IMF POSITIVE ON TUNISIA'S ECONOMY DESPITE THE

UNCLAS SECTION 01 OF 02 TUNIS 000539 SENSITIVE SIPDIS STATE FOR EEB 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) CASABLANCA FOR FCS (ORTIZ) CAIRO FOR FINANCIAL ATTACHE LONDON AND PARIS FOR NEA WATCHER E.O. 12958: N/A TAGS: ECON EINV EFIN ETRD TS SUBJECT: IMF POSITIVE ON TUNISIA'S ECONOMY DESPITE THE CRISIS REF: TUNIS 450 ¶1. (SBU) Summary: In a statement released in late June, following recent Article IV consultations, the International Monetary Fund stated that Tunisia is "well positioned" to weather the economic crisis, thanks to prudent macroeconomic policies, strong foreign direct investment (FDI),steady tourism, and constant inflow of remittances. The IMF estimated Tunisia's 2009 GDP growth at 3 percent, with the caveat that this "target" will only be possible "if recovery measures rapidly impact demand." This is a downward revision of the IMF's estimate in May of 3.3 percent GDP growth in 2009. Looking beyond the crisis, the IMF predicts that Tunisia's economic openness and reforms in the banking sector will help ensure long-term growth, as long as the GOT takes steps after the crisis to rein in spending, tighten monetary policy, and continue improving the business climate. The optimism of the IMF's assessment may not stand the test of time, as much depends on tourism receipts and job recovery in key sectors. End Summary. -------------- GDP growth estimates down -------------- ¶2. (SBU) After years of GDP growth averaging five percent, including 6.5 percent in 2007 and 4.6 percent in 2008, Tunisia's 2009 growth rate has often been estimated in the three to four percent range, particularly by GOT representatives seeking to present a rosy economic picture. IMF estimates as recent as May were relatively positive at 3.3 percent, but the Fund's latest assessment presents 3 percent as a "target" that "could be achieved" if the GOT's fiscal stimulus efforts produce the intended result of stimulating domestic demand. However, even this 3 percent growth projection could be overly optimistic (an African Development Bank official recently told us that the GOT and IMF figures are "political"). We note that figures published by the Economist Intelligence Unit estimate 0.6 percent growth in 2009, rising to 2.3 percent in 2010. We do not know the basis for their figures. -------------- Mixed performance in key sectors -------------- ¶4. (U) In the first half of 2009, traditional export sectors such as the mechanical and electrical industries, textiles, and mining saw mixed performance. The Tunisian Industry Promotion Agency reported a 17 percent decrease in investment in the building materials industry compared to the same period in 2008, a 24 percent drop in chemicals, and a 30 percent drop in textiles. Food processing investment increased by 12 percent and electric and mechanical increased by 23 percent. ¶5. (U) Service sectors such as information and communication technology (ICT) and financial services saw strong growth. Tunisian banks and the local stock market, insulated from the shocks of the financial crisis, have performed well. Hewlett-Packard, for example, is planning to open a customer service call center in Tunisia that will employ 800 Tunisians with technology and language skills. Recent press reports indicate that the Tunis stock exchange registered 25 percent returns in the first half of 2009, among the top performers among stock exchanges in the MENA region. Agriculture is expected to do well after abundant spring rains. ¶6. (U) Performance in several key sectors appears to be shifting month by month, and the final balance sheet by year's end is uncertain. For example, while mechanical and electrical industries saw major job losses earlier in the year, European and Japanese firms are opening new production facilities to take advantage of lower costs vis-a-vis Eastern Europe. Textile manufacturing, which TUNIS 00000539 002 OF 002 also saw losses earlier in the year, is beginning to recover, thanks to its ability to rapidly adjust production to fill niche market demand. Tourism receipts for the first half of the year have been stagnant, but authorities are counting on a strong summer season to boost revenues and hard currency receipts. The IMF has indicated that this year's tourism income will be a critical component of Tunisia's overall economic performance. ¶7. (SBU) Other key sources of income and foreign exchange are remittances from Tunisians abroad (mostly in Europe) and FDI. While Tunisian Central Bank data in March showed that remittances were up by 8.5 percent over the previous year, the economic contraction in Europe presents a risk to this source of income. Central Bank numbers do not take into account the depreciation of the Tunisian Dinar, which depreciated by 2.6 percent against the Euro from May 2008 to May 2009. Privately, some GOT officials have admitted that remittances are actually on the decline. On FDI, the Tunisian Foreign Investment Promotion Agency announced that the first six months of 2009 saw a 28 percent drop of actual FDI flows from the previous year. Despite these numbers, the GOT remains bullish on Tunisia's competitiveness as a low-cost destination with a skilled workforce and stable investment climate (Reftel). -------------- -------------- GOT reforms helping Tunisia through the crisis and beyond -------------- -------------- ¶8. (U) The IMF's Article IV consultations found that GOT macroeconomic policies have helped cushion the blow of the financial crisis and set the stage for further growth once the crisis is over. The IMF describes the GOT's recovery plan, which seeks to boost government expenditures to make up for lagging exports, as an appropriate response that will only cause a mild expansion in the GOT's budget deficit. The IMF is estimating that the GOT deficit will rise to 3.8 percent of GDP, just above the GOT target of 3 percent of GDP. It appears that even with the decline in trade and supplementary GOT expenditures, Tunisia's foreign reserve holdings are sufficient to maintain the GOT's strategy of maintaining export competitiveness via a steady depreciation of the dinar. ¶9. (U) Tunisia's ongoing banking reforms, which seek to reduce the sector's heavy load of non-performing loans, has continued despite the crisis and should, according to the IMF, continue to make progress in the coming year. Tunisia is also improving its business climate by simplifying customs procedures and investing in trade infrastructure. These reforms, plus Tunisia's policy of opening to the global economy, are likely to create long term growth after the crisis passes. The key to this, according to the new IMF analysis, will be scaling back public spending and tightening monetary policy after the crisis to prevent inflation. -------------- Comment: measured optimism -------------- ¶10. (SBU) Pro-government commentators refer to the international economic crisis as an opportunity, or claim that Tunisia has not been affected at all. They point to new investments taking advantage of Tunisia's low-cost, high-skill labor force, and suggest, as one optimistic businessman recently put it, that "there is no crisis here in Tunisia." But clearly, government expenditures to subsidize employment and stimulate domestic demand belie these assertions. By the end of the year, after the tourism receipts and employment figures are counted, the GOT may find reason to curb its optimism. As for future growth after the crisis, Tunisia will certainly need to strengthen and deepen its current efforts to reform the banking sector and improve the business climate. DESJARDINS