Outlook for Tunisian economy is clouding

Tunisia’s economy remains under pressure as both the ongoing pandemic crisis and elevated political risk weigh on the outlook. While the pandemic pressures are moderating, we have maintained our 2021 growth forecast at 3.0% given the manifold challenges still facing the country, and the poor data so far. Next year we anticipate that some of these pressures will ease, enabling growth of 3.9%, with tourism in particular expected to perform more strongly next year. However, the outlook for investment remains constrained. The struggling economy will be a key focus for new Prime Minister Najla Bouden but hopes for a new IMF deal have been complicated by President Kais Saied’s sidelining of parliament in July.

New daily Covid-19 cases

Source: Bloomberg, Emirates NBD Research

Looking at Q2 growth data, while the y/y rate was a robust 16.0%, this was boosted by base effects, with the corresponding period last year representing the peak of Tunisia’s crisis when the country was closed and tourism virtually nil (the third quarter of last year saw a brief period when European visitors returned to the country). On a quarterly basis, Q2 actually contracted by -2.0% on the previous quarter, reflecting the still significant challenges posed by the pandemic, with restrictions reimposed in a bid to curb a new wave of infections during the period. This was reflected in the 35.2% q/q contraction in the hotels & restaurants component of GDP (although it expanded by over 100% compared to last year) and given that cases remained especially high through July also, the third quarter will likely also have been fairly weak. Tourist arrivals numbered 387,500 in June, and while this is a significant improvement on June 2020 (16,600), it remains far off the 1.1mn arrivals in June 2019. On the positive side, the mining sector in particular has seen strong growth (33.6% q/q in Q2) on the back of the phosphate industry, while oil refining averaged q/q growth of 58% over Q1-Q2.

Real GDP growth, % y/y

Source: Emirates NBD Research

Aside from the residual pandemic challenges, private consumption will also likely be impacted by rising inflation, which has been over 6.0% for the past three prints, while unemployment remains elevated at 18.0%, having ticked up modestly in the second quarter. Political protests against Saied’s actions could also weigh on the outlook for private consumption, while they will almost certainly hold back investment. In July, Fitch Ratings downgraded Tunisia’s credit rating, reflecting the questions now hanging over the country’s commitment to economic and fiscal reform, and the diminished likelihood of a new deal being reached with the IMF in the near term.

The failure to secure IMF financing also raises questions regarding the sustainability of Tunisia’s finances. While the current account deficit has been narrowing this year (-3.5% of GDP over January-August, according to the central bank, compared to -4.8% a year earlier), the BCT has highlighted the ‘acute drying up of external financial resources’, which has seen reserves fall from 162 days’ import cover at the close of 2020 to just 127 days’ at the end of September as the government has turned to monetary financing.

This is even more concerning given the need to pay down considerable debt principal this year. Fiscal reform plans meanwhile, including a mooted removal of all subsidies, appear to have stalled along with the IMF discussions, meaning that spending on a bloated civil service payroll, a longstanding bone of contention with the Fund, will continue. The strong language used by the BCT in its latest communiqué on October 6, where it ‘reiterated its deep concern facing the current critical financial situation’, highlights how stark the challenges facing Tunisia have become.