INVESTORS GIVE TUNISIA VOTE OF "NO CONFIDENCE"

C O N F I D E N T I A L TUNIS 001433 SIPDIS SIPDIS STATE FOR NEA/MAG (HARRIS) STATE PASS USTR (BURKHEAD),USAID (MCCLOUD) USDOC FOR ITA/MAC/ONE (NATHAN MASON),ADVOCACY CTR (JAMES), AND CLDP (TEJTEL AND MCMANUS) CASABLANCA FOR FCS (ORTIZ) LONDON AND PARIS FOR NEA WATCHER CAIRO FOR TREASURY (SEVERENS) E.O. 12958: DECL: 10/29/2017 TAGS: EINV EFIN ECON TS SUBJECT: INVESTORS GIVE TUNISIA VOTE OF "NO CONFIDENCE" REF: A. TUNIS 1268 ¶B. TUNIS 1224 ¶C. TUNIS 1073 ¶D. TUNIS 948 ¶E. 06 TUNIS 2538 ¶F. 06 TUNIS 1622 Classified By: Ambassador Robert F. Godec for reasons 1.4 (b) and (d). -------------- Summary -------------- ¶1. (C) While Tunisia can boast about its impressive economic development and steady economic growth, paltry investment rates reveal that the economy faces significant challenges. Low levels of investment, particularly domestic, not only jeopardize continued economic success and efforts to reduce unemployment, but signal a broader lack of coQidence in the Tunisian economy. While red tape and unpredictability deter investors, ultimately these problems are rooted in the lack of transparency typical of GOT governance. Both foreign and Tunisian business people acknowledge that uncertainty over the political direction of the country has a negative impact on investor confidence and the economy as a whole. End Summary. -------------- Paltry Investment -------------- ¶2. (C) Despite the Tunisian economy's steady growth rate (an average of nearly 5 percent over the past decade),investment remains surprisingly low. According to World Bank Resident Economist Ndiame Diop, private domestic investment is 12.5 percent of GDP, or roughly half the rate in comparable countries (e.g., Morocco). Diop asserts that the economy's growth is largely due to increased productivity. However, Ezzedine Saidane, economic consultant and former Chairman of the Arab Banking Corporation, argues that the Tunisian economy is fueled by consumption. The decline in the domestic savings rate and concern over rising household debt appear to bear this out. ¶3. (C) While foreign direct investment (FDI) figures are more robust than the rate of domestic investment, overall FDI remains below the levels being seen in other comparable economies such as Morocco or Jordan. The GOT is quick to tout Tunisia's World Economic Forum rating as the most competitive economy in Africa and the Middle East (Ref E) and is eager to adopt the mantle as the "next Dubai"; FDI figures indicate that investors have a much different perception. In 2006, total FDI was about 4.4 billion dinars (US $3.5 billion) or 10.8 percent of GDP. Yet, economists highlight that a high percentage of foreign investment during the past years can be attributed to privatization receipts. FDI for 2006 excluding privatization was 1.4 billion dinars (US $1.1 billion) or 3.5 percent of GDP. Foreign investment may remain higher in the short-term as the GOT continues to privatize state-owned enterprises, but eventually the GOT will lose this source of income. ¶4. (C) Not only is the quantity of investment -- both domestic and foreign -- lower than it could be, but the investment is not allocated to the sectors most likely to erode unemployment and add the greatest value to the economy. Saidane told EconOff that domestic investment is primarily limited to two areas: land and stocks. He argued that neither of these two types of investments are contributing to private sector job creation. Land purchases, as opposed to investment in real estate, generates little value for the economy. While he acknowledged that investment in the stock exchange is generally positive, the tremendous growth in stock values is "more speculation than true investment." In 2006, stock values were up an impressive 43 percent without representing a true increase in value. Saidane cited Banque de l'Habitat, where stock prices are up despite the fact it is fundamentally the same bank as before. ¶5. (C) Although privatizations and large Gulf investments will have a positive impact on the economy, these types of investments are also unlikely to solve the unemployment dilemma. Privatization receipts, such as the US $2.3 billion from the Tunisie Telecom privatization, should be considered an income rather than a true investment. Rather than create the new jobs the economy desperately needs, privatizations may even lead to job loss as new private management attempt to return the often inefficient state-owned enterprises to profitability. Further, most of the large Emirati investments recently announced, such as the US $14 billion Sama Dubai project (Ref C),are in real estate. Real estate investments will help promote long-term growth, but in the short-term will not lead to technology transfer or create the skilled employment that Tunisia needs. -------------- Lack of Confidence -------------- ¶6. (C) The low levels of investment reflect a lack of confidence in the economy. Saidane emphasized that foreign investment and domestic investment go hand in hand. He asked rhetorically why foreigners would invest money in Tunisia when Tunisians will not invest themselves? Mourad Bsiri, a freelance economic consultant, argued that the positive assessments of Tunisia's competitiveness by the World Economic Forum and by international financial institutions were simply not accurate. He told EconOff, "It's not true. Tunisia is not a great place to invest." Bsiri noted that a high and growing percentage of Tunisia's FDI comes from the Gulf, reflecting liquidity based on high oil prices rather than signaling the strength of the Tunisian investment climate. -------------- Red Tape -------------- ¶7. (C) Tunisia's cumbersome and bureaucratic procedures inhibit both foreign and domestic investment and are a common complaint among Tunisian and foreign business people. Maraoane Abbassi, Professor of Economics at the Institute for Advanced Commercial Studies (IHEC),complained that the overabundance of bureaucrats -- and poorly qualified bureaucrats, at that -- breeds red tape. Without the red tape, Abbassi noted, these people would be out of a job. Abbassi recounted the story of a former Ministry of Commerce official who tried to open a pizza restaurant and ultimately abandoned the endeavor when even he could not navigate the complicated maze of licenses and permits. ExxonMobil Tunisia Director General Arnaud Blouin has been waiting four years for the required permit to sell a building, highlighting the disincentive to acquire new assets. -------------- A Level Playing Field? -------------- ¶8. (C) While many business people complain about excessive regulation, it is clear that some people are able to bypass the red tape. Corruption is the word that many Tunisians dare not utter, but has an undeniable impact on both foreign and domestic investment. Although difficult to quantify and verify, rumors of corruption, particularly among President Ben Ali's extended family, are rampant (Ref F). According to the 2007 Transparency International index, the perception is that corruption is increasing; Tunisia's ranking dropped 10 spots from 51 to 61 (septel). It is not just rumors of corruption that impact investment levels, but a general perception that the playing field is not level -- that doing business in Tunisia depends on who you are and who you know. Both Tunisian and foreign investors note that everything is negotiable (Ref A). One American investor told EmbOffs that this unpredictability creates a level of risk that makes long-term business planning nearly impossible. -------------- More Reforms Needed and Now -------------- ¶9. (C) With a tightly controlled press and an opaque system of governance, there remains great uncertainty over the political direction of the country. Saidane told EconOff that Tunisians notice the early calls for Ben Ali's reelection in 2009 and know that there is no possibility of significant political change until at least 2014, so why invest? While international rating agencies interpret this political stability as a positive, many domestic and foreign investors view this as stability as evidence of stagnation. Mondher Khanfir, a private economic consultant, stated that the lack of a strong civil society impacts business. He noted that UTICA, the Tunisian Employers' Association, is not representative of the larger business community. UTICA Secretary General Hedi Djilani is one of President Ben Ali's SIPDIS in-laws and UTICA's leadership is comprised of Tunisia's most powerful business people. Whereas the well-connected can resolve their problems through the direct intervention of the relevant minister, ordinary business people have no avenue through which to address their concerns. ¶10. (C) Despite complaints about inept lower-level bureaucrats, Tunisian and foreign investors generally praise the quality of the top economic leadership -- in particular Prime Minister Mohamed Ghannouchi, Minister of Development and International Cooperation Mohamed Nouri Jouini, and former Minister of Commerce Mondher Zenaidi. (Note: Minister Zenaidi became Minister of Public Health in the September cabinet reshuffle. Ridha Touiti was appointed the new Minister of Commerce (Ref B). End Note.) All are viewed as capable administrators that understand the need for continued reform. Yet, as Tunisian-American Chamber of Commerce President Mondher Ben Ayed emphasized, "Reforms should be faster." -------------- Comment -------------- ¶11. (C) As both business people and economists note, low investment rates are themselves a problem but also signal larger issues in the Tunisian economy. Although the GOT can be justifiably proud of the level of economic development it has already delivered, it is time to raise the bar. In its 11th Development Plan, the GOT targeted 6.1 percent growth -- a target that is too low to reduce the country's extremely high unemployment rate (Ref D). Reaching the 7 to 8 percent growth necessary to significantly reduce unemployment will require greater investment and, most importantly, liberalization. Improving Tunisia's investment climate will require more and faster reform -- on both the economic and political side. End Comment. GODEC