• Growth should pick up to 2 percent this year
  • But the country is still exposed to significant macro vulnerabilities
  • S&P Global Ratings considers Tunisian banks as a source of worry


By Levy-Sergio Mutemba

An International Monetary Fund (IMF) mission led by Björn Rother visited Tunis from November 30 to December 13 and concluded the second review of Tunisia’s economic program supported by the four-year IMF Extended Fund Facility (EFF) approved in May 2016. In its end-of-mission report, the IMF underscores the main opposing forces that currently shape the Tunisian economy, six years after the Arab Spring.

On one side, growth should pick up to 2 percent this year, thanks to improved security and a 30 percent rise in tourism arrivals so far in 2017. Phosphate production, of which the country is the fifth producer in the world, also rebounded, while the IMF sees “early signs” of revival in domestic and foreign investment. This is for the positives.

Public debt will probably reach or surpass 70 percent of GDP by the end of the year. The record current deficit should be in double digits

On the negatives, the country is still exposed to significant macro vulnerabilities which cannot be dissociated from the former nepotism-based regime of Zine el-Abidine Ben Ali which fell during the Arab Spring. For its part, public debt will probably reach or surpass 70 percent of GDP by the end of the year. The record current deficit should be in double digits, according to the IMF, while international reserves are falling.

Significant macro vulnerabilities

Björn Rother also draws attention to the significantly higher food prices and the risks that it may pose to the stability of a democracy born out of a hard-won revolution. “Rising inflationary pressures require a strong response”, insists Björn Rother. “Inflation moved above 6 percent in November, driven by significant increases in food prices. At this level, inflation negatively affects disposable income and long-term investment.”

The Tunisian authorities have taken an important step in adopting a bold budget law for 2018

The Government of Tunisia has not remained idle. The IMF itself acknowledged it. “The Tunisian authorities have taken an important step in adopting a bold budget law for 2018, which aims at reducing the fiscal deficit to below 5 percent of GDP”, observes Björn Rother. Adding, however, that in order to achieve this “ambitious fiscal target” the Government will have to take critical steps related to its tax strategy as well as to reduce energy subsidies “which disproportionately benefit the rich” and press ahead with the reform of the social security system.

Banks are a source of contingent liabilities

The 189 country-member institution also underscored the risks posed by the banking sector, which is severely impaired by undercapitalization, corruption and conflicts of interests. In a separate report which Zimpeto Press received yesterday from S&P Global Ratings, we read that the latter considers the banking sector as “a weakness” for the economy and a “significant source of contingent liabilities for the government”.

Tunisian Banks NPL Ratios
S&P Global Ratings: “The Tunisian banking system continues to show weak asset quality, with nonperforming loans (NPLs) making up 15.6% of total gross loans at year-end 2016, after being severely set back by a series of crisis since the 2000s, including the political instability and security threats that followed the Arab Spring in 2011.”

Before the Arab Spring, when Tunisia was ruled by a president who arrived at power by a coup d’état, the banking sector was oriented towards strategic economic sectors of the economy in which Ben Ali had significant private interest. As a result non-performing loans (NPLs) reached 15.6 percent of total gross loans at the end of 2016.

The NPL coverage by loan loss provision is particularly low as well at only 60%, despite “recent efforts” made by the Central Bank of Tunisia (CBT), such as requiring banks to set aside higher provisions through higher haircuts on collateral value, for example. According to S&P Global Ratings, a quarter of all NPLs are made of legacy loans from the tourism sector.

Hope based on the Egyptian and Moroccan experiences

However, the rating agency remains cautiously confident about the authorities’ commitment to reform the banking sector, as, a decade ago, Egyptian and, to a lesser extent, Moroccan banks tackled similar asset-quality issues through structural reforms.

Tunisia Banks' Profitability
23 banks are currently serving a population of around 11.5 million. The Tunisian banking system is thus fragmented and overbanked. Banks compete for business from a relatively limited number of creditworthy corporates and opportunities in the retail sector are held back by high unemployment.”

“In Egypt, the government cleaned up public-sector banks through public-sector NPL repayment or asset swaps (mostly real estate) and replaced their top management with employees from the private banking sector”, remind S&P Global Ratings’ analysts Pierre Hollegien, Mohamed Damak and Anais Ozyavuz.

More specifically, S&P Global Ratings considers that financial restructuring of some government-related entities would help to improve credit quality and borrowers’ debt-repayment capacity of the Tunisian banking system.

It also suggests “regulations that are more write-off friendly, especially for legacy loans”, as well as a tightening of banking supervision, classification and provisioning requirements of NPLs. “The Moroccan central bank Bank Al Maghrib successfully resolved asset-quality problems with similar steps.”

Finally, the IMF believes that a transition to International Financial Reporting Standards (IFRS) norms and the publication of quarterly consolidated financials to improve transparency would be a necessary step to enhance Tunisian banks’ attractiveness to local and foreign investors and encourage market discipline.

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