TUNISIA PROJECTS CONFIDENCE THAT IT WILL WEATHER

C O N F I D E N T I A L SECTION 01 OF 03 TUNIS 001101

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E.O. 12958: DECL: 10/16/2018
TAGS: ECON EFIN ETRD TS
SUBJECT: TUNISIA PROJECTS CONFIDENCE THAT IT WILL WEATHER
ECONOMIC CRISIS -- BUT CHALLENGES LOOM

REF: TUNIS 00052

Classified By: Ambassador Robert F. Godec for Reasons 1.4 (b) and (d).

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Summary
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1. (U) In the face of worldwide economic volatility, the GOT
is boasting about the Tunisian economy's resilience to the
crisis. Most often cited reasons for Tunisia's buoyancy
include the non-convertibility of the Dinar, lack of global
integration, regulations prohibiting Tunisian banks from
investing in financial instruments, and restrictions on
foreign portfolio investments in the local stock market.
Despite government claims to the contrary, clouds loom as
exporters confirm declining sales and predict lay-offs, while
worried portfolio investors pull their money out of Tunindex.
Embassy interlocutors list exports, tourism, and foreign
direct investment, pillars of Tunisia's economic growth
strategy, as the most likely victims of the crisis. End
Summary.

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GOT Projects Calm
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2. (SBU) Against the backdrop of the current financial
crisis, GOT leaders have been publicly congratulating
themselves for restrictive economic policies that have
allowed the economy to weather the storm. The
non-convertibility of the Dinar, coupled with restrictions on
portfolio investments, has largely kept foreign investors out
of the Tunisian stock market. Additionally, restrictions on
securitization of debt and Tunisian bank investment in
foreign financial instruments have sheltered the financial
sector from the sub-prime debt effect troubling other
markets. Even so, Tunisian exporters are already taking a
hit, and economic jitters resulted in a seven percent tumble
of the stock market on September 17. Since the Tunindex's
initial decline there has been limited volatility, until
October 15 when it declined 12 percent. In response,
President Ben Ali and other senior government officials have
regularly appeared in the local press to assuage concerns and
curb investor concerns about the potential impact the crisis
will have on Tunisia.


3. (SBU) On October 10, President Ben Ali announced that he
was forming a special advisory committee to monitor economic
conditions. That committee is comprised of:
- Taoufik Baccar, the Central Bank Governor;
- Mohamed Nouri Jouini, the Minister of Development and
International Cooperation;
- Mohamed Rachid Kchich, the Minister of Finance;
- Afif Chelbi, the Minister of Industry, Energy and Small and
Medium Sized Enterprises;
- Mongi Safra, Presidential Advisor;
- Hedi Jilani, the President of the Employers' Union (UTICA);
- Ridha Chalghoum, the President of the Council on Financial
Markets; and
- Moncef Ben Slama, professor of economics.

In addition, Central Bank Governor Taoufik Baccar sought to
reassure the market by publicly explaining that no more than
25 percent of investment in the Tunis Bourse is foreign.
Furthermore, he praised recent decisions by the GOT to extend
the mortgage lending period from 15 to 25 years and
reaffirmed that mortgage interest rates are fixed to protect
Tunisian borrowers from soaring rates.


4. (U) The GOT has gone one step beyond self-congratulation,
asserting that Tunisia may come out of this crisis a winner.
Minister of Employment and Professional Integration of Youth
Slim Tlatli recently told the French Ambassador that, by
positioning itself as a safe haven for investors seeking
calmer waters, Tunisia could benefit from increased

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investment over the medium term. In addition, early on as
the crisis unfolded, the state-controlled press praised the
GOT for successfully predicting the downturn in foreign
markets and for making prudent economic policy decisions in
response.

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If I say It, It is True, Or Not
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5. (C) Privately, however, some GOT officials are beginning
to share their concerns that all is not well in the Tunisian
economy. The French Minister of Cooperation, who recently
visited, found his Tunisian interlocutors "worried," among
other things about whether French assistance would be
decreased as a result of the financial crisis. Nejib Karafi,
the Director General of the Tunisian Center for Textile
Technology (CETTEX) expressed concern to EconOff about
textile exports. (Note: Karafi explained that the GOT is
working out a way to provide stop-gap loans to Tunisian
textile manufacturers as mainly European buyers increasingly
request longer repayment periods, sometimes exceeding the
90-day industry average. This effort to support the textile
industry, according to financial consultant Ezzedine Saidane,
precedes this financial crisis and is illustrative of the
troubles in the Tunisian textile industry.)

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Not If, But When
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6. (C) There is no doubt that the economic crisis is
affecting Tunisia's real economy. While the Tunisian economy
is largely shielded from the financial sector aspects of the
crisis, it is most susceptible in the short term to negative
impacts in its export-dependent industries. In the short to
medium term, its tourism sector may also suffer, and, over
the longer term, foreign direct investment may fall off. A
recent conversation with the managing director of Johnson
Controls, which exports automotive parts to European
automakers, revealed that orders from Europe have declined 25
percent since the crisis began. The head of Lear Automotive,
another US subsidiary parts manufacturer, confirmed the
trend; orders from his European clients are down by 20
percent for the coming three months. He is certain that he
will have to lay-off workers. Paul Garcia, the general
manager of Crown Maghreb Can S.A., a subsidiary of Crown
Holdings in the US, explained that he has suspended taking
orders for 2009, attributing aluminum price fluctuations as
the principal reason.

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Cracks In the Pillars of Economic Growth
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7. (C) Exports, tourism, and foreign direct investment are
the focus of GOT efforts to maintain 5.1 percent annual GDP
growth in 2008. (Note: The GOT's 11th five year economic
development plan targets annual GDP growth at 6 percent. On
October 8, a a Ministerial Council meeting reduced the
projection.) Several Embassy interlocutors, including
Ezzedine Saidane, concur that it is precisely these sectors
that are at greatest risk. He explained that the economic
downturn in Europe during the last two consecutive quarters
negatively affected Tunisian exports, a trend that will only
worsen in light of recent events. Saidane also stated that
with Europe's recession, comes declining European family
purchasing power, which may affect tourism.


8. (C) Saidane and Michael Smith of Fidelity Investments,
concurred that foreign direct investment (FDI) will assuredly
slow down. Smith highlighted the negative impact that
falling petroleum prices will likely have on the US $60
billion in various real estate development projects (reftel)
proposed by various Gulf entities. As Gulf investors come
under pressure, they may delay or even cancel investments the

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GOT is counting on. Further compounding Tunisia's
challenges, its banking sector is already weak and carrying
too many non-performing loans. It is not well placed to ramp
up lending to compensate for falling foreign investment.
Lastly, commentators believe the continued volatility in the
Tunisian stock exchange is illustrative of the psychological
impact the crisis is having on investors, which when coupled
with an ever tightening lending tendencies by Tunisian banks,
signals continued challenges for business development and
expansion in the last quarter of 2008 or beyond.

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Comment
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9. (SBU) This crisis does not bode well, in part because
Tunisia is dependent on exports and tourism for hard currency
income. It is also dependent on foreign investment for
continued strong economic growth. Moreover, a slowdown in
the economy will increase existing unemployment, which helped
lead to unrest in the Gafsa region earlier this year. If the
GOT wants to make good on its aspiration to come out of this
crisis a winner, it must make investing in Tunisia easier and
more attractive. In a crisis, it can be easier for a
government to pass reforms. The question is whether the GOT
is willing to take the difficult steps, for example, of
liberalizing its services sector. In addition, continued
efforts to clean up the banking sector are needed more than
ever to motivate domestic investment and bolster investor
confidence.

Please visit Embassy Tunis' Classified Website at:
http://www.state.sgov.gov/p/nea/tunis/index.c fm
GODEC