Emerging

A fragile stabilisation

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26  
EcoEmerging// 3 quarter 2019  
economic-research.bnpparibas.com  
Tunisia  
A fragile stabilisation  
The Tunisian economy has begun to show signs of stabilisation. Inflation is falling, exchange rate pressures are easing and the  
government finally managed to uphold its commitment to fiscal consolidation in 2018. Yet the country’s prospects are still very  
fragile. Although the support of international donors is reassuring, the persistence of major external imbalances exposes the  
economy to shocks. Bank liquidity is already under pressure due to the tightening of monetary policy, and the high level of public  
debt calls for further reduction in budget deficits that could be hard to achieve. Above all, economic growth is still sluggish.  
Tunisia will hold general elections in a few months that will be  
1
-Forecasts  
decisive for the consolidation of its democratic transition. Although  
the outcome is uncertain amid an increasingly fragmented political  
landscape, the roadmap is rather clear for future leaders: they must  
boost a sluggish economy, halt the surge in public debt and  
strengthen Tunisia’s external-account stability. On the positive side,  
signs of stabilisation are finally seen after several years of overruns.  
The overall picture, in any case, is still very fragile.  
2017 2018 2019e 2020e  
Real GDP growth (%)  
1.9  
5.3  
2.5  
7.3  
2.0  
7.0  
2.5  
5.7  
Inflation (CPI, year average, %)  
Central Gov. balance / GDP (%)  
Central Gov. debt/ GDP (%)  
Currentaccountbalance / GDP (%)  
External debt/ GDP (%)  
-6.2  
-4.8  
-4.3  
-3.6  
70.5  
10.2  
77.0  
-11.2  
78.1  
-9.7  
77.8  
-8.5  
-
Monetary policy: a necessary but difficult tightening  
84.0  
84.6  
5,3  
95.3  
5,9  
96.3  
6,7  
5,6  
Forex reserves (USD bn)  
Inflation is still high at 7%, but has declined since the peak reached  
in June 2018 at 7.7% (chart 2) thanks to the tightening of monetary  
policy. Since February 2018, the key policy rate has been raised by  
Forex reserves, in months ofimports  
Exchange rate USDTND (year end)  
3.0  
2.6  
2.9  
3.1  
2.48  
2.99  
3.15  
3.30  
275 basis points (bp) to 7.5%. For the first time in three years, real  
e: BNP Paribas Group Economic Research estimates and forecasts  
interest rates are negative. The Central Bank of Tunisia (CBT) has  
also tightened refinancing conditions for banks and has capped the  
loan-to-deposit ratio at 120%.  
2- Monetary environment  
Key policy rate  Money market rate  
Although the CBT has clearly shown its determination to fight  
against inflation, it has very little manoeuvring room. The overall  
volume of CBT refinancing has peaked since the beginning of the  
year (TND 16 bn, up from TND 10 bn one year earlier, with almost  
▪▪ Inflation (y/y)  TND per Euro (rhs)  
%
9
8
7
6
5
4
3
2
¼
made of 24-hour marginal loan facilities), which leaves the banks  
3.5  
highly sensitive to monetary policy tightening. It is not surprising that  
money market rates have soared to historical highs of nearly 8%,  
and that lending growth to the economy has slowed sharply. At the  
end of May 2019, banking credit growth had slipped to only 6.8% y/y,  
compared to 13% in early 2018. Expressed in real terms, lending  
growth even slipped into negative territory in May, for the first time  
since November 2003.  
2.5  
1.5  
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019  
Inflationary pressures are likely to remain high. Fluctuations of the  
Tunisian dinar (TND) call question. After depreciating by nearly 30%  
against the euro in 2017-2018, the TND has been resilient since the  
beginning of the year. Over the past three months, it has even  
strengthened 6% against the single currency. One explanation is the  
dynamic momentum of tourism. After a long period of stability, the  
Source: CBT, INS, Datastream  
External imbalances are still very high  
Tunisia’s external position is the main source of macroeconomic  
vulnerability. After reaching a record high of 11.2% of GDP in 2018,  
the current account deficit could finally begin to narrow this year.  
Even so, it will still hold at very high levels, at about 9% of GDP.  
Several factors continue to strain external-account dynamics.  
Despite currency depreciation, exports are still hit by the collapse of  
phosphate production and the ongoing loss of market share in  
Europe, by far its biggest trading partner. Although the tourism  
sector has rebounded strongly since the 2015 terrorist attacks, it  
16% depreciation in the real effective exchange rate over the past  
two years has partially reduced the over-valuation of the currency.  
Yet considering the magnitude of external imbalances, the dinar’s  
upward momentum seems unsustainable. The Central Bank of  
Tunisia might have to tighten monetary policy further if new currency  
pressures arise.  
rd  
27  
EcoEmerging// 3 quarter 2019  
economic-research.bnpparibas.com  
now generates fewer revenues than in the past (USD 1.5 bn in 2018,  
down from USD 2.1 bn in 2014) despite an increase in the number  
of tourists. The ongoing decline in national hydrocarbon production  
also limits the gains generated by lower oil prices on the import bill.  
Net oil imports accounted for half of the current account deficit in  
3
- Sector contribution to growth  
 Primary  Secondary  Tertiary  
GDP growth (y/y)  
%
8
2
018, up from 16% in 2010.  
6
4
The recent conclusion of the sixth tranche of the IMF programme  
provides grounds for relief. Net flows of foreign direct investment  
(
2
FDI) have been stable at 2-2.5% of GDP, but they only account for  
0% of the current account deficit. By keeping the IMF programme  
2
0
on track, not only is Tunisia ensured of the support of other  
international donors but this also paves the way for an upcoming  
Eurobond issue of EUR 500 mn, which should be sufficient to cover  
external financing needs. Yet, with foreign exchange reserves now  
below the warning threshold of three months of imports of goods  
and services and a sizeable major current account deficit, the  
economy is still highly exposed to exogenous shocks.  
-2  
-4  
2
010 2011 2012 2013 2014 2015 2016 2017 2018 2019  
Source: INS  
Public finances: progress must be kept in  
perspective  
 Economic prospects: towards a mild recovery  
The consolidation of public finances also promises to be difficult,  
even though some reforms are beginning to bear fruit. According to  
preliminary estimates, the fiscal deficit was cut from 6.2% of GDP in  
Q1 figures confirmed Tunisia’s economic difficulties. After a mild  
recovery over the past two years (+2% in 2017 and +2.5% in 2018),  
real GDP growth slowed to 1.1% in Q1 (see chart 3). With the  
exception of tourism, most sectors have stalled (construction) or  
contracted (agriculture and manufacturing). Although public-sector  
wage increases effective since March should boost household  
consumption as of Q2, the overall impact on growth will be small.  
With GDP growth estimated at 2% this year and 2.5% in 2020, the  
Tunisian economy will not be in a position to bring down the official  
unemployment rate, which has culminated at 15%. Looking beyond  
exogenous factors (regional instability, weak European demand)  
and security risks, which are all very real, it is critical to accelerate  
structural reforms to improve growth prospects. The challenge is  
daunting. Between 2010 and 2018, the investment rate fell by 5  
points to 20% (compared to 28% in Morocco). It is also very telling  
that Tunisia has lost 50 places on the World Economic Forum’s  
global competitiveness ranking over the same period, illustrating the  
fundamental problems the authorities must face.  
2
017 to 4.8% in 2018 thanks essentially to the increase in tax  
revenue (+1.2% of GDP). Ambitious goals have been set for 2019,  
with a deficit reduction target of 3.9% of GDP. We do not think this  
target will be met due to pressures created by the electoral  
campaign. Even so, the fiscal deficit should continue to narrow to  
4.3% of GDP, which would mark a break from the fiscal overruns of  
recent years. However, nothing guarantees that the authorities will  
be able to maintain the cap in the longer term.  
Contrary to IMF recommendations, the government granted wage  
increases to public sector employees for an estimated cost of 0.5%  
of GDP in 2019 and 2020. Although new cutbacks in energy  
subsidies should help absorb part of the cost, the decision further  
accentuates the rigidity of public spending. Despite a freeze on  
hiring since last year, the public sector payroll could absorb nearly  
65% of fiscal revenues in 2019, up from 54% in 2010. To meet their  
fiscal commitments, the authorities could have no option but to use  
public investment as an adjustment variable, to the detriment of  
economic activity. Above all, the government debt trajectory is still  
not showing any significant signs of improvements. Government  
debt (77% of GDP) is a source of concern, although the high share  
of debt contracted on concessional terms (63% of foreign currency  
debt) has helped limit the debt servicing cost so far. Significant  
contingent liabilities also arise from government guarantees for  
financially challenged state-owned companies (15.6% of GDP).  
Moreover, government debt is exposed to exchange rate  
fluctuations (75% of the debt stock is denominated in foreign  
currency). Lastly, external assistance from international donors is  
supposed to cover 60% of domestic financing needs in 2019 and  
2
020. Although the risk of disruption is rather limited, disbursements  
are subject to conditionality, which reduces the government’s  
manoeuvring room in the absence of any alternative sources of  
financing (the local capital market is shallow).  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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