Intro: Our report on the US Dollar soaring to new two-decade high is in three parts: (1) the world economy (2) the US economy and (3) the impact of a strong Dollar on the Tunisian economy published last week by Tunisie Valeurs research team, please write to recherche@tunisievaleurs.com to receive the full report
The world economy has seen a series of unprecedented shocks happening successively without respite: The covid-19 pandemic, the surge in inflation, the Russian-Ukrainian war and the subsequent food crisis. These shocks have substantially fueled inflation and slowed down economic growth which ultimately resulted in a worldwide stagflation environment. By way of consequence the FX markets have been seriously rattled by the crisis paving the way for a strong rise in the US Dollar against the main currencies. The surge in the US Dollar has, nonetheless, had an uneven impact on the economies around the world.
What it means for Tunisia: Year to date the US Dollar rise against the Tunisian Dinar has reached 13.8%. The rise obviously comes at a cost on a macro and a micro level:
On the macro level: The current deficit is growing bigger in the short term. The depreciating Tunisian Dinar creates an imported inflation. In the short term the “price effect” will hurt the trade balance. But in the longer term “The volume effect” will, theoretically, compensate the losses in the trade deficit. The assumption here is that Tunisia’s exports should grow in volumes given the price attractiveness after the devaluation. The question that we should ask, however, is Tunisia capable to restart its production capacity to benefit from larger exports? This question is strongly linked to how the political and economic outlook will evolve? In terms of visibility, Tunisia is still unable to send a strong signal of recovery.
Bigger Budget deficit: The direct consequence of a devaluation is a bigger interest charges to repay. More importantly, the cost of food and energy subsidies will surge to an extent that sustainability of the subsidies model will be at risk. The 2022 budget was built on the assumption that Tunisia will keep an FX rate to the Dollar at 2.90Tnd. Fort each increment rise to the Dollar there is an additional cost of subsidies for the government at 40 Million Tnd. With an FX rate evolving at an average of 3.063Tnd to the Dollar (Year to date), the additional cost of subsidies is estimated at 650.8 million Tnd (approx. 217 million US Dollars)
Higher Debt Ratio: Around ¼ of Tunisia’s foreign debt is denominated in US Dollars. The depreciation of the Tunisia Dinar will cause the overall debt to swell. According to the financial law for 2022, the overall debt will hover around 73 billion Tnd in 2022.
Rising inflation and a worse purchasing power for the Tunisian households: the double effect of imported inflation and the rise in interest rates decided by the Tunisian Central Bank (100 basis points in the base rate) will have a negative impact on the purchasing power ultimately choking-off consumption and putting the recovery plan at risk.
On the micro level: the surge in the US Dollar will also have a negative impact on the rentability of our industries. At the forefront of the companies at risk are those which import their raw material in US Dollars while they have little or no export activity. Even when these companies export a small portion of their output in US Dollars, it is not enough to offset the import cost. We need to wait for the year-end numbers of the industrial companies to measure the impact of FX losses on their earnings. Some companies will be better off. These are companies with the highest export capacities. As a general rule, the higher the export volumes, the lower the impact of the US Dollar rise.