Tunisia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Support from international, multilateral, European and Arab donors
- Economy in the process of diversification
- Proximity to the European market and association agreement with the EU
- Tourism potential
- Natural resources (phosphates and hydrocarbons in particular)
- High social and geographical inequalities, high unemployment - especially among young people (41%) - leading to increased social unrest and demonstrations
- Economy strongly impacted by COVID-19 and the political crisis
- Fragmentation of political representation reflecting that of society
- Tourism confronted with security problems, increased foreign competition, lack of investment, and little diversification in both range and themes
The Arab Spring’s “success story” at risk of democratic backsliding
Using a highly contentious reading of the 2014 Constitution, President Kaïs Saïed, elected in October 2019, suspended Parliament activity in late July 2021, dismissed prime minister Hichem Mechichi and his government and took the executive power. This was a response to social unrest, political stalemate, and quarreling between the president, prime minister, and Parliament. The Assembly of the Representatives of the People was deeply fragmented, with an opposition between the secularists and clerics (represented by Ennahdha, the conservative Islamist party, which holds 52 seats out of 217). In September 2021, Saïed suspended most of the Constitution and declared that he would rule by decree, then appointed a cabinet of technocrats in October. Although it is expected that Parliament will eventually be allowed to reconvene, M. Saïed will likely try to undermine its power. Even if he cannot amend the Constitution without a two-third parliamentary majority president is planning a constitutional referendum in July 2022Furthermore, he will seek to capitalize on his strong popularity by triggering snap elections in December 2022. The political and constitutional standoff will likely delay or water down structural reforms to the costly debt-laden SOEs. The high frequency of strikes further hampers the business climate. The government will be under increasing pressure from the U.S. and the EU to re-establish constitutional order. Reaching an agreement with the IMF will be crucial for avoiding a full-blown financial crisis.
The scope for recovery is limited between the pandemic and the political crisis.
The health and political crises and social unrest continue to affect the economy. While the country has started to recover, convergence to pre-pandemic output will be heavily constrained by a slow vaccine rollout, the ongoing political crisis, and the underlying threat of social unrest. These uncertainties, alongside still high unemployment (expected at 16% in 2022), are expected to undermine consumer confidence, weighing on the contribution of household consumption (75% of GDP). The unfavorable effect of uncertainty is even more substantial for investment, as businesses will likely adopt a “wait and see” attitude until the political situation is resolved. A deal with the IMF is reached. Public investment will be constrained by the need to keep fiscal spending under control. The fragile banking sector will be unable to support the real economy in the event of an adverse shock, which poses a further downside risk to the investment outlook. The hard-hit services sector (50% of GDP), led by tourism, will rebound with the vaccination campaign. Still, tourist activity is not set to recover to pre-pandemic levels before 2024. The manufacturing industry (16% of GDP) is relatively well-diversified (hydrocarbons, chemicals, phosphates, basic electronics, automobile, and aeronautical parts) and should benefit from recovering external demand, particularly from Europe. Olive oil producers (one of the rare sectors not to have suffered from the crisis) benefitted from the commodity price boom and should continue to prosper. Despite a rising energy import bill, higher exports and subdued imports due to weak domestic demand will lead to a minor negative contribution to net exports.
Without IMF support, a sudden stop crisis cannot be ruled out.
Tunisia received assistance from the EU in mid-2021 (EUR 300 million) and the African Development Bank (EUR 60 million) for economic recovery and social integration. This partly compensated for the amortization of maturing loans and the pressure on foreign exchange reserves, which still stand at around four months of imports. However, the ongoing political crisis is straining relationships with vital foreign backers. Chief among these is the IMF: with a new extended facility, short-term financing needs are likely to be covered, posing a severe threat of restructuring or default. Nonetheless, a deal can be reached if the government makes the necessary fiscal commitments. Although still high, the fiscal deficit is expected to narrow as revenues increase (modestly) and capital and current expenditures decline. Although the foreign currency share of debt is high (56% in Euro), around 70% is owed to multilateral and bilateral creditors. Moreover, the debt ratio will be vulnerable to currency depreciation. The external debt (over 90% of GDP) is expected to remain high, and the majority (80%) will continue to be public or publicly guaranteed debt. The diner has remained stable recently, but failure to ensure debt sustainability could trigger capital flight and a currency crisis.
While the modest recovery in tourism will help improve the services balance, this will be more than compensated by a deterioration in the goods balance due to rising import prices (energy in particular). Hence, despite positive contributions from the income and current transfer accounts, the current account deficit will widen. Failure to resolve the political crisis will result in lower FDI, adding further pressure on the dinar and currency reserves.