Fri, Aug 19, 2022
by Gary Kleiman
Tunisia’s democratic unwind the past year as President Saied first took full temporary power and dissolved parliament, and then enshrined executive omnipotence through a rushed constitutional referendum turned the regional investor spotlight again on the Arab Spring epicenter over a decade ago. As an MSCI frontier stock index member it is down 15% through July, and sovereign bonds trade at distressed levels, with the nearest 2024 maturity priced in the mid-60s. Before the political tug of war financial crisis was imminent with an 80% debt/GDP ratio, lackluster growth, and outsize public payroll that consecutive International Monetary Fund programs failed to tackle.
Nonetheless a new $4 billion request was tabled last year and remains in play after the President replaced the negotiating team and installed his own prime minister. The central bank has stayed in technocrat hands, and the governor warned explicitly of a hyperinflationary economic “Venezuela” meltdown scenario without an urgent official lender infusion and sweeping fiscal/monetary policy reforms. This plea largely repeated the post-2011 mantra there and in neighbors Egypt, Jordan, and Morocco as they endured their own anti-regime convulsions at the time. Finances are no better with high debt, pegged exchange rates abandoned by other developing regions, and overwhelming state presence in banking and industry. The IMF is on continued call, with innovations like a Middle East/North Africa dedicated institution stillborn as the London-based EBRD expanded its geographic footprint.
The US in Tunisia’s case went back to the post-communist transition East Europe playbook and rolled out a dedicated venture capital fund without the surrounding securities market ecosystem in place. Without lasting conditions attractive to commercial banks and asset managers at home and abroad, financial aspirations were dashed with anti-authoritarian ones. President Saied’s direction will stand so long as local and international business leaders do not offer a vision out of perennial cash shortfalls, youth unemployment, and stagnant aid delivery. A second post Arab Spring iteration can embrace partial privatization, flexible currencies, and policy and practical support from third party direct and portfolio investors alongside development professionals.
Washington has spoken out against President Saied’s actions including harassment and detention of opposition parties and leaders of the politically-influential labor union federation. It expressed doubts about the validity of the new constitution vote, with official results at over 90% approval with 30% turnout. Raw data was not publically disclosed amid outside observer irregularity citations, and the President personally appointed all members of the oversight body. Economic aid may be suspended and the US, as the largest shareholder in the IMF, is under pressure to abstain in an eventual board decision. Even with continued engagement past practices will no longer make sense, such as partial sovereign bond guarantees. Tunisia is now C-rated in the near default category with yields in the 25% range, and enhancement cannot alter the near-term underlying calculus. GDP will increase modestly at 2-3% as the budget deficit approaches 10%, and inflation was 8% in July on food and fuel import costs. The managed exchange rate is at a record low 3 to the dollar as tourism, which accounted for nearly 10% of GDP pre-pandemic, remains lackluster. The main bridge for the chronic trade gap is remittances from workers and families who have already fled abroad and continue to cross the Mediterranean by the tens of thousands in rickety vessels to reach Europe. Another mainstay US State Department program was small business loan promotion through the government dominated elite corporate customer banking system. It entailed years gaining passage of a secured transactions law that was supposed to allow credit without onerous personal collateral pledges, but historic banks were never broken up and divested to give fresh entrants and products a chance.
Egypt under President Al-Sisi has been compared with the original ousted Mubarak regime in human rights terms, and economic policies too have been in a time warp. The stock exchange has barely moved on a handful of army-controlled company divestitures announced five years ago, a pegged exchange rate is in place after serial IMF vetted devaluations, and public debt/GDP is 90%. For financing the government improvised a formula of Treasury bill double-digit yield issuance that could lure speculative foreign investors. Massive inflows in the $15-20 billion range followed equal outflows on consecutive occasions, such as this year when the country was added to JP Morgan’s benchmark local bond index and then bled FX reserves in the aftermath of the Russia-Ukraine war.
Jordan and Morocco still have royal families in charge, with a rotating cast of directly-appointed prime ministers and consultative parliaments by popular vote. Both have experienced a post-war phosphate export bump but depend on geopolitical position to gain Gulf and Western donor funding. Rabat has leveraged ratification of the Abraham Accords with Israel, while Amman is home to millions of Syrian, Iraqi, and Palestinian refugees. The Moroccan currency is now pegged to a dollar-euro basket and can marginally fluctuate in a band, with no timetable for floating.
The Arab Spring nations can move in this overdue direction matching the emerging and frontier market norm and enlist standing private sector advice at home and overseas alongside traditional aid providers to break the decade-long financial gridlock. Tunisia’s democratic reversal can be retraced with a greater leap forward on economic performance and policy that was particularly outlined by the Jasmine Revolution’s younger generation looking to break the self-perpetuating debt crisis cycle, and to translate constitutional aspirations into business startups and jobs.