The Tunisian and Turkish economies are the most vulnerable to changes in global liquidity. According to S&P Global Ratings, banks can be exposed directly, through their own large external debt, or indirectly, through corporate or sovereign weaknesses related to net external debt.
As a result, direct effects tend to weigh on banking systems with large net external debt, while indirect effects are transmitted to banking systems through non-bank entities with large external debt exposures.
S&P Global Ratings has assessed the banking systems of five emerging markets: Tunisia, Egypt, Indonesia, Qatar and Turkey, which were considered potentially vulnerable to changes in global liquidity.
According to S&P analysts, Tunisia is highly vulnerable to indirect risks that could affect the economy and the banking system. This vulnerability stems from the current political instability and the government’s difficulties in obtaining financial support from the International Monetary Fund (IMF).
“If the Tunisian government fails to reach an agreement with the IMF, this could put the country under significant financial pressure, with negative consequences for the economy and banks,” the S&P report warns.
Unlike in Turkiye and Qatar, none of the banking systems of Indonesia, Tunisia, or Egypt appear to have external debt that are significant enough to directly cause issues. Yet all three systems are still exposed to external funding pressures through indirect channels.
Indonesia’s corporate sector has significant external debt, while Tunisia’s sovereign is highly vulnerable to external debt refinancing. Tunisia and Egypt also have growing external financing needs. Of the three countries, Tunisian banks have the highest external funding, underpinned by deposits from offshore companies and expatriates, and the use of multilateral financing lines.
Tunisian banks continue to navigate significant macroeconomic pressure, at least some of which is still linked to the country’s revolution 12 years ago. Those issues, coupled with the COVID-19 pandemic, have weighed on economic activity, resulting in expected economic growth of 1.3% in 2023, according to the IMF.
Failure to secure an IMF program could result in the country defaulting on its financial obligations. This would be accompanied by a significant depreciation of the Tunisian dinar and a major spike in inflation. For Tunisia’s banks that would likely mean losses of a magnitude that would require their recapitalization.
Though S&P expects the government will be able to mobilize the necessary resources to avert a crisis, the risks of a negative outcome to be significant and possible within the next 12 months.
