Moez LABIDIUniversity of Monastir - Tunisia

Tunisian Macroeconomics : Waiting for

Political Stability & Structural Reforms

THE POLITICAL ECONOMY OF TRANSFORMATION IN THE ERF REGION

Tunis October 27-28, 2013

1 - Economic policy facing the « revolution shock »

3 - « Confidence shock » vs « Distrust schock »

2

2 - The challenges of democratic transition in Tunisia

4 - Conclusion

Moez LABIDI - ERF - Tunis october 27-28 20132

1 - Economic policy facing the « revolution shock »

3Moez LABIDI - ERF - Tunis october 27-28 2013

3

Fiscal policy Expansionary spending policy

Wage increase

Massive public sector hiring

Bailout of businesses

4Moez LABIDI - ERF - Tunis october 27-28 2013

4

budget deficit

Political uncertaintyDownturn in fiscal revenuesIncreasing social demands

Public debt

[ 7,4 %] [ 48 %]

2013 2013

Public expenditures

[ + 65 %]

2010 - 2013

Monetary Policy : ultra-expansionary

Distortion in Monetary policy Transmission mechanisms

Political uncertaintyinsecurity

Banking fragility [NPL = 14 %]

5Moez LABIDI - ERF - Tunis october 27-28 2013

5

12,5 %

2 %

4,5 %

3,5 %

Interest rate Reserves requirements

TND 5 Billion

Liquidity injection

4 %CB lending rate

The upper limit of the corridor[ ]

Money Market

rate

Austerity

?Austérity

6Moez LABIDI - ERF - Tunis october 27-28 2013

6

Public consumption

Recruitment

Wages

Private consumption

Consumer credit

WagesC

I

X

Institutional cacophony

Rising insecurity

Strikes / Sit-inDomestic

Eurozone crisisExternal

Growth2013

[2.5 % - 3 % ]

Monetary policy

Fiscalpolicy

Central bank injections

Current expenditures

TND 5 billion

2010 2010

[ + 88 %]

Stabilize the exchange rate

Foreign exchange

reserves fall

Sell foreign currencies

Stabilize the foreign exchange reserves

Sharp currency depreciation

No market intervention

Exchange rate policy : Tunisian Central Bank faces dilemmaDownward pressure on

the dinar

7

2010 2013

147 days 103 daysDEC OCT

2010 2013

EUR/TNDUSD/TND

1.921.43

2.241.64

DEC OCT

1 - Economic policy facing the « revolution shock »

8

2 - The challenges of democratic transition in Tunisia

Moez LABIDI - ERF - Tunis october 27-28 20138

An urgent need for jobs and investment

Govermental limited resources

Current economic situation

Tunisians’ expectation

s

Social challenge

Seek refuge in easy solution

Deterioration in fiscal balances

Inability to generate a positive confidence shock

9Moez LABIDI - ERF - Tunis october 27-28 2013

9

Clearer political and economical vision New perspectives

gap

15,9 %

Unemployment Rate Overall University graduates

32 %

83 % of total revenue

Tax Revenue

Pressure on bank liquidity

Boosting investment

Purchasing power decrease Negative real interest rate

Low Saving rate

(17,3 % )

Financing needs Businesses bailout

Shortage of liquidity

Allocation of long-term resources

Central bank intervention

Deposit withdrawls (early 2011)Banks largely undercapitalized

A marginal Bond Market

10Moez LABIDI - ERF - Tunis october 27-28 2013

10

2013Inflation : 5.8 % SEP

Currency reserves decrease

Economy funding

foreign investment fallCurrent account deficit

11Moez LABIDI - ERF - Tunis october 27-28 2013

11

External debt

International markets

Multilateral / Bilateral

Regional development funding projects

Budget

Heavy External financing requirements

BB+

Ba2B

Speculative grade

?

- IM guaranteed

2012 - 2013 [- 21,2 %]8 months2012 [8 % of GDP ]

1 - Economic policy facing the « revolution shock »

3 - « Confidence shock » vs « Distrust schock »

12

2 - The challenges of democratic transition in Tunisia

Moez LABIDI - ERF - Tunis october 27-28 201312

Confidence shock

Distrust shock

Good governancein democratic transition processes

13Moez LABIDI - ERF - Tunis october 27-28 2013

13

« Confidence shock » verus « Distrust shock »

Poor governancein democratic transitionprocesses

Confidence shock

Distrust shock

Investment spending

Budget adrift

Protest fever(wages, Recruitment)

Positive consequence on the structural reforms agenda

Switch to a new development model

Shor

t

term

Long

ter

m

14Moez LABIDI - ERF - Tunis october 27-28 2013

14

Pass urgent reforms

More flexibility for the public finance

Investment spending

Keeping the old development model

Negative consequence on the structural reforms agenda

1 - Economic policy facing the « revolution shock »

3 - « Confidence shock » vs « Distrust schock »

15

2 - The challenges of democratic transition in Tunisia

4 - Conclusion

Moez LABIDI - ERF - Tunis october 27-28 201315

Interaction : Economical / Political

Economic policy succes : First Test / Second Test

Challenge : New development model / old development model

16Moez LABIDI - ERF - Tunis october 27-28 2013

16

1

2

3

Political transition

Economic transition

17Moez LABIDI - ERF - Tunis october 27-28 2013

17

Interaction : Political / Economic

Political

impasse

Financial

Impasse

Reforms

Blocking

Moez LABIDI - ERF - Tunis october 27-28 201318

Avoid the spectre of « credit crunch »First Test

Generating a « confidence shock»Second Test

Economic policy succes

Success

Failure

19Moez LABIDI - ERF - Tunis october 27-28 2013

19

Confidence shock

Distrust shockPass

urgent reforms

New development model

Fiscal consolidationImproving macroeconomic balances

Undertake structural reforms

Old development model

Delays in urgent reforms

Budget adrift

Worsening macroeconomic balances

Block structural reforms

20Moez LABIDI - ERF - Tunis october 27-28 2013

20

Switch to a new development model?

Thank You