Tunisian banks will post ‘moderate’ profits amid economic crisis, Moody’s says

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

Loan loss provisioning for growing problem loans will delay the recovery of overall profitability, the rating agency said in a report.

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

“Inflationary pressures, exacerbated by the impact of the military conflict in Ukraine, and the potential depreciation of the local currency if talks of a third IMF [International Monetary Fund] the country’s bailouts are failing, will exacerbate banks’ lending problems, increase liquidity shortages and risk eroding their profitability,” said Moody’s analyst Badis Shubailat.

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

The economy of this North African country is experiencing turbulence in a context of political instability, growing debt, high inflation and rising commodity prices caused by the conflict in Ukraine.

The country’s gross domestic product growth is expected to remain “moderate” at 2.2% this year after a sharp contraction of 8.7% in 2020 and modest growth of 3.1% last year, Moody’s said.

Tunisia’s economy is expected to grow by 2.5% in 2023 but will be “lower than the levels of around 5%” recorded by the country before 2011, he added.

The IMF also expects the Tunisian economy to grow by 2.2% this year, with inflation expected to reach 7.7%. The World Bank estimates GDP growth at 3% 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 aid from the IMF to help stabilize its economy. Earlier this month, the lender signaled it was ready to engage in talks with the country but called on Tunis to embark on reforms that have been sidetracked by political instability.

“Tunisia must urgently address its fiscal imbalances by improving fiscal equity, controlling the large civil service wage bill, replacing generalized subsidies with transfers targeting the poor, strengthening its social security and reforming its loss-making public enterprises in order to rapidly reduce its considerable economic imbalances and ensure macroeconomic stability,” said Jihad Azour, director of the IMF’s Middle East and Central Asia department.

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

Overall, problem loans will remain high in 2022, at around 12% to 13% of the industry-wide loan book due to weak credit growth and the end of “forbearance measures” adopted during the pandemic, the rating agency said.

Russia’s invasion of Ukraine has also exacerbated existing risks to the banking sector by “raising oil import prices, stoking 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 ability to support ailing banks is also weakening and further delays in securing a new IMF program “would erode foreign exchange reserves through debt service drawdowns, exacerbating balance risks.” payments,” he added.

Updated: July 01, 2022, 04:30

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