“The BCT is faced with a dilemma: raising its rate to maintain the stability of the dinar, which increases the cost of credit for households and businesses, or decreasing it to favor the possible recovery of investment and economic growth”.
This is what was stated in the economic note of the MAC SA broker.
Nevertheless, the appreciation of the dollar following the recent rise in the US interest rate will have mainly two effects: first, rise of dollar debt. It is estimated that for each appreciation of the dollar against the dinar by ten millimes is an additional cost of servicing the debt of 20 million dinars as a third of the outstanding amount is denominated in US dollars.
Second, an increase in subsidies and budget deficit: In this context, experts predict a rise in the prices of raw materials and hydrocarbons in 2017. The average price of a barrel of oil will exceed the one adopted by the budget law, i.e. $ 50.
It is estimated that for every dollar increase in the price of a barrel, the budget will disburse 48 million dinars, which is the equivalent of 8% of the subsidy bill dedicated to hydrocarbons.
In this note, it was also indicated that overall our economy will be less impacted than countries whose currency is directly linked to the dollar.
The BCT predicts that economic growth will follow an upward trajectory. The increase in GDP at constant prices in 2010 will be 2.2% in 2017 and 2.8% in 2018.
Non-agricultural growth would be around 2.2% in 2017 and 2.6% in 2018.
This expected weakness can be explained by political instability and the decline in the olive harvest in 2017.
The forecasts of the “inflation will continue to rise to an annual average of 5% in 2017 and 4.2% in 2018.
This trend is explained by persistent pressures on the exchange rate and rising world commodity prices. Underlying inflation remains high.
“The US has returned to growth and inflation since 2015, when the eurozone remained at the bottom of the cycle.
This proves that the economic cycles in Europe and the United States are not synchronized (delay of 2 to 4 years).
This relative strength of the US economy gives arguments to the Fed (Central Bank) to raise rates for the years to come leading to a dollar attractiveness and appreciation, “the note reads.
In addition, Europe is becoming more competitive, meaning that production and exports are increasing. Conversely, imports of oil will be more expensive because payments are made in dollars.
On the other hand, emerging countries will be in trouble because when US rates were close to zero, these countries attracted capital because US bonds were less profitable.
The future evolution of the Fed rates will cause a reflux of investors to the United States. In addition, the appreciation of the dollar may increase budget deficits as a result of rising commodity and hydrocarbon prices, further undermine the balance of payments deficit and increase the cost of dollar debt.