Emerging

Another high-risk year

Eco Emerging // 1 quarter 2021

economic-research.bnpparibas.com

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

019

2020e

2021e

2022e

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

Budget deficit (excluding grants)

Amortization

021 will be hard to reach in the face of strong social pressures. Other

Financing requirement (RHS)

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.

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.

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.

The bank

for a changing

world

Eco Emerging // 1 quarter 2021

economic-research.bnpparibas.com

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)

3.0

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

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

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

% 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

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%),

The bank

for a changing

world

Another high-risk year

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