FRI, JANUARY 26 2018-theG&Bjournal-We think Tunisia should be a winner in the 2020s, thanks to good literacy and infrastructure, as well as recent FX-driven competitiveness gains.
The TND is the cheapest currency in Africa or Frontier markets, according to our REER model
The Tunisian dinar (TND) this year became the cheapest currency of all the Frontier or African economies in our real effective exchange rate (REER) model. Unlike for some volatile currencies, this is an exceptional occurrence. The TND has only been more than 20% cheap vs fair value of TND1.9/$ in just 3% of the months since 1995. Its current level is contributing to a big shift in competitiveness. Already at the average exchange rate for 2017, the minimum wage in euro terms has fallen by 13% since 2012, a deeper fall than Greek hourly labour costs over 2012-2016. The minimum wage is now roughly half the level of that in Morocco – which itself has a fairly valued currency based on our REER model.
Tunisia has become increasingly competitive within North Africa and vis-à-vis Emerging Europe
This big improvement in competitiveness is against a positive backdrop for literacy, electricity and infrastructure that we think should make Tunisia one of the next decade’s winners in Africa and Frontier markets. In terms of literacy, Tunisia is a decade ahead of Egypt and 15 years ahead of Morocco. As early as a generation ago it reached the threshold at which we calculate manufacturing can exceed 20% of GDP. Industry requires energy, so it is encouraging that electricity output per capita was 63% above that in Morocco in 2015, 10x that of Nigeria and 17x that of Ethiopia. Meanwhile, as we wrote last year, emerging Europe has run out of labour, which is driving labour costs much higher even as Tunisia’s costs fall. With an employment rate of just 44% (2013) against 68% in Bulgaria (2016) or 77% in the Czech Republic, there is plenty of room for Tunisian women and men to enter the formal workforce and provide the supply of labour that foreign industry may seek. We think FDI flows will look with increasing interest at North Africa and Turkey as springboards to sell into the EU, and Tunisia should be a big beneficiary in the 2020s. The EU is keen to foster stability in North Africa and began talks in 2015 with Tunisia on a comprehensive free trade agreement. This will cover agriculture as well as the manufacturing exports Tunisia already produces (over 50% of exports go to France and Italy).
We forecast that 2017 was the worst year for the C/A
A currency does not get this cheap without reason. The first years after the Arab Spring saw inexperienced governments, faced with unstable neighbours, a restive electorate and weak export markets, choose to boost public spending, and particularly wages, rather than risk embarking on radical economic reforms. This worsened public finances, perhaps crowded out private investment, and maintained sluggish growth but at the expense of a current account (C/A) deficit that probably reached 10% of GDP in 2017. Change is now under way. More technocratic governments have in the past two years pushed some reform, let the currency take the strain resulting from the twin deficits, and shown resolve this month when protests began against price rises and stubbornly high unemployment. The IMF and international community remain engaged, having promised $3.3-3.5bn annually to Tunisia through to 2021.
Eurobonds appear to offer value, as will local assets when the TND has stabilised
Tunisia’s eurobonds trade at wider spreads vs lower-rated credits in Africa, which we think is only justified if growth continues to be around 2% or less and if 2019 elections produce a very negative surprise. That is not our base case. Given supportive market conditions at present, we expect a tightening of bond spreads relative to Egypt. For local assets (TND bonds and equities), we think investors will wait for data that show the currency has stabilised.
If you have any questions or comments regarding this report, please contact Charles Robertson or Vikram Lopez.
