Thursday, May 30, 2013

Tunisia not immune to economic fallout from Arab Spring

The Arab Spring revolutions scored a number of political victories by removing several entrenched and ruthless dictators. The movement however failed to make economic strides, particularly in the lives of most ordinary people. In fact economic conditions in Egypt have deteriorated significantly since the revolution (see discussion). Many argue that these issues are temporary and will subside once political stability returns. Perhaps. For now however things are not looking great for the Arab Spring economies.

Take Tunisia for example. It had built a diverse, market based, export oriented economy, delivering a fairly consistent strong growth. The nation became an economic success across North Africa and the Middle East.
The CIA: - Tunisia's diverse, market-oriented economy has long been cited as a success story in Africa and the Middle East, but it faces an array of challenges during the country's ongoing political transition. Following an ill-fated experiment with socialist economic policies in the 1960s, Tunisia embarked on a successful strategy focused on bolstering exports, foreign investment, and tourism, all of which have become central to the country's economy. Key exports now include textiles and apparel, food products, petroleum products, chemicals, and phosphates, with about 80% of exports bound for Tunisia's main economic partner, the European Union. Tunisia's liberal strategy, coupled with investments in education and infrastructure, fueled decades of 4-5% annual GDP growth and improving living standards.
However, since the revolution, the Tunisian currency (the dinar) has been deteriorating, as capital continues to flow out of the country. The central bank has been trying to stem the decline (see article) with minimal success.

DNR/USD (dollars per one dinar)

That currency weakness (combined with other factors) is fueling inflation, which is becoming entrenched. Increases in food prices and rent are of particular concern.


At the same time the GDP growth has fallen to 2.7% per year. With the unemployment rate of around 17% and inflation becoming a real problem, political instability is sure to follow. There is a good chance now that the parliamentary and presidential elections will be delayed, increasing the risk of more social unrest.
JPMorgan: - We believe parliamentary and presidential elections are unlikely to be held before early 2014. In our view, discussions of the draft constitution by the constituent assembly are likely to revive political tensions in coming months. As an example, the opposition has fiercely criticized the draft constitution while President Marzouki is set to face a no-confidence vote before the constituent assembly. We believe the vote is unlikely to pass. Yet, the political rift will continue to dominate the constituent assembly, in our view, and to delay the formation of the independent commission to oversee upcoming elections, which will likely delay the elections.
Moreover, Tunisia's trade deficit continues to worsen while the banking system is becoming strained. Many bank shares have declined in value quite substantially (some banks look completely undercapitalized).

The nation's government budget deficit is also widening while foreign reserves have fallen sharply. As a result Moody's cut Tunisia's sovereign rating yesterday, with further downgrades possible.
Moody's: - The first factor underlying Moody's one-notch downgrade of Tunisia's government ratings to Ba2 is the country's persistent political uncertainty and the risk of instability. Although tensions have declined since the assassination of politician Chokri Belaid and the collapse of Prime Minister Hamadi Jebali's interim government in February, the risk of a further escalation in political instability remains high. ...

The second driver of the downgrade of Tunisia's sovereign rating is the fragile state of the Tunisian banking sector, particularly the large government-owned banks, which have severe asset quality issues and are largely undercapitalised. ...

The third driver of the downgrade is the significant external pressure on the balance of payments and government finances, as reflected by the decline in the country's official foreign-exchange reserves which cover the costs of only 95 days of imports (as of end of May).

Moody's has assigned a negative outlook to the rating to reflect the challenging political situation in Tunisia and the sizeable external pressures on the balance of payments and government finances. Any renewed period of political instability would likely have further negative consequences on the recovery of the economy, on fiscal metrics and also on the wider reform agenda in Tunisia.
In spite of all the excitement around Arab Spring, the movement so far has resulted in economic deterioration and growing risks to the stability across the region. Unfortunately, even a relatively prosperous and stable nation such as Tunisia has been unable to escape this fate.
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