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.
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
The President's Cake
Director: Hasan Hadi
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Rating: 4/5
UAE currency: the story behind the money in your pockets
