Political instability, rising public debt and high unemployment were already dragging on Tunisia’s economy before the Covid-19 pandemic hit in early 2020. Ten years after demonstrations in the country kickstarted the Arab Spring, many of the public grievances that sparked the country’s Jasmine Revolution remain.
While Tunisia requires external assistance to address its multiple economic challenges, negotiations with the International Monetary Fund (IMF) were put on hold in July after president Kais Saied drew international condemnation in July after suspending parliament and tightening his personal grip on power.
Negotiations resumed in early November, but had yet to produce results as The Banker went to press, with prospective reforms that would see the introduction of new taxes and the price of basic commodities rise bitterly opposed by much of the population.
Reforms envisaged by the IMF will almost certainly impact the country’s banking sector, which is struggling with rising non-performing loan (NPL) ratios and high exposure to state-owned enterprises, with thin capital buffers putting lenders at risk from further shocks to the economic system.
Economic woes
Tunisia’s economy faced numerous challenges even in the lead up to 2020. Tourism – the country’s second largest employer after agriculture and responsible for 8% of gross domestic product (GDP) – has struggled for the past 10 years in the wake of the Arab Spring and a terrorist attack in 2015 that left 38 tourists dead.
Since the heady days of the 2011 Arab Spring protests, successive governments have failed to revive the economy or stem the growth of corruption in the country. The World Bank reports that real growth averaged just 1.6% between 2015 and 2019, and has failed to exceed 3% since 2012. Unemployment has been stubbornly high, hovering at around 15% between 2015 and 2019.
The economy did see some improvement in 2019, with the government deficit falling to an eight-year low of 3.5% and tourist arrivals hitting a new record of 9.5 million. Such gains were quickly reversed in 2020, however, with restrictions on international travel having a disastrous impact on the economy.
Tunisia is very exposed and vulnerable to travel related restrictions because tourism makes up a significant share of the economy
“Tunisia is very exposed and vulnerable to travel related restrictions because tourism makes up a significant share of the economy,” says James Swanston, an economist at Capital Economics. “That’s one of the main factors that drove the downturn, which was one of the largest contractions in the world.”
While the World Bank estimates Tunisia’s economy shrank by 8.8% in 2020 – the deepest contraction by any country on mainland Africa – some estimates put the figure even higher, with no part of the economy immune.
“The total impact of the crisis was quite a bit stronger in Tunisia, with a 9.3% contraction last year compared to 6% in Morocco and Algeria,” says Cedric Berry, an associate director for sovereigns at Fitch Ratings.
“What we see looking at the numbers is [that the decrease is] really broad-based. In most sectors in Tunisia, we saw a contraction in activity, whereas in Morocco for example, government services and healthcare expanded. This points to the challenge authorities faced in keeping things running,” he says.
The country’s fiscal deficit surged to 10.5% of GDP in 2020 from 3.5% the previous year, while public debt stood at 88% of GDP as of October 2021.
Covid relief
The government announced $2.5bn of fiscal and financial measures to cushion the economic impact of the pandemic, including a $300m fund for unemployed workers, $150m for poor and vulnerable families, and TD500m ($176m) of support to state-owned drug, food and oil companies to increase the stock of basic products on offer. A TD500m credit programme was also launched to finance private sector companies unable to obtain bank credit.
Other key Covid measures included allowing relaxed tax payment deadlines, reducing deadlines for the refunding of tax credits to a minimum of one month, and rolling out a payment moratorium on microfinance loans with a cap on the interest rate charged during the period. The government also mandated the Caisse des Dépôts et de Consignation, a public financial institution, to establish a TD700m fund supporting small and medium-sized enterprises (SMEs) and the public health sector.
The Central Bank of Tunisia (BCT), meanwhile, reduced its policy rate by 150 basis points in total in 2020, bringing it down to 6.25%, where it remains at time of writing. The BCT also introduced a six-month moratorium on corporate and individual bank loans, which was extended until the end of September 2021, mandated banks to waive fees for the use of cards in ATMs, and doubled its refinancing fund to TD10bn. Until September 30, banks were also permitted to defer the classification of loans granted payment relief.
“The measures have been relatively effective, as they have allowed banks to make profits despite the crisis, but banks have also been called upon not to distribute dividends in 2020,” says Dhia Bouzayen, senior partner at KPMG Tunisia.
“The freeze on loan repayments in 2020 has also allowed companies to maintain themselves and use their reduced revenues to pay wages and maintain employment.”
Lockdowns and restrictions on movement implemented by the government have so far proved effective; as of November 2021, just under 26,000 people had died of the virus in a country of nearly 12 million people. Yet while the death toll remains low, the economy remains in the doldrums. Many businesses impacted by the pandemic have yet to reopen, and tourism remains extremely subdued as the result of a third wave of infections that began in June 2021 (which has subsequently begun to subside).
“In terms of the rebound, so far it’s been very slow going because they still have restrictions in place,” says Mr Swanston at Capital Economics.
“GDP is still well below pre-virus levels and tourism again is the main culprit here. Arrival rebounds are mostly Tunisians coming back and Libyans coming to Tunisia, so it’s not a real resumption of the tourism industry. In the 12 months up to June this year, tourism arrivals were still down nearly 90% compared with pre-virus levels, so it’s still a long way to go towards having any sort of normalcy in the sector.”
The economic woes faced by the country in 2021 in many ways recall the conditions faced by the country immediately before the Arab Spring protests of 2011. Unemployment has jumped to 17.8% as of the first quarter of 2021, with levels particularly high among women and young people, at 24.9% and 40.8% respectively, hitting highs last seen 10 years ago.
“Looking at labour force data, the situation is pretty dire. Employment was down about 4% in 2020, and it fell again between June 2020 and 2021 in absolute numbers. The majority of the workforce has seen employment fall by 8% between 2019 and June 2021,” says Fitch’s Mr Berry.
Inflation is also getting worse, having already been elevated for several years prior to 2020. Headline inflation stood at 6.3% as of October 2021, the third-highest in north Africa, and food inflation is even higher, at about 8% year-on-year.
GDP growth is forecast to hit just 3% this year, according to the World Bank, as structural issues and subdued tourism revenues weigh on the prospects of a quick bounce back.
“The economic recovery is less robust than previously expected given the escalation of the Covid-19 pandemic in mid-2021 and the heightened political uncertainty,” the World Bank said in an October update. “This increases the downside risks particularly regarding debt sustainability, which is a source of increasing concerns.”
State banks dominate
Tunisia’s banking sector, dominated by state-owned institutions, faces a number of risks as the economy continues to stagnate, not least given their high exposure to government debt. While profitability remains high, the sector’s rising NPL levels and thin capital buffers may spell trouble in the near future as the economic outlook worsens.
There are 42 banks and financial institutions operating in Tunisia, including 23 local banks, eight lending institutions, two merchant banks, and seven non-resident banks, according to BCT data.
Three of the country’s four largest banks by assets at the end of 2020 – Banque National Agricole, Banque de l’Habitat and Société Tunisienne de Banque – are state-owned. They accounted for 40% of banking assets and 34% of sector deposits as of 2019, according to the US International Trade Administration.
The BCT reported solid growth in the banking sector for 2020, with assets rising by 6.1% year-on-year, against 4.6% in 2019, while lending rose by 6.8% to hit TD98.6bn, against 3.7% in 2019. Corporate lending rose by 7.1% last year, while loans to individuals rose by 5.8% over the same period.
Profitability has been another bright spot, with aggregated net income for the country’s 10 largest banks rising by 37% year-on-year in the first half of 2021, according to data compiled by Fitch. Average return on equity, which declined from 16.8% in 2019 to 10.1% in 2020, improved slightly to 11% at the end of June 20201. Banks’ average net interest margin also held steady at 3.8% owing to lower funding costs brought on by the BCT’s steep rate cuts.
“Before Covid, Tunisian banks tended to report healthy margins,” says Jamal El Mellali, associate director for banking at Fitch Ratings. “On the one hand, they were operating in a high interest rate environment before rate cuts, which is positive for asset yields because banks lend at floating rates. They’re funded with cheap or non-remunerated customer deposits. So that’s for the top line; and looking at the bottom line, loan impairment charges used to represent a third of pre-impairment profit, which is not high, especially considering the state of Tunisian economy.”
Other recent positive developments have included a slight improvement in reserve coverage of impaired loans, which stood at 72% in the first half of 2021, against 68% in 2020, according to Fitch. Unreserved impaired loans as a share of equity decreased to 23% over the same period, compared to 30% in 2020, according to Fitch.
Mounting challenges
A return to pre-pandemic levels of profitability is unlikely in the near future, according to an October note from Fitch, with the ratings agency predicting that weak credit conditions will push provisioning. And the exposure of major lenders to large levels of state debt may spell trouble for the sector in the coming years.
NPLs have been elevated across the sector for some time, hovering at around 13% in the three years to 2020, and just above 10% for major banks. The sector’s overall NPL ratio rose to 13.8% as of June 2021, but this number does not tell the whole story.
Much of the stock of NPLs dates back from 2013-2016, in the aftermath of the Arab Spring
“When you look at it bank by bank, some report much higher NPLs, especially state-owned banks; some report in excess of 20%,” says Mr El Mellali. “One interesting and important thing to note is that much of the stock of NPLs dates back from 2013-2016, in the aftermath of the Arab Spring.”
Local lenders are also highly exposed to the public sector, with up to 15% of total sector assets currently in the form of treasury bills and deposits at the BCT, according to Fitch. The state has borrowed from domestic banks on five occasions since 2016, including a $400m syndicated loan taken during the first quarter of 2021, with participation from 10 domestic banks.
“We view lending to the state as risky considering its weak financial flexibility,” says Mr El Mellali.
“Another element that is a source of concern for us is the significant exposure of banks to state-owned enterprises: some banks we rate are highly exposed to these SOEs, total exposure can be more than 300% of the equity base, which is extremely high considering the weaknesses we have seen with the entities.”
There is consensus among analysts that capital ratios among major lenders are weak, given banks’ asset quality risks and Tunisia’s economic vulnerabilities, particularly among SMEs and SOEs.
“Public enterprises deserve special attention so as not to increase their bank debt, even though it is guaranteed by the state,” says Mr Bouzayen.
The BCT’s required capital adequacy ratio for Tunisian banks is set at 10%, and some argue that this is not enough. New IFRS 9 accounting standards will also come into effect at the end of 2021, with asset quality metrics likely to be further eroded, requiring fresh provisioning, according to Fitch.
“Banks are exposed to high event risks given the thin buffers over minimum regulatory capital requirements. These include operational risks, social protests, and attacks, but also corporate defaults. Tunisian banks’ loan portfolios are also highly concentrated which makes them sensitive to a default, the risk being that it wipes out a big portion of their equity base,” says Mr El Mellali.
Faced with such challenges, and the expiry of debt relief measures brought in in the wake of the pandemic, Fitch downgraded its outlook on Tunisian banks to negative from stable in October.
Fellow ratings agency Moody’s followed suit the same month, announcing a downgrade of the long-term bank deposit ratings of four Tunisian banks: Amen Bank, Arab Tunisian Bank, Banque de Tunisie, and Banque Internationale Arabe de Tunisie. Moody’s attributed the decision to banks’ increasingly difficult operating environment, as well as the government’s weakening credit profile.
Stalled reforms
Tunisia signed a four-year agreement with the IMF in May 2016 that included commitments to enhance the BCT’s independence and strengthen monetary policy to improve exchange rate flexibility. The Tunisian dinar is currently pegged to a weighted basket of currencies that is dominated by the euro.
Other reforms outlined in the IMF package included measures to strengthen reserve buffers, facilitate external adjustment, improve banking resolution and supervision frameworks, and relax caps on lending rates to improve credit access. Perhaps most importantly, the IMF also stipulated that Tunisia restructure its public banks.
The prospects for such a reform programme remain uncertain at best, given the rocky state of negotiations between the government and the IMF.
The two parties had been in discussions since April over a fresh $4bn financing package, but negotiations were suspended in July following the suspension of parliament by Mr Saied drew international condemnation. Following the approval appointment of a new cabinet on October 11 – which saw the appointment of Najla Bouden as prime minister – discussions with the IMF resumed in early November.
Despite the resumption of talks, the prospects of a successful outcome remains dim.
“Saied’s got a cabinet now, but there does seem to be growing discontent towards policy-making and actions he’s taking,” says Mr Swanston. “In terms of passing reforms that are needed – if the rest of the government doesn’t support him, he’ll be stuck in political paralysis. We should not forget that Saied couldn’t pass policies when he formed a government last time.”
The scale of Tunisia’s economic problems makes the negotiation of a new financing package ever more urgent; the increase in the country’s debt burden has been accompanied by a halving in value of the Tunisian dinar in the past 10 years. Short-term external debt stood at 160% of foreign exchange reserves as of September 2021, according to Capital Economics.
Annual debt service payments alone account for around 9% of GDP, while state salaries and subsidies on basic goods represent 18% and 5% of GDP, respectively.
Yet if the necessity of a bailout is clear, the accompanying reform package required to secure one is likely to be a hard sell, with public anger over economic hardships likely to increase if and when reforms, such as tax rises and subsidy reductions, hit already strained disposable incomes.
The country’s powerful Union Générale Tunisienne du Travail (UGTT), while initially welcoming the appointment of October’s new government, in early November rejected any plans by the government to cut wages or subsidies.
“Tunisia has to bite the bullet one way or another, but what’s on offer is economically painful policies that will hinder the recovery over the short term, and make Saied even more unpopular, in exchange for repairing the country’s balance sheet,” says Mr Swanston.
The political difficulty in passing through the necessary reforms has made the risk of a sovereign debt restructuring more likely, Peter Atanasov, sovereign analyst at distressed debt fund Gramercy, told Reuters in October.
Gulf rescue?
Beyond reform and restructuring, a third option has emerged for the government in the form of a possible rescue from Saudi Arabia. In August 2021, Mr Saied’s office announced that Saudi Arabia had pledged financial support for the Tunisian government. In October, BCT governor Marouane El Abassi told local media that countries friendly to Tunisia would offer financial support.
Days later Abdelkrim Lassoued, the BCT’s head of financing and foreign transactions, said an agreement with two Gulf states – most likely Saudi Arabia and the UAE – was imminent. In late October, Ms Bouden made her first trip abroad as prime minister to Saudi Arabia. But serious questions remain as to whether they offer a lasting solution to Tunisia’s mounting economic woes.
“Loans from the Gulf states are more appealing to the Tunisian government at the moment because Saudi Arabia and the UAE would back them with far fewer concessions, but there probably will still be [concessions demanded],” says Mr Swanston.
“Taking these loans would probably just be kicking the can down the road. Tunisia would still have large payments due towards the middle of the decade and could face the same problem again three or four years down the road.”
