In the face of macroeconomic uncertainties, Tunisia seeks financing

By Puja Sharma

The country’s banks are navigating major uncertainty and significant macroeconomic pressure

Tunisia seeks to secure an IMF program to alleviate its twin deficits, the country’s banks are navigating major uncertainty and significant macroeconomic pressure, according to a new S&P Global rating scenario analysis report published today.

“With a potential IMF deal looming, we have analyzed the current situation and considered the potential financial and economic implications for the banking sector under three hypothetical scenarios, from low stress to severe stress. Under the latter, we stress tested the resilience of the banking system to a potential sovereign default,” said S&P Global Ratings credit analyst Mohamed Damak.

The COVID-19 pandemic and prevailing political uncertainty have weighed on Tunisia’s economic activity in recent years. According to the IMF, the country’s economic growth is expected to reach 1.6% in 2023, while its fiscal and external deficits will likely total a cumulative 13% of GDP. The country faces major hurdles to raise external funding and internal divides have reportedly caused delays in mobilizing the necessary resources. The Tunisian authorities and the IMF are in talks to agree a program that entails important reforms.

The World Bank Board of Executive Directors has approved a $120 million loan for Tunisia to fund the project “Support to Small and Medium Enterprises for Economic Recovery.” The project aims to address the primary long-term liquidity constraints faced by Tunisian firms by financing long-term lines of credit that will be on-lent by the Ministry of Finance to participating financial institutions for lending to eligible small- and medium-sized enterprises (SMEs).

“SMEs play a key role in the Tunisian economy. The COVID-19 pandemic and the war in Ukraine have caused macroeconomic imbalances in Tunisia, which have exacerbated challenges faced by SMEs and weakened their performance and financial health,” said Alexandre Arrobbio, World Bank Country Manager for Tunisia. ”Through this project and other financial sector support programs, the World Bank, together with our partners, is pursuing support for the Tunisian government’s recovery plan. This plan includes pivotal financial sector reforms that the authorities are undertaking to strengthen financial sector regulation and supervision, further develop financial infrastructure, and promote broader financial inclusion.”

Tunisian SMEs’ access to finance is insufficient. According to the World Bank’s 2020 Business Surveys in Tunisia, SMEs have seen their access to financing deteriorate over the years. For instance, access to funding was considered a major constraint by 21.9 percent of firms in 2013 and by 43.9 percent of firms in 2020. SMEs that do have access to funding mainly obtain short-term credit due, in part, to a lack of long-term liquidity in the banking sector. Indeed, capital markets and contractual savings institutions, the main sources of long-term financing in many emerging markets, still need to be fully developed in Tunisia.

The World Bank consulted with a broad range of stakeholders during the preparation of this project, who endorsed the lines of credit. This support to SMEs is realized in cooperation with other partners, including the Agence Française de Développement (AFD) and the European Investment Bank (EIB), which are planning to extend similar credit facilities by the summer, subject to satisfactory due diligence and board approval.

In this context, banks’ exposure to the state remains significant at 83% of total equity on Aug. 31, 2022 (including direct lending to the public administration exposures), up from 5.1% at the year-end 2010. Although this is lower than that seen in some peer banking systems, it represents a major source of risk given the lack of visibility on how the country will finance its twin deficit.

“Overall, the calculations show that a Tunisian sovereign default might cost the banking system $4.1 billion-$7.6 billion, or 8.0%-14.8% of forecast nominal GDP at year-end 2023. Our calculations exclude the potential effects of a sharp depreciation of the Tunisian dinar, which might add to these costs,”  Damak noted.