Tunisia can overthrow old capital markets order

By Gary Kleiman

Over a decade after its Jasmine Revolution ousted a dictator and set the political and economic tone for the Arab Spring, Tunisia is back with omnipotent President Kais Saied. He has suspended parliament and judicial operation, and blamed slow growth on enemy business executives and foreign conspiracies. His abrupt manoeuvre pre-empting the constitution last year spurred editorial and foreign policy condemnation from the US and Europe, backing democratic and free-market change through bilateral development aid and consecutive International Monetary Fund loans. Financial market repercussions were overlooked since it is a small frontier equity index market that finished at the bottom with a 15% loss last year. Its sovereign bonds, previously guaranteed by the US Treasury before Saied’s move, are fractional weights or excluded in benchmarks, and trade at the 70-range distressed level.

The government under a figurehead prime minister is trying to wangle a reported $4bn Fund programme to cover $6bn in borrowing needs this year, and deal with a 5% budget deficit and a 90% debt-to-GDP ratio. The outsize public payroll compared with B- rated emerging market peers is again a core sticking point after repeated lapses, as the main labour union federation that participated in ruling coalitions and the executive are no longer in regular dialogue after the quasi-coup. President Saied has embarked on a year-long online consultation to redraft the constitution that so far has enlisted less than 5% of the population, and the process will drag on beyond the April target date for finalising terms. The cash squeeze is already serious with unpaid salaries in January, and Western shareholders will be reluctant to endorse a deal without a clear return to charter democracy. In the meantime, the banking and portfolio investment communities at home and abroad with European Bank for Reconstruction and Development (EBRD) technical assistance can fill the breach with overdue policy and practical initiatives that can recapture the post-Arab Spring early reform spirit and draw in Maghreb-North Africa neighbours with the model.

The president was a law professor before taking office, with scant admitted interest in and understanding of economic issues. Inflation is above the 6% central bank benchmark interest rate, and his first move after closing the legislature was to berate business executives for price gouging. He also called for bankers to lower borrowing costs as a magic recipe for stoking 2-3% growth, versus the previous era’s 5-7%. Tourism was the one-tenth of GDP mainstay before the pandemic, but regularly suffered from dry spells with terrorist episodes. State producer phosphate exports are currently 4mn tonnes with the intent to double output by mid-decade, but operations are among the most strike prone. Remittances were the savings grace in 2021 at a record $3bn but for the past five years came at a steep human cost. With youth unemployment at 30%, tens of thousands attempt to cross the Mediterranean to Europe as migrants in rickety boats annually. According to a January survey 60% of the population wish to relocate abroad for work and better living standards.

The executive takeover removing the Islamic party Ennahda from power immediately won kudos from the Gulf monarchies, and deep pockets in Saudi Arabia and the UAE were initially framed as IMF replacements. However, a $500mn Saudi contribution will only be released once the Fund restructuring template is in place, and the only ally that has come forward is next door Algeria with a $300mn loan. State banks and the central bank will once more be forced to buy domestic debt to close the $3bn fiscal deficit, even though they are respectively stuffed with paper and promised to phase out the practice. No major lender has been offered for privatisation on the stock exchange due to double-digit bad loan ratios and cleanup vows unheeded for decades. US officials were approached in the Arab Spring aftermath to create a twinning programme with global banks that could later evolve as anchor strategic investors as was popular in Eastern Europe. They went instead with the small-scale longtime private equity startup fund approach to create new institutions from scratch. It encountered continued delays and difficulties and never managed a breakthrough public offering.

The technocrat central bank head has warned that in the absence of a bottom-line debt solution, the country is on track for a mass default-poverty Lebanon scenario with government-bank financial engineering collapses.  Loss-making state-owned enterprises are perennial drags and the launch of scalable local corporate bonds could join equity swaps as a viable near-term securities market response. They could widen the asset class menu beyond a handful of illiquid stocks and sovereign bonds for foreign investors, who will also push for updating the antiquated 45-year-old foreign exchange law and modifying the currency peg in line with the emerging market universe outside the Middle East. The channel would open new business lines for banks and allow family-owned smaller firms to tap large capital pools. Tunisia in a capital markets sense can return to the regional vanguard to find a lasting escape valve outside its vicious political-economic cycle. At the Arab Spring onset visions of connected exchanges and floating currencies with Egypt and Morocco also becoming EBRD members were widespread, and the dark passage for the country’s solvency and institutions should not foreclose compelling real economy and index performance detours.

Originally Published 26 February 2022

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