The JH Explorer series follows our investment teams across the globe and shares their on-the-ground research at a country and company level.

 

On our way back home from attending the IMF Annual Meetings in Morocco, we paid a visit to Tunisia, a country that is not on every emerging market debt investor’s radar due to its benchmark weight of less than 0.12%.¹ However, this small nation, which is considered the birthplace of the Arab Spring, cannot be overlooked if one wants to understand the major trends shaping the Middle East and North Africa (MENA) region.

Across many countries in the MENA region, the tortuous road to democracy – one involving authoritarian backlashes and civil strife – has also shaped relationships with outside powers like the EU and the Gulf Cooperation Council (GCC), all of whom are trying to achieve their own strategic objectives, such as limiting migration flows or maintaining regional stability and security.

With that in mind, we went to Tunis wanting to understand if market fears of an imminent restructuring were justified, or whether the various factions in Tunisian society would once again be able to forge a peaceful consensus on how to escape the economic malaise that had gripped the country.

IMF bailout: on ice for now, but there for a rainy day

In the closing months of 2022, the Tunisian economy looked to be heading towards a brick wall. The government had negotiated a $1.9bn bailout programme with the International Monetary Fund (IMF), intended to stabilise fiscal and external balances through a comprehensive public sector wage reform and an effort to restrain fuel subsidies and limit contingent liabilities stemming from SOEs. However, due to a delay in receiving financing assurances from Tunisia’s bilateral partners (which only came in the first quarter of 2023) and the government stalling on the adjustment of petrol prices, the programme never went to the IMF Board for final approval.

As expected, this led to a significant weakening of Tunisian sovereign bond prices in the first four months of 2023. During this period, the 2026 maturity briefly traded below 50 cents on the dollar and the October 2023 maturity dropped below 85 cents on the dollar, reflecting market fears that a restructuring was imminent.

What ultimately saved the day was a combination of two factors: external support and better-than-expected performance of macro fundamentals. The World Bank, the EU, Saudi Arabia, Algeria, Japan, the African Export-Import Bank and others provided much needed stopgap funding, with only some of this help (like the EU’s €900m Macro-Financial Assistance) contingent on an IMF programme. Even better, the current account deficit (CAD) outperformed the IMF projections of 7.2% of GDP by more than 3 percentage points, thanks to strong export growth, tourism receipts and remittances.²

Taken together, this led to a strengthening of foreign exchange (FX) reserves, which touched $8.4bn ahead of the €500m October 31^st Eurobond maturity, which was repaid in full after our trip. Figure 1 shows the resilience of Tunisia’s FX reserves despite fears earlier in 2023 that they would suffer a sharp decline.

The economy’s external resilience has provided the government with the “luxury” of treating the IMF programme like an option of last resort: something that can be avoided if the economy continues to overperform, yet a useful backstop in case of a crisis. Currently, the programme can best be described as “suspended until further notice”.

Wage reforms progressing, but subsidy bill remains a bone of contention

During our discussions in Tunis with various multilateral institutions, local banks, foreign embassies and government authorities, it was encouraging to hear that some critical parts of the reform agenda agreed back in October 2022 were already being implemented. Key among these is the wage bill reform, a set of measures agreed in the summer of 2022 with the Nobel prize winning trade union UGTT, aimed at reining in the country’s ballooning wage bill through a combination of a recruitment freeze, early retirement schemes and an audit of State-Owned Enterprise (SOE) employees.³

The major bone of contention with the IMF remains the subsidy bill, which at 7% of GDP remains one of the highest in our investment coverage universe. Subsidies have recently become a subject of totemic significance after President Saied publicly expressed his opposition to cutting any subsidies for fuel, electricity and food.

Nevertheless, the prevailing view on the ground was that after the upcoming presidential elections scheduled for the autumn of 2024, there will be room for compromise, as the president is likely to moderate his opposition if compensatory measures are put in place to protect the poor and the IMF allows for a more gradual adjustment of energy prices.⁴ The upcoming Article IV mission in December 2023 (which was recently postponed for early 2024) was highlighted to us as one possible avenue to restart discussions with the Fund. The publication of the related IMF report, scheduled for the first quarter of 2024 and which should contain an updated Debt Sustainability Analysis and set of macroeconomic forecasts, will be eagerly awaited by investors.⁵

Volatile local political environment

In July 2021, President Saied initiated a so-called “self-coup” by firing the prime minister, suspending parliament and assuming all executive power. Since then, the country has been in a continuous state of political flux. A constitutional referendum expanding the president’s power and fresh parliamentary elections held in December 2022 were boycotted by a large part of the population who had become disillusioned by their first decade of democratic experience.

The president’s authoritarian tendencies have put off some voters, but he remains by far the most popular politician in the country, despite his handling of the ongoing cost of living crisis and penchant for political repression.

The dismissal early in 2023 of four ministers followed by the sacking in August 2023 of Najla Bouden, the Arab world’s first female prime minister, and the firing in October 2023 of Economy Minister Samir Saied, an ardent supporter of the IMF programme who was ousted hours before we landed in Tunis, highlights the volatile policy environment and the degree of control the president currently exerts in the domestic political sphere.

Geopolitics trump domestic politics

That said, local politics tend to be relegated to the backseat when geopolitical concerns take centre stage. This was clearly on display earlier in the summer of 2023 when – despite the president’s dismantling of state institutions and wave of arrests targeting politicians, civil society activists, trade unionists, judges and journalists – the EU was willing to overlook the country’s democratic recession in a quest to fulfil its own strategic objective of limiting irregular migration flows over the Mediterranean Sea.

The “Strategic Partnership Agreement” signed in July 2023 saw Tunisia committing to cooperate on the fight against the smuggling and trafficking of migrants in exchange for financial aid.⁶ The deal had a rocky start, with Tunisia returning €60m in October as a sign of dissatisfaction with the European Commission’s insistence that the bulk of the aid package should only be disbursed in conjunction with an IMF programme.

However, the expectation in Tunis was that given the importance attached to the migration issue by many European states a solution may be found, perhaps after the European Parliament elections in the Spring of 2024, through which some of the financial aid could be delinked from an IMF programme or the Fund could be convinced to take a more “pragmatic” approach in its negotiations. Whether or not this can be achieved remains to be seen, but in our view the manner in which Tunisia decides to play its geopolitical cards in 2024 will be a key credit risk driver and something we will be monitoring closely.

Summing up

For better or worse, the political fragmentation and policy paralysis that characterised Tunisia’s credit story for the past decade is history. The president and his appointed government have the ability to improve governability and deliver on a reform agenda, a break from past form that saw two IMF programmes failing due to poor implementation. Whether he has the willingness to do so, is an entirely different question and something that will drive Tunisia’s economic fate over the medium term.

A better macro performance has allowed the government to delay subsidy reform and push the IMF programme into 2024. Supported by bilateral and multilateral funding, President Saied will only engage with the IMF under his own terms and with an eye on the upcoming elections.

Over the short term, the country has many options to fund itself, either by reviving its stalled IMF programme, or by leveraging its geopolitical position to attract further donor inflows. The country’s unexpected external performance in 2023 leaves it in a favourable position to meet its upcoming Eurobond maturities in February 2024 and January 2025 absent any major external or domestic shock.

The migration issue will keep EU countries involved and willing to help as long as Tunisia remains engaged. In our view, Tunisia will continue to play up its geopolitical significance particularly in its relationship with the European Union, with whom it had recently signed a “Strategic Partnership” deal to fight illegal migration in return for financial support. The moral hazard this creates means that the outlook for bold reforms and tough policy adjustments in the near future is rather dim.

IMPORTANT INFORMATION

There is no guarantee that past trends will continue, or forecasts will be realised.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
High-yield or “junk” bonds involve a greater risk of default and price volatility and can experience sudden and sharp price swings.
Beta measures the volatility of a security or portfolio relative to an index. Less than one means lower volatility than the index; more than one means greater volatility.