Tunisian Economy fights off Terror Threat

The terrorists who have targeted Tunisia’s tourism industry will fail to derail the north African country’s slow but steady recovery from the recession induced by its 2011 revolution, analysts believe.

The slaughter of 38 foreign tourists in the resort of Sousse in late June and an attack on the Bardo Museum in March that left 23 people dead are, of course, primarily a human tragedy.

However, amid a warning from the UK government on Thursday that a further attack was “highly likely” and that British tourists should leave, the damage has a clear knock-on effect on Tunisia’s economy.

Despite this, analysts covering the country remain reasonably upbeat. Arnaud Louis, a director in the sovereigns group at Fitch Ratings, still forecasts economic growth of 1.9 per cent this year, even if that is below the 2.3 per cent recorded last year and Fitch’s earlier forecast of 2.8 per cent growth in 2015.

A more upbeat Jason Tuvey, Middle East economist at Capital Economics, still sees growth rising to about 4 per cent in 2016-17, double the average rate since 2011.

“While the hit to tourism is likely to keep growth relatively subdued this year, further ahead signs of political progress and the onset of economic reforms should support a pick-up in activity,” says Mr Tuvey.

In 2014, tourism directly accounted for 7.4 per cent of Tunisia’s gross domestic product, according to the World Travel & Tourism Council.

This is, however, less than in the years preceding the revolution — which saw notoriously kleptocratic dictator Zine el-Abidine Ben Ali toppled in one of the first acts of the Arab uprising — when it typically topped 9 per cent. Tourist numbers, which fell sharply in 2011, are yet to return to their highs of 7m a year.

However, the tourism sector’s contribution to Tunisia’s gross domestic product rises to 15.2 per cent when indirect effects, such as from investment, the supply chain and “income induced” impacts, are factored in, says the WTTC.

Tunisia has the 48th largest tourism sector relative to GDP in the world, behind Mediterranean neighbours Morocco and Greece but ahead of Spain, Egypt and Italy.

Using this broader measure, the sector also accounts for 12 per cent of employment, about 500,000 jobs, and 9 per cent of current account receipts ($2.1bn in 2014).

Mr Tuvey accepts that, given the terror attacks have been specifically aimed at visitors, they are likely to “deal a hammer blow” to Tunisia’s tourism sector.

Yet he holds out hope that the reversal may prove short lived, noting that Egypt saw a 40 per cent fall in tourist arrivals after 62 people, mainly tourists, were killed in an attack in Luxor in 1997, yet saw arrivals return to their previous peak in less than two years.

But any further attacks may make it harder for Tunisia to recover. Moreover Tunisia’s sun, sea and sand seekers could relatively easily get their fix elsewhere, a harder task for those transfixed by Egypt’s pyramids.

Mr Louis warns that “a material increase in security-related, social or political instability would put negative pressure” on the BB minus sovereign rating Fitch ascribes to the country, two notches into non-investment grade and four notches below the BBB rating Tunisia enjoyed before the revolution, an unusually precipitous fall.

Despite this, Mr Louis stands by Fitch’s decision to upgrade Tunisia’s outlook from negative to stable in March.

“As long as we don’t see a risk of politics becoming unstable, I think the rating would be fairly resilient at that level,” he says.

Indeed, Mr Louis’s relative optimism, and that of Mr Tuvey, stems from elections in December that delivered a broad coalition government seemingly committed to growth-enhancing structural reforms.

“The government has made the right noises about much-needed economic reforms. It has announced plans to push ahead with subsidy cuts, seen as vital to putting the public finances on a more sustainable footing,” says Mr Tuvey.

Mr Louis welcomes proposed improvements to Tunisia’s investment code and bank restructuring regime, as well as fiscal reforms required by the International Monetary Fund. While the need to ensure a “social and political consensus” could mean implementation is slow, he believes the effects will begin to be felt by 2016.

Hopes for a smooth transition to democratic stability were reflected in $4bn of orders for a $1bn 10-year bond the government got away at a 5.875 per cent yield in January.

Lower oil prices are also seen as helping Tunis narrow its twin current account and budget deficits.

As to where growth might come from, Mr Tuvey says Tunisia has the scope to copy neighbouring Morocco, which has set itself up as a manufacturing hub for Europe, attracting the likes of Renault, the French carmaker.

In particular, with eastern Europe becoming relatively wealthy by emerging market standards, he foresees jobs being transferred to lower wage economies in north Africa, particularly Tunisia, given that it probably has a better education system than Morocco or Egypt.

Mr Louis also sees Morocco, with its tax-free zones, as a model for Tunisia to follow, while the establishment of a bad bank to remove non-performing loans from the banking system has probably become more crucial, given the likely impairment of some of the loans made to the tourism sector.

Whatever happens in the coming weeks and months, though, one constant is likely to be that Europe and the US will continue to offer financial, economic and political support to a country seen by many as the sole success story of the Arab uprising.

Source: The Financial Times