Tunisia’s Testing Turnaround Trickle
Tunisia joined other Middle East frontier markets Jordan, Lebanon and Morocco with flat to negative results on the Morgan Stanley Capital International Index through mid-year, as the composite gauge was up 8.5%. Despite billions of dollars in international community support since the Arab Spring eight years ago, it has not escaped lackluster 2-3% gross domestic product growth and now heads into another election cycle with political party unity also stalling. Tourism has recovered from a spate of bombings, but recent terrorist attacks on police posts renewed fears at the same time the over 90 year old president was rushed to hospital before his term ends in November. If incapacitated, the octogenarian parliamentary speaker would assume the position. Legislative polls are slated for October, with the Ennahda wing of the splintered ruling coalition pulling 15% in opinion surveys, and the prime minister’s new party only single digits. An outsider wealthy media executive is ahead in popularity, but may be disqualified since no candidate can use foreign funds. The election code also bars challenge to the basic tenets of the 2011 constitution enshrining secular principles and women’s rights, and strict Islamic candidates have complained.
The IMF in June released another $250 million slice of its latest 4-year $3 billion program, amid “high risks to socially-balanced economic stabilization.” It noted energy price hike backsliding after union and business protests last year, with the powerful workers’ federation a main political force. Its strikes stifled phosphate exports, as official unemployment is over 15% and an estimated 30-40% for youth. Inflation and the central bank policy rate are both around 7.5%, with credit growth also at that pace in the first quarter. The fiscal deficit is under 5% with public debt above 75% of GDP, as dinar depreciation swells the latter. The 11% current account gap in 2018 was the highest in decades as agricultural, electrical and textile exports slumped, leaving reserves under less than three months import cover. Medium-term growth could reach 4-5% with the external payments balance halved under an optimistic reform and donor aid scenario, but the immediate picture is grim. Europe slowdown will further dent foreign investment and remittances, as debt peaks at 100% of output at end-decade, the Fund predicts. It warned against civil servant salary hikes in election promises and further state enterprise borrowing, as value added tax is due to rise 5% inviting popular anger.
On monetary policy the central bank aims for positive rates after inflation, and has reduced commercial bank refinancing. Capital adequacy is sufficient, but the bad loan portion nears 15% and liquidity ratios are strained. Tightening and exchange rate weakness will continue, with the latter at risk of overshooting with more competitive interbank auctions. Small business funding remains constrained pending credit register and collateral changes, including implementation of a new secured transactions law promoted under a US Agency or International Development initiative. Future donor support is a key variable, especially from the Gulf as it tails off from the immediate Arab Spring aftermath, and sources reevaluate investment prospects, the Fund comments.
A Saudi Arabia Article IV consultation at the same time listed domestic priorities that have assumed urgency in the past decade of actual or threatened regional ruling regime overthrow. The IMF calculated mere 2% growth this year on double-digit unemployment, and worsening fiscal and current account balances. Deflation has set in and credit growth will be in single-digits, as banks grapple with deteriorating loan portfolios and capital markets are unable to fill the funding hole. The sovereign wealth Public Investment Fund has successfully borrowed tens of billions of dollars in high profile external debt operations, but the demonstration effect ended there amid longstanding official and corporate governance doubts. The so-called Vision 2030 has yet to take shape amid chronic internal labor and private sector deficiencies, according to the analysis.
The richest sovereign wealth fund and another Tunisia backer, Abu Dhabi’s ADIA, published its 2018 annual report in July estimating lower 5% yearly returns. Its Middle East/ Africa portfolio was 7% of the total, with developed equities outstripping by 10% emerging market ones as the largest exposure. Allocation responsibilities remain split between internal and external managers, who have begun to follow environmental, social and governance criteria. Tunisia’s anti-corruption efforts still lag as measured in the Fund checkup, testing investor eligibility and patience election reshuffling has yet to grasp.