THE GLOBAL ECONOMIC CRISIS: IMPACT ON TUNISIA

C O N F I D E N T I A L TUNIS 000160

SIPDIS

STATE FOR EEB/IFD/OMA, EEB/EPPD, AND NEA/MAG
(PATTERSON/HAYES)
STATE PASS USTR (BURKHEAD) AND USAID (MCCLOUD)
USDOC FOR ITA/MAC/ONE (MASON),ADVOCACY CTR (TABINE)
CASABLANCA FOR FCS (ORTIZ)
RABAT FOR FAS (HASSAN)
CAIRO FOR FINANCIAL ATTACHE (SEVERENS)
LONDON AND PARIS FOR NEA WATCHER

E.O. 12958: DECL: 03/03/2019
TAGS: ECON EFIN EINV ETRD FAO TS
SUBJECT: THE GLOBAL ECONOMIC CRISIS: IMPACT ON TUNISIA

REF: A. TUNIS 154

B. TUNIS 44

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

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Summary

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1. (C) The global economic crisis is affecting Tunisia, but,
so far, to a lesser degree than some other emerging market
countries. Tunisia's financial sector, by virtue of its
limited development and insulation from international credit
markets, remains largely unscathed. However, exports,
especially in the auto parts, textiles, and tourism are
starting to slump. Foreign direct investment should also see
some decline, especially mega-projects funded by Gulf states.
Unemployment shows signs of increasing. The GOT has reacted
swiftly to the crisis by aiding companies in peril, but its
actions will not avert a slowdown of growth. Nevertheless,
IMF and private sector economists still project positive real
GDP growth for Tunisia in 2009, making it one of the rare
countries that will continue to expand. End Summary.

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THE BIG PICTURE: MACRO-ECONOMIC EFFECTS
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2. (C) The effects of the global economic crisis on Tunisia
are clear and growing, but are overall less dramatic than
other countries in the region. According to the World Bank,
North Africa will see less of an impact than Europe and
Central or South Asia. A visiting International Monetary
Fund (IMF) team noted the best projected annual real GDP
growth rate for 2009 is 4.5 percent, representing a decrease
from 5.1 percent in 2008 and 6.3 percent in 2007. Deutsche
Bank Research has a 2009 growth estimate of less than 3
percent year-on-year. The financial sector has hardly been
affected by the crisis thanks to its insulation from
international credit markets. The Tunisian Dinar (TD)
devalued 12.9 percent year-on-year from 2008-2009 against the
US dollar.


3. (C) Slumping demand in Europe has resulted in a downward
trend in exports, especially in the textile, mechanical and
electrical components, and tourism sectors. Agriculture
exports have also decreased, apparently due to bad harvests.
There is some possibility for a counter-balance in textile
exports and tourism, as Tunisia may replace other higher-cost
markets. The GOT believes remittances will not significantly
decrease.

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GOT SWIFT RESPONSE TO THE CRISIS, BIG PLANS AHEAD
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4. (C) According to the Nawele Ben Romdhane, Director
General of Public Services in the Ministry of Development and
International Cooperation (MDIC),some bankruptcies are
inevitable, but the GOT is mainly looking at the crisis as an
opportunity to deepen reforms and attract investment. MDIC
said Tunisia is working toward more integration and
increasing FDI incentives, such as cutting down on red tape
and decreasing customs fees by six to nine percent over the
coming year. The MDIC has commissioned sector studies in
health, offshoring and tourism from consultants Ernst and
Young. For the short-run, the GOT has come to the rescue of
ailing firms, specifically by paying salaries of workers who
would otherwise be laid off, covering insurance guarantees
for exports, providing short-term loans, and paying partial
or full social security contributions. The IMF praised the
GOT for monitoring loans closely and taking quick action.


5. (C) MFA Director General for the Americas and Asia Elyes
Kasri characterized the GOT's short-term reactions as
remedial measures. He added that the GOT was continuing its
economic modernization efforts and mentioned Open Skies as
part of this strategy. He also mentioned his support of
regional integration and the revival of the Eizenstat
Initiative, which he believed would raise the GDP growth rate
of all the Maghreb countries involved by 2 percent.
Unemployment remains the single biggest concern for the GOT.
Kasri said the economy needs to grow at 6.5 percent to absorb
new university graduates.

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FINANCIAL SYSTEM LARGELY UNAFFECTED
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6. (C) According to the IMF delegation, Tunisia doesn't face
the same problems as some emerging market economies, such as
large capital outflows or a credit crunch. The GOT was
already overhauling the banking sector when the crisis hit,
and Tunisian banks were not trading toxic financial
instruments. Structural weaknesses, along with sizable
percentage of non-performing loans (NPLs),prevented Tunisia
from having a credit boom akin to other emerging markets in
the last few years. NPLs made up 17 percent of total loans
in 2007. In December 2008, the GOT set a target for NPLs at
10 percent by 2011. Standard and Poor's believes the current
NPL figure is 15.5 percent. With roughly 20 commercial
banks, the Tunisian banking sector is quite fragmented.
However, three of the five largest banks are still
state-owned and have a joint market share of 44 percent.

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FISCAL AND MONETARY POLICY UPDATES
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7. (C) The IMF noted the GOT's prudent fiscal policies have
reduced the public debt ratio from 50.5 percent of GDP in
2007 to 46.9 percent in 2008. Current figures show Tunisia's
public debt service ratio declining from 5.3 percent of
current income in 2008 to 4.4 percent in 2009. Current share
of external debt relative to GDP is 39 percent. The IMF team
was surprised to find large reductions in Tunisia's 2008
budget deficits, which they attributed to exceptional oil and
tax revenues. However, they believe the positive deficit
trend will reverse this year. Private credit growth, even
after the onset of the crisis in 2008, remains strong (from
2007-2008 it grew 14.7 percent).


8. (C) On monetary policy, the current 4.5 percent interest
rate leaves the GOT with ample room to maneuver. A downward
inflationary trend has allowed the GOT to slightly reduce the
interest rate (from 5.25 percent to 4.5 percent in February
2009) and decrease Tunisia's reserves ratio. Current
international foreign exchange reserves stand at 12 percent
of GDP, with hard currency reserves actually increasing 25
percent year-on-year (from US $6.5 billion in 2008 to US $8.4
billion in 2009).

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FDI EXPECTED TO DECREASE
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9. (C) According to the IMF, FDI currently stands at 6
percent of GDP and has grown in recent years, mostly in the
energy sector. However, IMF expects some freezing of
projects in all sectors, though it is too early to gauge the
real impact. This projection is in contrast to a March 16
statement by Tunisia's Foreign Investment Promotion Agency
(FIPA) that FDI increased by 46 percent year-on-year for
January and February 2009. There has been media speculation
about a halt or slowdown to Gulf Cooperation Council (GCC)
investments, especially in the construction sector, although
the GOT has denied any outright cancellations. In February,
a business sector contact told EconOff the contracting
company affiliated with Sama Dubai, the UAE company set to
build the large South Lake development in Tunis, had left the
country.

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EXPORTS: THE CONSEQUENCES OF EURO-DEPENDENCY
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10. (C) Given that 80 percent of Tunisia's exports are
destined for the European Union, the downward trend in the
value of exports due to the global economic crisis is not
surprising. According to the GOT and the IMF, the total
value of exports is projected to decrease 17.1 percent in

2009. Standard and Poor's estimates a 10 percent decrease in
the volume of exports for this calendar year. From
2007-2008, there was a slight decrease (2.8 percent) in the
volume of exports. During that same period, however, export
values increased 21.8 percent.


11. (C) There is a significant difference between export
declines in the offshore versus the onshore sectors. For
textiles, the onshore sector has seen a decline of 20.4
percent, versus 12.4 percent for offshore enterprises.
However, for mechanical and electrical components and other
mechanical products, the trend is quite the opposite, with
offshore companies seeing a decrease of almost double that of
the onshore enterprises in the same industry. Companies in
the offshore sector, including some US businesses, have
already begun layoffs and have shortened workweeks (Ref B).


12. (C) Given the sharp decline in the European automobile
sector, Tunisian companies furnishing mechanical and
electrical components for this industry are feeling the
pinch. Mechanical and electrical components, which make up
26.4 percent of total exports, are expected to decline 17.2
percent in value. STARZ electronics (protect),a small
U.S.-owned electronic components company in Bizerte reports
automotive electric subcontracting is down by over 50
percent. Faouzi Elloumi (protect),CEO of a multinational
electrical auto components manufacturing company, said
however, his factory has shifted production towards parts
(wire harnesses) for smaller vehicles for the European market
and the company has seen 14 percent growth in exports for
January/February 2009 over the same months in 2008.

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TEXTILES: NUMBERS LOOK BLEAK, BUT SOME OPPORTUNITIES
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13. (C) The textile sector, with a 21.9 percent share in
total exports, is not faring well and is expected to decline
12.6 percent in value. Nazeh Ben Ammar (protect),the owner
of an onshore textile production company, notes that
automobile textile sales have taken a deep nose dive. A
recent survey conducted by Tunisia's Export Promotion Center
(CEPEX) identified a decline in overall textile orders
(although with slight increases in some seasonal clothing),
higher prices for raw materials, and a delay in payments as
factors pressing upon the textile sector. There is a silver
lining, however. The economic crisis may have some short-run
positive effects, since Tunisia may be able to penetrate the
market previously captured by China and India. Ben Ammar
believes European buyers will look to Tunisia for smaller
orders and faster turnaround time.

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AGRICULTURE OUTLOOK MIXED, TOURISM EXPECTED TO DECLINE
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14. (C) The value of agricultural and agri-food exports,
which represent 20 percent of exports and generate 12 percent
of GDP, is expected to decrease by 23.7 percent in 2009. The
IMF notes the GOT's agricultural reform so far has been
"piecemeal" and although lower commodity prices have
benefited Tunisia in the recent years, the sector remains
highly regulated. Exports of olive oil, a staple of the
export basket, fell by 25 percent from 2008-2009 due to low
rainfall. Cereals, as in the past two years, have also fared
poorly due to bad harvests. The magnitude of the
international crisis' effects on this sector is not clear, as
meteorological conditions could also be an important causal
factor.


15. (C) The tourism sector in Tunisia is also likely to be
affected by the global economic crisis. However, it is too
early to tell. There have been some reports of lower
bookings compared to this season last year, but the IMF
representatives said they cannot gauge the impact on the
sector yet. The GOT has increased the communications budget
for the Ministry of Tourism in order to market Tunisia as an
option for tourists who would otherwise travel to more
expensive destinations but would downgrade to Tunisia due to
cost.

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COMMENT
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16. (C) Tunisia's efforts to stem the effects of the economic
crisis will not likely mitigate contraction of exports and
subsequent job loss, in the short term. Although Tunisia is
more sheltered from the effects of this crisis than other
emerging markets, its strong ties to Europe have created some
vulnerability. The GOT is well aware that slowing growth
will only compound their unemployment problem, unless they
can increase investment dramatically (Ref A). Although the
signs of impact are growing, the true effect of the crisis on
some key sectors, such as tourism, remains to be seen. END
COMMENT.
Godec