Fitch Ratings-Paris/London-01 July 2015: Last week’s attack in Sousse highlights Tunisia’s exposure to terrorism risk and its potential to damage the economy, Fitch Ratings says. But the country’s successful political transition in recent years could support structural reforms that increase growth in the medium term.
The attack, the second in three months after the attack at the Bardo Museum in Tunis in March, which also targeted foreign tourists, will hit the economy in the short term through its negative impact on tourism. Minister of Tourism Salma Elloumi Rekik said yesterday that the attack could cost the industry more than USD515m this year (equivalent to around 1.1% of GDP).
In 2014, tourism accounted for 7% of GDP, 12% of employment and 9% of current account receipts (USD2.1bn). Fitch expects growth to slow this year, to 1.9% in 2015, from 2.3% in 2014 as the attacks damage tourism and FDI. Growth remains below ratings peers, and far below Tunisia’s pre-2010 era level (4.4% on average in 2005-2010).
The attack highlights Tunisia’s security risks after its successful transition to a democratic political regime. These are compounded by the common border with Libya (where the Tunisian government believes both the Sousse and Bardo attackers were trained, according to Bloomberg), the large contingent of Tunisian nationals fighting in Syria and the deterioration in the economic situation following the Arab Spring in 2011, which has contributed to high youth unemployment.
A material increase in security-related, social or political instability would put negative pressure on Tunisia’s ‘BB-‘ sovereign rating. We believe the process of political transition and stabilisation is well entrenched, and the revision of Tunisia’s Outlook to Stable from Negative in March primarily reflected the completion of a four-year democratic process. Elections were smooth and a broad coalition government with a large majority was formed swiftly in early 2015.
This transition should support efforts to kick-start the Tunisian economy and implement growth-enhancing structural reforms in areas such as the investment code, public bank restructuring, and fiscal reforms (as required by official lenders). But the need for social and political consensus could mean that reform implementation is slow, with effects only being felt from next year.
Nevertheless, fiscal reform and stronger growth would help rebuild external and fiscal buffers. The pressure of twin deficits has eased due to falling subsidy and transfer costs and lower oil prices, among other things, and January’s USD1bn Eurobond issue. Tunisia will continue to benefit from financial, economic and political support from key western allies following the transition to democracy. International financial support has kept the external interest service burden moderate, and improved the public debt maturity profile.