Tunisia’s banks to record 'subdued' profits amid economic crisis, Moody's says

Intense competition for deposits will keep lenders' interest margins tight, although higher interest rates on loans will provide some relief

People walk in the Medina in the old city of Tunis. Moody's expects slower export demand and higher inflation will weaken Tunisia’s economic recovery. Reuters

Tunisia's banking sector is expected to be negatively affected due to the current economic turmoil in the country, with lenders' profits expected to remain “subdued”, Moody's Investors Service said.

Loan-loss provisioning for rising problem loans will delay the recovery of bottom-line profitability, the rating agency said in a report.

Intense competition for deposits will keep banks' interest margins tight, although higher interest rates on loans will provide some relief, it added.

“Inflationary pressures, exacerbated by the impact of the military conflict in Ukraine, and potential local currency depreciation if discussions over a third IMF [International Monetary Fund] bailout for the country are unsuccessful, will exacerbate banks' problem loans, increase liquidity shortages and risk eroding their profitability,” Moody's analyst Badis Shubailat said.

“In addition, Tunisia’s fragile economic recovery from a sharp coronavirus-induced recession in 2020, persistent fiscal and current account deficits and inability to access international capital markets will weigh on banks’ solvency and liquidity profiles over the next 12 to 18 months.”

The North African country’s economy is experiencing turmoil amid political instability, mounting debt, high inflation and rising commodity prices triggered by the conflict in Ukraine.

The country’s gross domestic product growth is forecast to remain “subdued” at 2.2 per cent this year following a sharp contraction of 8.7 per cent in 2020 and modest growth of 3.1 per cent growth last year, Moody’s said.

The Tunisian economy is expected to expand 2.5 per cent in 2023 but will be “below levels of around 5 per cent” recorded by the country before 2011, it added.

The IMF also expects Tunisia's economy to grow 2.2 per cent this year, with inflation expected to rise to 7.7 per cent. The World Bank estimates GDP growth of 3 per cent this year.

“A recovery in economic output in absolute terms to pre-pandemic levels is not likely before 2024,” Moody’s said.

Tunisia is seeking $4 billion in assistance from the IMF to help stabilise its economy. Earlier this month, the lender signalled its readiness to engage in discussions with the country but called on Tunis to initiate reforms derailed by political instability.

“Tunisia needs to urgently tackle its fiscal imbalances by improving tax equity, containing the large civil service wage bill, replacing generalised subsidies with transfers targeting the poor, strengthening its social safety net and reforming its loss-making state-owned enterprises to quickly reduce its sizeable economic imbalances and ensure macroeconomic stability,” said Jihad Azour, IMF's director of the Middle East and Central Asia Department.

Tunisia's banks are “heavily exposed” to the government, which will affect their performance, Moody's said.

Overall, problem loans will remain high in 2022 at about 12 per cent to 13 per cent of the sector-wide loan book as a result of low credit growth and the ending of “forbearance measures” enacted during the pandemic, the rating agency said.

Russia’s invasion of Ukraine has also exacerbated existing risks to the banking sector by “raising prices for oil imports, fanning inflation, reducing tourism and weakening export demand — all factors that will make it harder for borrowers to repay their loans”, Moody's said.

The government’s capacity to support ailing banks is also weakening and further delays in securing a new IMF programme would “erode foreign-exchange reserves through drawdowns for debt service payments, exacerbating balance of payment risks”, it added.