Tunisia: Risk Assessment

Country Rating¹

Rating: A4

Business Climate Rating¹

Rating: A4

Risk Assessment²

Political uncertainties and many social and economic challenges to overcome
After the eviction in mid-January 2011 of the ex-president Ben Ali, who had been in power since 1987, an interim national union government was formed with the particular aim of organising elections for the formation of a constituent assembly.
The outcome of these elections, postponed until the end of October 2011, is uncertain, insofar as around 80 parties have been formed in the vacuum left by the dissolution of the ex-presidential party, the Democratic Constitutional Assembly, with the possibility that the Islamist party Ennahda could become the main beneficiary of the situation.
Furthermore, the new authorities are faced with multiple social and economic challenges.  Unemployment, which affects around 15% of the population and particularly young graduates, is still a major issue.  This fuels a considerable sense of frustration and led to the protests which caused the fall of the old regime. In addition, the fruits of growth are unequally distributed, not only socially but also geographically, and a regional development programme favouring the interior of the country, which is underprivileged in relation to the coastal areas, is planned by the authorities.

Activity dependent upon the changes in the political situation
Activity has dropped significantly since the beginning of 2011 due to the political uncertainties, even though the transfer of assets of the Ben Ali Trabelsi family (commercial and automobile distribution, hotel management, air transport, banks) is being realised without paralysing it. By sector, the most notable decline is in tourism (which represents directly or indirectly the livelihood of 1.5 million Tunisians), with a fall of around 45% in the first quarter; then comes industry, with a drop of nearly 10% in production. Furthermore, foreign direct investments decreased by a quarter over the first four months. Conversely, the agricultural sector (8% of GDP) stood up well, with good harvests forecast. Overall, the Tunisian economy could narrowly escape the recession in 2011 (+0.5%), assuming a gradual recovery in activity during the second half of the year, with private investment in particular, which had been curbed by the nepotism of the ex-presidential clan, possibly picking up.

Deterioration in twin deficits mitigated by international financial aid
At the G8 summit at the end of May 2011, Tunisia was granted the promise of additional financial support to cover the forecast increase in deficits on its public and external accounts. In this respect, loans totalling $1.35 billion are planned, with the World Bank and the African Development Bank having promised $500 million each; and the French Development Agency $275 million. Loans from the European Investment Bank and the Arab Fund for Economic and Social Development are expected to be added to this.  This mitigates the sovereign risk and the risk of a balance of payments crisis. The budget deficit will increase, on the one hand because of the drop in activity that must automatically lead to a drop in tax revenues and on the other, because of an increase in expenditure resulting from the various measures taken to improve quality of life and reduce unemployment, subsidies on the prices of some basic commodities and, later on, the possible resumption of public investment.  Nevertheless, for several years the level of the public debt - primarily contracted with multilateral institutions at concessional terms - has reduced in relation to GDP and is close to the average for comparable emerging markets (around 45%).
It is likely that there will be a downturn in exports in 2011, due to political uncertainties, weakness of demand from the EU (particularly Italy and Spain) and the war in Libya; these countries are among Tunisia's principal trade partners and the exploration of new markets, particularly in Africa, will probably be delayed. Conversely, the relative robustness of domestic demand could result in an increase in imports, particularly of raw or semi-finished products, and therefore by an increase in the trade deficit. In addition, although expatriate remittances should be maintained, tourist revenues are likely to see a catastrophic fall (of around 50% compared to 2010) and overall the current deficit should deteriorate very significantly. In addition, this deficit is likely to be only partially covered by foreign direct investment flows, with Tunisia running the risk that it will represent a less attractive target for these, at least temporarily.

Strengths

• Proximity to European market
• Natural resources (gas, phosphates), agriculture, tourism.
• Integration into the major international political and financial organizations.
• Relatively skilled workforce and gradual upgrading of infrastructure, industry and financial sector

Weaknesses

• Knock-on effect from the off-shore sector (equivalent of a free trade zone) which represents 60% of exports
• Tourism sector facing increased competition and political uncertainties.
• Weak banking sector providing insufficient support for private domestic investment
• High unemployment, mainly among young people, especially university graduates.
• Excessive economic weight of agriculture and the public sector.
• Strong social and geographical inequalities.
• Importance of the informal economy (40 to 50% of GDP) and ample room for improvement in the business environment.