Tunisia, May 16th 2025 ,
Things don’t always go according to the textbook ! Tunis is still standing !
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We aim here to bring you regular updates on factors and events impacting financial markets in the Middle East and North Africa region with an accent on foreign exchange and rates.
We also aim to bring reflections on certain topics and subjects, close to recent events, which we think are worth stopping on .
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Carthage, Tunisia.
Things don’t always go along the textbook ! Tunis is still standing !
Before,
What is a bit of extra cash between friends ? Do numbers mean anything anymore ? Long before Trump’s visit to the Gulf, promises of incredible investments were flying around. Now that the President touched ground we see a bit better. Saudi Arabia was first to fire and it will be 600 bn $ of commitments. The Kingdom’s population is about 35 millions with a bit more than 55 % of nationals. Qatar aired 1.2 trillion dollars : for the record, there is about 2.8 million inhabitants in Qatar of which less than 400.000 Qataris. So 1.2 trillions would correspond to 4 million $ per Qatari national. The bar is set very high for the UAE now even if Eric Trump warmed up the room with hotels and some crypto deals ahead. Weapon procurements, AI, energy, technology, planes. The President will be happy to fly in a Qatari Boeing 747 after blasting the American company for its delays to deliver new Air Force One jumbos. If we heard correctly, they will have to deliver over 100 jets to Saudi airlines and close to 200 to Qatar Airways and we don’t know yet for the world’s biggest airline, Emirates. Markets are noT impressed : in a super bullish environment, after the US-China trade pause, Boeing is just up 4 %.
Now, Tunisia,
And it was in Tunisia , as the legend will say in years from now, that the Arab Spring started. Today there is not much of it left to be found in Tunisia nor in any of the countries that “ experienced it “ .
In Tunis in 2019, Mr Kais Saied , a then law professor and politician, with the support of Tunisians fed up with a dysfunctional political system, was elected President.
Long story short, while the pandemic raged, fractious confrontations between the government, the prime minister and the president ,and later violent demonstrations, President Saied dismissed the Prime Minister, suspended the Parliament and later the Constitution , announcing his intention to put a new one for referendum later.
Initially, Tunisians supported him amid strong disillusions and the failure of the different governments following 2011 to improve their lot.
The power grab turned to dissolving the independent Supreme Judicial Council . 96 % of those taking part in the referendum supported the new constitution but the turnout was very low. Again they had nothing to lose. It turned the political system into a presidential regime with few parliamentary or judicial checks. The Consultative Commission formed by Pdt Saied to create a first draft for the new constitution delivered it in 2 weeks ; 8 years earlier, the process took more than three years. Many from the civil society and Tunisia’s largest trade union refused to participate in the discussion.
All the while the security apparatus was clamping down on political opponents and critics. Press freedom was curtailed. Reports of serious abuses on African migrants looking to transit to Europe via Tunisia abounded. The new constitution turned the President into the Executive, the Parliament and the Judiciary altogether . Interestingly, no clause in the new Constitution allows for the removal of the president.
Economically and financially with important consequences, President Saied decided to do away with the IMF, thus rendering access to international financing more arduous.
Fast forward to fall 2024, President Kais Saied was reelected with 90 % of the vote with a very low turnout ( 28 % ) and the almost total absence of participation from the 18 to 35 age class, 6 %.
Economically, the President has chosen to pursue an expansionary and populist fiscal policy : the outcome is large public deficits, a stagnant economy, rising unemployment, high inflation, declining investments and domestic financings.
Few numbers below ( IMF, World Bank ) :
· Tunisia is diverging from its regional neighbours and will be the only country with real GDP still below pre-Covid levels.
· Agriculture is still a drag on the economy. Although 2024 was better than 2023, output is highly dependent on rainfall and available water reserves. Tunisia has been suffering from severe droughts since 2015, 8 dry years out of 9 and 5 consecutive years after 2019. Rainfall for the 2023/24 season was 64 % of historical levels. Rain often fell away from catchment areas or too late in the cereal cycle. Dams’ fill rate is at 22.3 % and available water reserves are down 13.5 % compared to same period in 2023 and 21.3 % over a 3 year average. And it is supposed to get warmer !
· Limited domestic and external demand;
· Three key sectors in negative growth : garments ( -9.7 %) , oil and gas ( -15.7 %) and construction ( -4.3 %).
· But tourism up 7.4 %.
· Labour market pressure : unemployment is higher at 16 %, labour force participation rate is declining to 45.8 % and high unemployment rate for the youth.
· Declining saving and investment rates : low investment constrains Tunisia’s ability to bring modern technologies from abroad and spread them and that is key for a transition to upper-middle income status.
· The trade balance has improved thanks to favourable effect , price and volume, in the agro-industrial sector. But the energy balance despite better prices worsened.
· Improved tourism inflows ( +7.2 % y/y ) and foreign workers’ remittances play their part to reduce the C/A deficit. Tourism contributes 3.1 % to GDP and remittances 3.3 %.
· A lower C/A deficit eases the strain on external financing needs but debt servicing remains high
· Tunisia continues to rely on sovereign lending to finance its foreign exchange needs. The door is virtually shut for international private financing. Portfolio and capital account flows are mostly absent due to strict controls on capital outflows. FDIs did better but cover only 18 % of financing needs.
· Due to the internal situation and its sovereign credit rating, Tunisia has been unable to issue foreign-denominated bonds since 2019.
Now a fine balancing act ,
· As sovereign financing shrinks, the government has turned to domestic sources to cover external needs. In February 2024, the Parliament instituted a Central Bank facility to finance the budget up to 7 bn TND for 2024 ( 4 % of GDP and 42.7 % of the government external financing needs ) including from its FX reserves. For 2025, the CBT will again contribute its 7 bn TND .
· The amount of domestic financing contributed by the domestic financial sector ( loans, bonds and t-bills ) will reach 15 bn TND or 9.4 % of GDP and this expected to grow to 11.8 % in 2026.
· To make things easier and to incentivise banks, the CBT removed restrictions on the collateral type for repo financing, meaning collateral can be entirely government bonds, hence the continued interest of banks to invest in those bonds.
· The government also tapped the domestic banking system to help finance its external needs. Domestic banks will lend the budget about 5.6 bn TND, 80 % from local-currency national borrowing program, the rest in foreign currency.
· The banking sector exposure to the sovereign and the Central Bank is 21 % of their assets by the end of Q3 2024 and 60 % of domestic debt is held by domestic banks ( 37 % ) and the CBT ( 23 %).
· Fitch estimates that the country’s external amortisation will shrink to 4.9 % of GDP in 2025 from 5.9 % in 2024 while the domestic long-term amortisation is going the opposite way, from 5.3 to 5.8 %.
· It concludes by adding that the banking sector has sufficient liquidity to meet the country’s financing needs thanks to healthy deposit growth and sluggish credit demand.
· In short, the government is crowding out the private sector which is not healthy.
· Two opposite trends : while the share of government in total credit has grown from the low 20 % in early 2020 to above 35 % now , the year-on-year growth in credit to the economy dropped from above 9 % to below 3 % now.
· One more , the exposure of the banking sector to state-owned entreprises is also rapidly increasing : one example, Banque Nationale Agricole ( BNA)’s exposure to the Office des Cereales has grown three-fold over 5 years and is one third of total credits !
· Surprisingly with all this, foreign reserves have actually gone up and the dinar has been very stable despite the risk of monetary financing and inflationary pressure.
· Reserves expressed in months of imports have also gone up ( 4.9 months now ) and above the 3month recognized threshold for safety ( Bahrain has only1.5 months )
· Fitch expects Tunisia to secure about 1.5 bn$ in external funding in 2025 or about 2.8 % of GDP , roughly the same as in 2024. It’s rating for Tunisia is CCC+. Moody’s recently upgraded the long term issuer rating from Caa1 to Caa2.
· Inflation has started to decline and should move further down with lower energy costs.
· The benchmark rate that was at 8 % since early January 2023 was cut to 7.5 % on the 27th of March 2025.
Done with numbers !
It seems that nothing much has changed since President Zine El Abidine Ben Ali was kicked out in 2011. Same populism , same absence of reforms, same absence of perspectives for the young educated and uneducated with the only hope to migrate . The declining standards of living are encouraging corruption . And the government is vampirizing the private sector with its financing needs.
Pledges of financial support from Italy or France are merely there to help reduce the flow of immigration from Tunisian shores.
The European Investment Bank ( EIB ) has been stepping up its efforts to Tunisia committing 415mn euros of financing.
Before the summer last year, Tunisia and China signed a “ strategic partnership agreement” encompassing political and economic aspects. President Kais Saied said about the IMF “ we should reject diktats that will only lead to more poverty “ . Thus the rupture of talks between Tunisia and the Washington institution.
Despite all this , the value of the Tunisian dinar has remained remarkedly stable.
Foreign exchange reserves are quite high looking at the situation and the import cover ratio is also quite comfortable.
True, import restrictions put in place by the government are limiting demand for foreign currencies and contribute to maintain FX reserves.
A few words on the FX market :
· Hard currencies are difficult to get locally.
· Foreign exchange regulations mean that an offshore entity cannot buy foreign currencies from a local entity .
· As you know , the Dinar is a trade-weighted basket of currencies with the two heavier components being the Eur and the Usd.
· The average notional deal in the interbank FX market is small, typically between 1 to 3 mio $ or Euros. Same for the funding in offshore.
· In theory, forward prices can go up to 2 or 3 years ; in reality, it doesn’t deal much beyond the short end ; longer deals are sporadic.
· There is possibility to transact via NDF to avoid delivery issues.
· A little quirk : spot trading is mostly based on Eur versus Tnd ; forwards mostly Usd versus Tnd.
· For the brave enough, funding short Tunisian dinar position is a challenge beyond the very short term. Local entities will not provide any assistance.
· Another obstacle is linked to the perceived perilous situation of Tunis’s public finance and debt : most international banks have pulled their limits on local banks. It doesn’t help that apart from beautiful beaches and Roman architecture, the country doesn’t have any obvious strong points. Some key industries haven’t performed that well recently ( garments, oil ).
· In fact, the biggest flows affecting the Dinar market in the offshore are corporate entities buy Tunisian dinars for various maturities going up to 2 years: outsourcing companies, operational costs..
Looking at all the above and the political and fiscal risk, one would not take the chance to bet on the Tunisian dinar. The lack of market liquidity and absence of market depth do not make the currency an obvious choice for a “ punt”. Counterintuitively though , if you had to, - it is more attractive to be long the Tunisian dinar versus either the Euro or the US dollar.
Since December 2023, according to the Central Bank’s statistics, the average of the Usd/Tnd on a monthly basis was 3.11 and against the Eur 3.36. Looking at a chart , the currency has been moving within more or less +/- 2.5 % around. Now if you are lucky, you might be able on the forward side to get from 350 to 400 bps above $ rates, that’s the mid of the FX swap curve . But that is if you are lucky. As said above, most of the interesting flows passing through the offshore markets are Buyers of Tnd and they can be of decent sizes and maturities relative to this market . So there is natural interest to sell Usd or Eur outright to get rid of those flows.
The interesting point here is not what one can do with the currency but rather that for a country that ticks most of the negative boxes, from biting the hand of the IMF to roll backwards any kind of democratic steps that were taken before ( not that EU or the US had much to say as they remained very silent about what President Saied has imposed his country ) and to finance budget deficit via the Central Bank, its markets and currency have remained very stable. Many international banks pulled their lines and retreated on fear that the CBT would fail to repay external sovereign bonds. But no, they are still standing and no default is apparently looming ; on the contrary, they even managed to increase foreign exchange reserves ! That is little comfort for Tunisians !
Thank you !
DC