Emerging

Another high-risk year

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Eco Emerging // 1 quarter 2021  
economic-research.bnpparibas.com  
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5
TUNISIA  
ANOTHER HIGH-RISK YEAR  
With real GDP contracting by 8.5% in 2020, Tunisia was one of the region’s most severely hit economies. The  
prospects of a recovery are highly uncertain. The economy is threatened by the resurgence of the pandemic, but the  
government no longer has the manoeuvring room that it had in 2020. The budget deficit and public debt have soared  
to alarming levels, which calls for a difficult consolidation of public finances. Although FX reserves have been stable,  
the country’s external vulnerability is growing. The pandemic’s shock has aggravated a structural deterioration in  
fundamentals. This could have lasting consequences.  
For a little more than a year, Tunisia has been faced with a triple  
whammy of overlapping political, health and economic crises. Since  
the legislative elections of October 2019, the country has already had  
three prime ministers. The cabinet that took office on 2 September  
FORECASTS  
2
019  
2020e  
2021e  
2022e  
2
020 has just been reshuffled and now needs to receive the approval of  
Real GDP growth (%)  
1.0  
-8.5  
5.7  
4.0  
5.4  
2.6  
5.0  
the parliament. Its ability to rule the country amid a highly fragmented  
political landscape remains to be seen. Yet there is an urgent need for  
action. A three-year financing agreement with the IMF seems highly  
necessary, although its signing has been pushed back by political  
paralysis. The IMF agreement could be adopted in Q1, but uncertainty  
remains high. The previous plan signed in 2017 was interrupted and  
it had to be replaced by emergency financial assistance following the  
outbreak of the Covid-19 crisis.  
Inflation (CPI, year average, %)  
Central Gov. balance / GDP (%)  
Central Gov. debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
6.7  
-3.3  
72.5  
-8.8  
97.1  
7.4  
-12.3  
88.6  
-7.2  
106.8  
8.0  
-7.5  
93.0  
-8.1  
109.6  
8.2  
-5.6  
95.0  
-7.4  
113.6  
8.0  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDTND (year end)  
3.8  
4.8  
4.4  
3.9  
2.80  
2.71  
2.90  
3.05  
PUBLIC FINANCES: GROWING PRESSURE  
e: ESTIMATE & FORECASTS  
SOURCE: BNP PARIBAS ECONOMIC RESEARCH  
The deterioration in public finances is worrisome. Initially forecast at 3%  
of GDP, the budget deficit excluding grants is estimated to have reached  
more than 12% of GDP in 2020. About two thirds of the shock is due  
to the contraction in government revenue (5.5% of GDP). Meanwhile,  
spending was largely swollen by the payment of government arrears  
to state-owned companies and a new increase in the total wage bill for  
public-service employees (+15% compared to 2019), which has already  
been rising for several years. In 2020, it absorbed 67% of government  
revenue. The target of holding the increase in the wage bill below 5% in  
TABLE 1  
GOVERNMENT FINANCING REQUIREMENT  
% of GDP  
1
4
25  
Budget deficit (excluding grants)  
12  
Amortization  
20  
2
021 will be hard to reach in the face of strong social pressures. Other  
Financing requirement (RHS)  
1
0
8
6
4
2
0
factors will continue to strain budget implementation in 2021, starting  
with the ongoing impact of the 2020 recession on fiscal receipts. To  
bring the fiscal deficit down to 6-7% of GDP, the government plans to  
withdraw several support measures introduced during the pandemic.  
Yet the situation is far from stable. In any case, covering financing  
needs will be challenging.  
15  
1
5
0
0
In addition to a high fiscal deficit, the government will also have to deal  
with significant debt amortization (see chart 1). Its borrowing strategy  
expects the amount of total loans to reach more than 16% of GDP – of  
which 70% are due to be external, the equivalent of 11.5% of GDP. This  
is 4 points higher than the average for the past five years. Tunisia is not  
currently benefiting from any IMF assistance and, without it, attracting  
support from international donors (which have provided more than  
half of its external financing since 2015) or tapping the international  
financial markets will prove to be difficult. There are also domestic  
financing constraints. For the first time, the government had to call  
on the central bank to directly finance part of its fiscal deficit in 2020.  
Although the amount was modest (2.5% of GDP), this strategy can  
hardly be replicated without undermining the monetary stabilisation  
gains that have been achieved over the past two years. This might be  
another sticking point in its negotiations with the IMF.  
2
010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020f 2021f  
CHART 1  
SOURCE: MOF, BNP PARIBAS  
Moreover, a higher recourse to market financing would aggravate the  
increasingly alarming debt dynamics. Government debt is expected at  
3% of GDP this year, 20 points higher than in 2019. Despite a debt  
stock that is still 45% owned by official creditors, the interest burden  
has risen rapidly. It absorbed 15% of government revenue in 2020, up  
from 10% in 2019, and it is bound to swell in the years ahead. With  
two-thirds of the debt denominated in foreign currency, the debt tra-  
jectory is also vulnerable to currency risk.  
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Eco Emerging // 1 quarter 2021  
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EXTERNAL ACCOUNTS: A PRECARIOUS STABILITY  
MONETARY ENVIRONMENT  
Tunisia has so far been able to absorb the external shock thanks to a  
significant fall in imports due to the contraction in economic activity  
and lower oil prices. Despite the collapse in tourism receipts and a  
downturn in manufacturing exports, the current account deficit has  
narrowed, FX reserves have been rebuilt and the dinar has remained  
stable against the euro, appreciating thus slightly against the US dollar.  
With FX reserves of USD 8.2 bn and external financing needs estimated  
at a little over USD 6 bn in 2021 (including the EUR 1 bn Eurobond in  
%
TND/Euro  
Policy rate (RHS)  
Inflation (RHS)  
4
.0  
.5  
8
7
6
5
4
3
2
1
3
3.0  
2
tranches with an American guarantee), there is still a low risk of an  
imminent government default on its international bonds.  
2.5  
Yet the situation is fragile. Even though the current account deficit has  
narrowed, it remains high at about 7-8% of GDP. Meanwhile the spread  
of the pandemic continues to strain the main sectors that generate  
foreign currency. Moreover, as slow as it may be, the expected rebound  
in the Tunisian economy will fuel greater demand for imports. Foreign  
direct investment will also come under downward pressure and is  
unlikely to exceed 2% of GDP this year. This covers less than 25% of the  
expected current account deficit. Consequently, there is a significant  
2.0  
1
.5  
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020  
SOURCE: NATIONAL STATISTICAL OFFICE, CENTRAL BANK  
CHART 2  
gap to close, which could place new pressure on external liquidity the quality of bank loan portfolios was already deteriorated before the  
and the dinar if international donors fail to provide sufficient financial crisis, especially among state-owned banks (one third of the banking  
assistance. Persistent external imbalances will also continue to drive system). The moratorium on loan payments has so far helped limit the  
up the external debt, which could approach 110% of GDP by year-end impact of the Covid-19 shock. Yet pressures on the banking system  
2
021, an increasingly unsustainable debt level.  
are bound to intensify due to its high exposure to the most vulnerable  
sectors (manufacturing accounted for 23% of loans outstanding at  
year-end 2019; commerce, 16.7%; and tourism, 4.8%).  
ECONOMIC GROWTH: PROBABLY A LASTING IMPACT  
The expected rebound in economic growth in 2021 remains hypothetical  
The capacity of the economy to rebound is highly uncertain. The  
year 2020 already got off to a bad start with real GDP declining by  
(
forecasted at 4% after a recession estimated at 8.5% in 2020). Even if  
this is confirmed, real GDP would be still 4.8% below the 2019 level.  
The epidemic’s shock could have a lasting impact because it slams  
an economy already weakened by a decade of sluggish growth (1.6%  
on average between 2011 and 2019). This has been the consequence  
of a declining trend in private-sector investment (from an average of  
2
% year-on-year in Q1. Economic activity abruptly contracted by 21%  
in Q2 under the combined impact of strict lockdown measures, the  
collapse of the tourism sector, and the decline in European demand  
(
75% of Tunisian exports). Despite the Q3 recovery, especially in the  
manufacturing sector, Tunisia reported one of the region’s most severe  
recessions, with GDP contracting 9.6% on average in the first nine  
months of the year. The resurgence of the pandemic, both locally  
1
7.5% of GDP in 2000-2010 to 15.2% in 2011-2019) and the steady  
deterioration of fundamentals. In particular, the need to consolidate  
public finances means that new sources of economic growth will have  
to be found in order to reduce the unemployment rate, which has now  
reached 16.2%.  
(
with between 1,000 and 1,500 new cases each day since mid-October,  
compared to fewer than 50 cases during the first wave) and among its  
main trading partners, is also threatening the economy again. Major  
efforts have been deployed to secure vaccine supplies, thanks notably  
to the World Health Organization’s Covax initiative. Yet the vaccination  
campaign will not start up before early Q2.  
Completed on 18 January 2021  
Stéphane ALBY  
stephane.albyc@bnpparibas.com  
In the meantime, the government has virtually no fiscal manoeuvring  
room. Capital expenditure barely exceeds 3% of GDP in the 2021  
finance bill, more than 2 points less than in 2019. CAPEX is likely to act  
as an adjustment variable in case of renewed pressure on Treasury’s  
liquidity. In comparison, the total wage bill for public-sector employees  
is projected at 16.6% of GDP this year.  
Monetary policy is also constrained. The continued decline in the  
inflation rate, in part due to the strong dinar, has certainly allowed  
the central bank to lower its key rate by 150 basis points to 6.25% (see  
chart 2). Yet its approach remains cautious, and real interest rates are  
still positive. Moreover, monetary easing will only marginally improve  
the poor health of the banking sector. With a non-performing loan  
ratio of 14% at year-end 2019 (of which provisions cover only 55%),  
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