TUNISIA'S PILLARS OF ECONOMIC GROWTH SHOWING WEAR

C O N F I D E N T I A L TUNIS 000044 SIPDIS STATE FOR EEB/IFD/OMA, EEB/EPPD, AND NEA/MAG (HAYES) STATE PASS USTR (BURKHEAD) AND USAID (MCCLOUD) USDOC FOR ITA/MAC/ONE (MASON),ADVOCACY CTR (TABINE),AND CLDP (TEJTEL AND MCMANUS) USDOC PASS USPTO (ADAMS, BROWN AND MARSHALL) CASABLANCA FOR FCS (ORTIZ) RABAT FOR FAS (HASSAN) CAIRO FOR FINANCIAL ATTACHE (SEVERENS) LONDON AND PARIS FOR NEA WATCHER E.O. 12958: DECL: 01/20/2019 TAGS: ECON EFIN EINV ETRD FAO TS SUBJECT: TUNISIA'S PILLARS OF ECONOMIC GROWTH SHOWING WEAR AND TEAR FROM THE INTERNATIONAL FINANCIAL CRISIS REF: A. 08 STATE 134459 ¶B. 08 TUNIS 1011 Classified By: Ambassador Robert F. Godec for reasons 1.4 (b) and (d). -------------- Summary -------------- ¶1. (C) The GOT is struggling to manage the growing impact of the international economic crisis. The GOT recently ratcheted down 2009 GDP growth projections from five to four percent. Exporters, suffering from the downturn in Europe, are directing their focus to managing fixed costs in an effort wait out the worst of the crisis. Lay-offs, particularly in export sectors, are spreading. Companies are also looking to the GOT for help through programs that offset salary costs and reduce the cost of services. GOT ministries are capitalizing on the financial crisis to present new programs focusing on employment generation and keeping exporters afloat. The GOT was slow to recognize the speed with which the Tunisian economy would feel the effects of the financial crisis, but is beginning to understand the extent of the trouble. Nevertheless, with the right remedies Tunisia might yet position itself for faster growth as the world begins (eventually) to come out of the crisis. End Summary. -------------- Signs of Trouble -------------- ¶2. (C) Tunisia is probably losing jobs by the thousands, or so says banking sector consultant, Ezzedine Saidane (protect). Tour operators report they have not started receiving summer rQervation requests from their counterparts in Europe, forewarning of a tough 2009 summer tourism season. Michael Cracknell, co-founder of a local non-profit NGO, explained that the Tunisian youth he interacts with every day feel hopeless. Without jobs, financial independence and prospects of any change to the situation, they cannot move out of their homes, get married or even dream of a future for themselves. The situation becomes worse yet, when companies like Quimia, a southern Tunisia chemical company, recently stopped operations and laid-off 320 workers. The state-owned chemical company Groupe Chimique has yet to open two of its plants after the holidays due to a plunge in demand. South Korean automotive supplier Yura, located in western Tunisia, is reported to have recently fired two-fifths of 500 employees. FUBA Printed Circuits Tunisia laid off 25 percent of its staff, as did Valeo and TTEI, both of which are automotive parts suppliers primarily serving the European market. ¶3. (SBU) UTICA, the national employer's union, reported that 40 exporters confirm experiencing international financial crisis related problems. Their most recent survey revealed that 22 automotive suppliers, six textile companies and four other manufacturers reduced the number of daily production hours from ten to five. In total, those surveyed canceled a total of 2,500 employment contracts; put 970 employees on furlough; and fired 293 other employees. ¶4. (C) Johnson Controls' General Manager Marc Duquesne asserted that sales to European car manufacturers remain down 25 percent. As there is no end in sight to this decline, Duquesne's concerns have turned to managing his overhead. Johnson Controls is one of several companies seeking GOT relief on electricity costs and salary expenses during the lull. Duquesne is concerned about losing staff that can take up to eight years to train, but is also feeling pressure to reduce his fixed costs. -------------- How is the GOT Responding? -------------- ¶5. (SBU) In a late December cabinet meeting, the GOT agreed to bolster exporters negatively affected by the international crisis. For some companies, the GOT agreed to pay the employer portion of the national social security fund. For others, the GOT offered to pay a portion or all of the salary of employees selected for furlough. Aside from minimizing costs, the GOT increased access to credit for exporting companies by making TND 35 million (US $26.89 million) available in lines of credit. ¶6. (SBU) The cabinet called for a reduction in red tape for new start-up businesses, effectively reducing the number of required steps from ten to five. The GOT removed the minimum capital requirement for establishing a limited liability corporation and established an online corporate tax payment to improve tax collection and accuracy in collection. In addition, entrepreneurs are now allowed to use their homes as the headquarters for a new business rather than a commercial location. ¶7. (C) The cabinet also called on the Ministry of Industry, Energy and Small and Medium Sized Enterprises to establish a new commission to focus on developing entrepreneurship. Director of International Cooperation at the Ministry of Industry Mokhtar Hajji highlighted a new initiative that encourages Tunisian exporters to seek new markets in Africa, Asia and North America. According to Hajji, 80 percent of exports are destined for the European market, which confirms earlier predictions about the impact the financial crisis would have on the Tunisian economy. -------------- Is Change Afoot? -------------- ¶8. (C) In a December meeting, Minister of Employment, Slim Tlatli and the Ambassador exchanged views on the growing Tunisian unemployment problem. According to the Minister, the 2.5 percent population growth during the 1980s is responsible for the surge of new entrants to the labor market. Tlatli explained that in 2008 there were more than 100,000 new job seekers. Meanwhile, the Tunisian economy generated roughly 78,000 jobs with real GDP growth above five percent. (NB: Overall, more than 500,000 people who would like jobs cannot find them.) ¶9. (SBU) Tlatli admitted that Tunisia needs to change its approach to job creation. The Minister used the transportation sector as an example, claiming that Tunisia does not have a fully developed passenger transportation industry. He mused that deepening and modernizing the sector by encouraging the establishment of a central dispatch and call-ahead service could increase both efficiency and demand and therefore the number of Tunisians employed in the business. Tlatli said he was inspired by a case study he read on networks of childcare providers collaborating to create efficiencies and improve service in New York. He is evaluating way to implement this model in the Tunisian economy. -------------- Some Unknowns -------------- ¶10. (SBU) Total foreign direct investment, as reported through the fourth quarter 2008, surpassed the TND 30 billion (approximately US $25 billion) mark. Calendar year 2008 exceeded the GOT's investment goal of TND 1.7 billion (US $1.3 billion) when it reached TND 2.4 billion (US $1.8 billion) at the end of November. Foreign direct investment in tourism and real estate explains the bulk of this growth. The services sector was the other strong performer in 2008, attracting more than TND 400 million (US $307 million) worth of investment from Italy, France and Libya. European companies seeking to reduce their overhead costs, like Van de Velde of Belgium, are considering transferring the bulk of their production to Tunisia which may mean increased investment dollars. On the other side of foreign investment, rumors are spreading that the Gulf Finance House project known as the Financial Harbor was postponed and that the US $25 billion real estate project by Sama Dubai was canceled. While the UAE Ambassador denied these rumors in a January 6 conversation with Ambassador Godec, only the most senior GOT officials probably have this information. On the ground, the GOT continues to move forward with leveling the area and hooking up electricity and water, which was part of the original agreement. -------------- Comment -------------- ¶11. (C) The GOT continues to focus on shoring up exporters with programs that offset overhead costs and ease access to credit. While this constitutes a stop-gap measure, it is not a sustainable long-term solution to burgeoning unemployment. The GOT is literally paying employers to retain workers, rather than employing those resources to invest in infrastructure or human resource development. As it stands today, cafes throughout Tunisia are full of able-bodied, literate, Tunisians, (particularly men) who are either minimally employed or unemployed, a condition not likely to improve in the short-term. Minister Tlatli's vision, combined with recent steps to reduce bureaucratic red tape in new business start-up, is two steps in the right direction. What remains to be seen is if this new Minister has the clout to convince the senior GOT decision-making apparatus to support these innovations and others like them. On a separate note, if rumors about Gulf-financed investments being shelved bear out, it might deter other investors from entering Tunisia and would represent a blow to DOMESTIC investor moral. Moreover, a cancellation could result in a serious loss of credibility for President Ben Ali, as he is personally and very publicly tied to the success of these projects. End Comment. -------------- Bio Note -------------- ¶12. (C) Mokhtar Hajji, from the Ministry of Industry, Energy and Small and Medium-Sized Enterprises, is entering his second year as the Director of International Cooperation. He is a fluent English speaker who participated in a Humphrey Fellowship program at Boston University. His wife, Amina Jlassi, participated in a Fulbright exchange from 2004 to 2005 and is now an English teacher at the Lycee of Slimane. In a period when Tunisian government officials are facing increasing controls on their interactions with foreign embassies, Hajji was refreshingly forthcoming. For example, he opined that one of the reasons cooperation between the United States and Tunisia is stilted is that the GOT expects bigger more meaningful projects from the USG. He drew the comparison with an EU commission industrial modernization project totaling 50 million Euros, noting that small-scale projects were not worth the trouble. Please visit Embassy Tunis' Classified Website at: http://www.state.sgov.gov/p/nea/tunis/index.c fm Godec