Tunisia

Country Risk Assessment

Amina Muhtar Country Risk Analysis CERAM February 1, 2008

Abstract This purpose of this paper is to identify and assess the risk associated with investing in Tunisia. The assessment will primarily be based on the balance of payments, focusing on debt levels, deficit level, trade and competitiveness. Based on the BOP assessment of Tunisia and other financial and political indicators, my analysis finds that Tunisia offers an apparently progressing sound market economy and stable environment for investment.

Introduction: An overview of the Tunisian Economy In the past few years, Tunisia has had many economic and fiscal achievements. Among the few include an average annual economic growth rate of 5.0751 percent during 2005 to 2008, an improving terms of trade from -5.8 in 2005 to 1.7 in 2007, a steadily rising annual investment rate and a decline in foreign debt as a percentage of GDP from over 80 percent in 2003 to approximately 60 percent in 2007. Measured in terms of its Human Development Index (HDI), Tunisias status has increased from 0.703 in 1998, via 0.745 (HDI 2002) to its most recent rating of 0.76. In relation to other countries with a regional average of 0.716, Tunisias index ranking is consistently increasing alongside other human development indicators. The GDP per capita at PPP has soared from $4500 in 1996, via $7800 in 2005 to a forecasted $8490 in 20082. In general, Tunisias high level of poverty reduction in recent years is incomparable to nearby countries in its region, though poverty levels are still very high in rural areas. One of the main problems the economy faces is its high external debt level. Other problems include high unemployment levels and its inefficient banking sector. The inefficiency is characterized by strong state intervention and high non-performing loans (NPL) that account for over 21% of total loans3. As a percentage of GDP, Tunisias 2008 foreign debt level is forecasted at 58.2%, although this amount has been declining for the past decade, Tunisia is still facing a strong debt burden and improved fiscal consolidation is essential to strengthen Tunisias debt position. Balance of Payments Overview In the past decade Tunisia has significantly improved its trade flows and competitiveness through increased economic integration with the EU and through the constant depreciation of the Tunisian Dinar, resulting in strong export growth. Tunisia has a free-trade agreement with the EU mainly based on dismantling tariffs and liberalizing the service sector4. The cooperation between Europe and Tunisia will
1 2

Calculation based on Real GDP data from IIF, (2007). Sum (4.2,5.4,5.6,5.1)/4=5.075 COFACE, (2008) 3 Saddem, (2001) 4 Bertelsmann, (2007)

improve many areas relating to Tunisias macroeconomic and fiscal reforms, private sector development and will enhance a social balance. Though, the fact that Europe is Tunisias main trading partner (responsible for over 80% of Tunisias exports) creates uncertainty for investors based on the risks associated with a potential slowdown in time periods of lower demand from Europe. An issue with Tunisia is that the economy relies primarily on the tourism and textile sector. Globalization has increased competition, especially within the textile industry. Tunisia will have to boost its textile industry to be able to compete with other major producers of textiles like China, otherwise there is a risk in losing some of the key demanders for textile exports (Europe). In addition, the reliance on tourism sector also may cause harm to the economy in the even of an adverse shock. The tourism sector is dependent on many factors and any small shock from weather changes, natural disasters, to political turmoil can have a significant impact on Tunisias tourism sector and investor attractiveness. Tunisia currently faces a current account deficit of 3%. One issue that may concern potential investors is the risks associated with inflation. High and volatile international oil prices combined with the gradual removal of oil subsidies are the primary concerns for increasing inflation and inflationary pressures. A recent summary appraisal5 of Tunisia indicated that the widening of the current account deficit from 1% of GDP in 2005 to 2.9% of GDP in 2006 was a result of higher oil prices. Political Outlook Tunisia is a one party state under President Zine El-Abidine Ben Ali. Tunisia has very little political liberalization and because of its authoritarian context, there are no veto powers and political enclaves. This enhances a stable political and social situation, with limited possibility of political turmoil as almost all effective power lies under President Ben Ali. Conclusion The steady increase in economic growth and the improvements in macroeconomic
5

IIF, (2007)

indicators could be expected to further increase through acceleration of Tunisias structural transformation based on more skill-intensive sectors6. Despite inflationary pressures from persistently high and volatile oil prices, fiscal flexibility has overall been improving as the public debt levels decline and oil subsidies are gradually removed. High unemployment as well as the weakness of private investments and FDI remains very critical in determining the direction of Tunisias growth. Overall, Tunisia provides a good opportunity for diversification and investment.

Sources

IIF, (2007)

IIF, 2007. Summary Appraisal Tunisia. The Institute of International Finance, Inc. February 9, 2007 COFACE, 2008 Country Risk Assessment, Tunisia. Retrieved January 27, 2008 from Saddem A.,2001. How Tunisia is Meeting the Challenges of Globalization. Finance and Development IMF Magazine. Retrieved January 27, 2008 from http://www.imf.org/external/pubs/ft/fandd/2001/12/saddem.htm