RPT-Fitch: Arab Spring Leads to Divergent Rating Paths for Morocco and Tunisia
Fitch Ratings says in a new report that the divergence in rating dynamics between Morocco (BBB-/Stable) and Tunisia (BB-/Negative) since the start of the Arab Spring in early 2011 reflects different developments arising from the political transition in each country and their impact on economic performance.
In Tunisia, the political transition has proved long and difficult with recurrent violence and popular protest. Marked political instability (with four prime ministers in three years) has undermined confidence in the economy and in Tunisia’s ability to reform and finance widening twin deficits.
In contrast, Morocco’s transition to a more open political system was smooth. A new constitution that gave more power to the elected Parliament was adopted in mid-2011. The elections that followed brought to power a coalition dominated by the Parti de la Justice et du Developpement. Social and political stability has allowed the authorities to implement potentially difficult reforms, as illustrated by the gradual increase in subsidised energy prices.
The smoother political transition in Morocco was aided by a tradition of political pluralism, the permanence of the monarchy (with King Mohammed VI seen as a reformer and legitimate among the population), and economic and social reforms started after the accession of the King to the throne in 1999.
Stability in Morocco has supported growing tourist arrivals (which reached 10 million in 2013) and FDI inflows. Non-agricultural GDP has grown steadily above 4%, except in 2013 when it grew by just 3.1% as a consequence of slower growth in the eurozone. In contrast, Tunisia’s GDP contracted by 1.9% in 2011 and growth has since remained well below the pre-revolution trend. Tourist inflows (six million in 2013) are well below the 2010 level (seven million) and FDI has declined. Rising inflation has added to instability.
The combination of accommodative policies, high oil prices and a weak eurozone has led to a sharp deterioration in budget and current account deficits in both countries. In Morocco, the deterioration was bigger and sharper but deficits started to narrow in 2013 (to 5.4% and 7.5% of GDP respectively) as a result of fiscal reform, the strong performance of new exporting sectors, and lower oil prices. In Tunisia, given the slower reform process and a more challenging economic environment, the twin deficits (6.5% and 8.4% respectively in 2013) will only narrow from 2014.
The two countries have benefited from official grants and loans from bilateral and multilateral creditors and are supported by IMF programmes. In Morocco, the Precautionary Liquidity Line (worth USD6.2bn or 6% of GDP) has been a key anchor for the reform agenda, but the authorities do not intend to draw on it. In contrast, Tunisia has drawn on its IMF facility (Stand-By-Arrangement worth USD1.8bn or 4% of GDP). It has also used partial guarantees from Japan and the US to issue bonds.
Structural indicators in Morocco and Tunisia, including GDP per capita, Ease of Doing Business, World Bank governance and UN Human Development index, remain in line with ‘BB’ medians and markedly weaker than ‘BBB’ medians. Unemployment is high, at 15% in Tunisia and 9% in Morocco in 2013, and is a key social issue. Tunisian banks’ asset quality is particularly weak and the sector needs recapitalisation (an estimated 3% of GDP). In Morocco, domestic banks have remained fairly sound despite pressures in recent years.
Ratings dynamics in Tunisia and Morocco will crucially depend on their ability to narrow twin deficits, rebuild policy buffers, implement reforms and accelerate growth. In Morocco, the Stable Outlook anticipates a gradual narrowing of the twin deficits, supported by continuing reforms. Tunisia’s Negative Outlook reflects ongoing uncertainty over the political transition despite this year’s adoption of a constitution. Tunisia’s rating would benefit from peaceful elections and the formation of a long-lasting government able to implement reforms.
The report, Morocco and Tunisia: Diverging Paths Since Arab Spring, is available on www.fitchratings.com or by clicking on the link below.
Link to Fitch Ratings’ Report: Morocco and Tunisia: Diverging Paths Since Arab Spring
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