Tunisia: Political uncertainty intensifying financial pressures

Event

On 11 October, Tunisian President Kais Saied appointed a new government headed by recently nominated Prime Minister Najla Bouden – the first woman to occupy the position in Tunisia. The appointment came more than two months after the President dismissed the previous Prime Minister, Hichem Mechichi, suspended parliament and assumed full executive power. The political move came after months of tensions between the President, the former Prime Minister and Parliament Speaker Rached Ghannouchi. The President, however, pointed at Tunisia’s economic and health crisis as justification for the extraordinary measures.

Impact

Since the Arab Spring that led President Ben Ali to step down, Tunisia has been used to recurrent political instability – as a result the country had 9 prime ministers between 2011 and 2020. The current political crisis, however, is viewed by many observers as a real threat to the democratic gains made by country. Despite having appointed a new government, the President has kept in place emergency measures imposed in July, thereby restricting the responsibilities of the government. Concerned by the political instability, international donors such as the European Union have called for the resumption of the democratic order and functions.

As a result of the suspension of parliament, the discussions initiated by the previous government with the IMF on a possible programme have been halted indefinitely. This is a source of concern as Tunisia’s fiscal and financial positions have degraded significantly in the last decade. The introduction of structural and credible fiscal reforms – under the supervision of the IMF – are considered key steps in keeping public debt from becoming unsustainable and improving macroeconomic stability. Even before the current political crisis, however, the introduction of reforms targeting among others the civil service wage bill, energy subsidies and state-owned enterprises was considered very challenging given the strength of trade unions and the risk of further social unrest.

Without fiscal consolidation measures being implemented, the public debt, which increased to almost to 90% of GDP in 2020, is expected to increase further. With more than two thirds of public debt consisting in external debt, the increase has led to an increase in gross external debt and debt service over the years. This has deteriorated the financial risk for Tunisia, thereby putting pressure on Credendo’s MLT political risk rating, which represents a country’s solvency. Concerns about Tunisia’s financial situation have limited its access to international capital markets. Indeed, in recent months, the country has been downgraded by notable credit agencies. A sharp tightening of global financial conditions (e.g. amid an increase in the US interest rate) would further restrict the country’s access to international markets while swift implementation of reforms under the auspices of the IMF would improve the outlook.  

Looking ahead, Tunisia’s economic outlook remains challenging and fragile. A partial recovery of 3% GDP growth in real terms in 2021 and 3.3% in 2022 is predicted, supported by the acceleration of the vaccination roll-out. Nevertheless, the predicted growth in 2021 and 2022 would not be sufficient to compensate for the contraction experienced in 2020 (8.6%). After all, the current political instability, the Covid-19 outbreak experienced during the summer, subdued support measures (amid a lack of fiscal space) and the muted recovery of the tourism sector are weighing on the recovery.

Despite the challenging environment, Tunisia’s short-term and medium- to long-term political risk classifications remain unchanged in category 5/7 and 6/7 respectively. Nevertheless, the country’s fiscal and financial vulnerabilities are putting significant pressure on the classifications.

Analyst: Andres Hernandez Cardona – a.hernandezcardona@credendo.com