrough privatizations since a telecoms sale was cancelled with the Arab Spring outbreak as investors search for a next leg bounce.
