Tunisia: 2022 growth downgrade

We have revised our growth forecast for Tunisia substantially lower as the country is hit by another wave of Covid-19 which has led to renewed restrictions on activity at the start of the year. While we anticipate that this will ease as the months progress, there are other likely drags on growth, not least government plans to reduce the budget deficit, alongside salient (and related) political risk. We now forecast real GDP growth of 3.1% this year, compared with our previous projection of 3.9%, with 2023 forecast at 2.8%.

Tunisia real GDP growth, % y/y

Source: Haver Analytics, Emirates NBD Research

Covid-19 continues to weigh on activity

Tunisia’s recovery from the pandemic crisis and the -9.7% contraction seen in 2020 looks set to be a drawn-out affair, not least as the country continues to grapple with new outbreaks of the virus. Last year we estimate that real GDP growth in Tunisia was a lacklustre 3.0% as the country was hit by a severe wave of coronavirus in the summer months which impeded the recovery seen elsewhere in the world. Indeed, growth in both Q1 and Q3 last year was negative, offset by a double-digit expansion in the second quarter. The impact of this renewed spread of the virus was especially apparent in the hotels and restaurants component of GDP which contracted by -13.1% y/y in Q3, following a 104.7% expansion the previous quarter.

Tunisia daily Covid-19 cases, 7dma

Source: Bloomberg, Emirates NBD Research

While that wave of infections receded, Tunisia has been hit once again through the last several months as the Omicron variant has spread through the country, leading the government to announce new restrictions, such as night curfews, aimed at stopping its spread. This will lead to a renewed slowdown in the crucial hospitality and leisure sectors, which will also be impacted by Omicron’s impact on global travel and the diminished number of visitors likely to be travelling to Tunisia while the new strain remains a real and present danger. We still expect that there will be an improvement on the Covid front through the remainder of the year, and tourism should see a marked improvement this summer compared to the past two years, but for now it remains under pressure.

Political risk to the fore

This outlook is compounded by what is a troubled political environment following the dismissal of parliament by President Kais Saied last summer. The mood could improve later in the year as the scheduled constitutional referendum (July) and legislative elections (December) are held, but at present Tunisia is contending with threats of street protests, in direct contravention of the covid rules (which the opposition argue have been convened simply to curb any demonstrations anyway). This could further jeopardise the tourism sector’s recovery, and any pick-up in investment flows, which in any case will be muted following credit rating downgrades last year. Meanwhile, inflation has risen to 6.6% in December, the fastest pace in over two years, and fiscal tightening will have a further adverse effect on household spending, while also posing another potential flashpoint as powerful labour unions oppose it.

This fiscal tightening is another key reason behind our growth downgrade, and while Tunisia has long needed some substantial fiscal reform, it will pose a significant downside risk to growth coming as it does while households are still buffeted by the pandemic. The government aims to bring the budget deficit down from -8.3% of GDP to -6.7% this year, in part by raising fuel and electricity prices, freezing public sector pay and introducing new taxes.

IMF deal still under discussion

Although the timing of these efforts at greater fiscal rectitude could prove damaging to the recovery in the near term, they might help Tunisia secure a new IMF support package which would help support more sustainable growth over the longer term. The IMF is looking for commitment to serious reforms, not least on the bloated public sector wage bill which in 2020 accounted for more than half of all government spending. IMF support, the policy anchor that would provide, and ongoing efforts to bring down public debt levels would all help encourage greater investor interest in Tunisia.