Tunisia Country Risk Report Q4 2018
Mounting tensions between Prime Minister Youssef Chahed and President Beji Caid Essebsi and growing coalition party calls for a vote of confidence severely raise the risks of a government collapse in Tunisia. While this is too close to call, we believe that repercussions for policymaking would be negative in the near term.
We only expect a modest acceleration of growth in 2018, as the recovery of the tourism and agricultural sectors boosts private consumption and exports, and as structural reforms yield results in terms of fixed investment.
Growth is unlikely to return to pre-2011 levels in the near term, as social instability weighs on investor perceptions and as high inflation dents households' purchasing power.
The government's budget deficits will see some small reductions over the coming years as the government moves forwards with consolidation measures. However, the pace of consolidation will remain hampered by risks of social unrest.
The Central Bank of Tunisia will remain on a tightening path in 2018, in order to contain the depreciation of the dinar and elevated inflationary pressures.
The dinar will continue to depreciate over the next two years, owing to large external imbalances, elevated inflation and struggling foreign investment.
Tunisia's current account position will benefit from recovering exports, due to both domestic and external conditions, and from the improved performance of the tourism sector. That said, the rally in oil prices will put upward pressure on imports, limiting the improvements in the current account position.Major Forecast Changes
We now forecast a budget deficit of 5.3% of GDP in 2018 and 4.9% in 2019, up from 5.0% and 4.7% previously. The revision is largely due to a higher-than-expected deficit in 2017.
We now forecast inflation to average 7.2% in 2018 and 6.5% in 2019, up from 5.8% and 4.8% previously.
We have also revised up our interest rate forecasts for 2018 and 2019, following the aggressive tightening seen in H118. We now expect the Central Bank of Tunisia's policy rate to end 2018 at 7.25% and 2019 at 8.00%.
Popular pressures and opposition from vested interests will continue to slow the pace of reform. An elevated terrorist threat, amid porous borders with Libya, regional instability and domestic socio-economic grievances, will continue to pose strong security threats, and will be a major challenge for the government. Nevertheless, we remain optimistic towards the country's transition to a relatively stable democracy.
Domestic political instability will continue to weigh on business sentiment, limiting the recovery in fixed investment. Faster growth is conditional on improve-ments in the regional security environment and the positive implementation of structural economic reforms, both of which will take time to materialise. A more market-oriented public policy framework and the recapitalisation of the banking system will be key to attracting foreign direct investment and boosting domestic credit growth.
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