Tunisia’s immediate security concerns appear to be abating, even as political uncertainty persists, says the world leader in financial services Nomura. In the wake of more than two decades of autocracy, and even longer one-party rule, it could well take several months (or longer) of wrangling before the political environment stabilizes. Nonetheless, so long as the security environment continues to improve, we would expect that the economy, which has already begun to resume normal activity, will begin to recover more fully. A few key points about the economic impact follow:
Tunisian authorities have estimated the total cost of the unrest will reach EUR1.4bn, or approximately 3% of GDP, though they note that this will likely be mitigated by several factors, including the resumption of normal economic activity, which should see surge of deferred purchases and export revenues which had been delayed during the crisis. Authorities also report having been reassured of several anticipated foreign direct investments (though it is too early draw longer-term conclusions about foreign investment). Some rebuilding (of shopping centres and the main train station in Tunis) could also contribute to increased economic activity in the period ahead. Stock market capitalization remains low (at about 20% of GDP), which should minimize the impact of market losses on the broader economy.
While it is still early days, we would expect economic growth to slow to 2-3% in 2011, versus 3.8% in 2010, and a previous government forecast of 5.4% (we expect that the government will reduce its forecast for economic growth this year as well). We would also expect a modest increase in inflation pressures in coming months, as commercial establishments have already begun increasing prices to make up for some lost revenue. However, this could well prove limited, being mitigated by a likely slowdown in credit growth, as well as anticipated declines in real estate prices and the stock market, both of which had been rising rapidly pre-crisis.
There is no doubt that the tourism industry will be hard hit by the crisis. Already suffering from a downturn as a result of slower economic activity in Europe, combined with the fact that the holy month of Ramadan falls during the peak summer months, many establishments are likely to suffer a significant decrease in occupancy rates, which will have a trickle-down effect throughout the sector. Nonetheless, given that the tourism sector represents less 10% of GDP, even a severe decline is unlikely to create a meaningful drag on aggregate growth.
We do expect some widening of the current account deficit in 2011 to almost 5% of GDP, particularly as the tourism industry, an important contributor of foreign exchange, is deeply affected by the crisis. This widening was already under way as a result of the worsening trade balance in 2010. The likely slowdown of FDI, even if modest, will also present an important challenge for the financing of the growing deficit. Nonetheless, the limited convertibility of the Tunisian dinar means that the risk of significant capital flight remains low. Central bank reserves remain comfortable at US$9bn, or more than five months of imports, which should ensure that the current account widening remains manageable, at least for this year.
The servicing of external debt does not appear compromised, and the central bank has already moved to reassure creditors that it has ample foreign currency reserves to meet its 2011 payments. Sovereign obligations in 2011 are composed of two payments: EUR450mn on April 7 and JPY15bn on September 27. Moreover, although the budget deficit has widened in the past year as a result of the government’s stimulus measures in response to the global crisis, it remains at a relatively manageable 3% of GDP.
Some of the most important economic challenges surround the fate of the banking sector. With a few of the country’s key banks having been either partly or majority owned by members of the former president’s family, focus could well turn to their health. As such, it will be important for banks, especially those which were closely associated with Ben Ali and his extended family, to reassure their shareholders and depositors that they have good understanding of their risk exposure, and will make provisions for any loans that may be negatively affected by the current situation. The well-regarded Tunisian central bank should also act to ensure that depositors in all banks feel safe, especially since it will inevitably take time to have a proper understanding of the lending exposure of the banking sector to the former president’s extended family. The extension of a blanket deposit guarantee could be helpful in this respect. Some steps important have already been taken to resolve the ownership questions around Ben Ali-linked banks, but more will be needed.
Over the longer term, the removal of the corrupt, non-transparent and anti-competitive practices of the former president and his extended family is likely to herald a period of reinvigorated entrepreneurial activity in the country, provided the security situation stabilizes.