In Tunisia, Second Deadly Attack on Tourists in Four Months Is Credit Negative

Tunis, Tunisia (Capital Markets in Africa) — Last Friday, a Tunisian student attacked foreign tourists at a beach resort in Sousse, Tunisia, killing at least 38. It was the second large-scale attack on foreign tourists in the country in just four months, following two Tunisian gunmen killing 22 people at a museum in Tunis in March. Although Tunisia’s (Ba3 stable) successful democratic transition between 2011 and 2014 and our outlook for its economic recovery prompted us in May to change the outlook to stable from negative, the terrorist attacks are credit negative. They threaten the nation’s economic outlook, investment activity and the travel and tourism industry, a key contributor to GDP.

The travel and tourism industry in Tunisia accounted for 7.4% of GDP and 6.8% of total employment in 2014. Including the travel and tourism sector’s indirect contributions of investment spending, government spending and the effect of purchases from the travel industry, the contributions to GDP are about double. The first-quarter 2015 balance of payments data show a downturn in tourism revenues in US dollar terms because tourism has yet to recover to pre-crisis levels of 2010 (see exhibit below). The number of overnight stays also dropped during the first five months of the year compared with 2014 and 2010 levels.

Our growth forecast of 2.8% reflects the effects of the museum attack, but the latest attack and weak 1.7% growth in the first quarter suggests our forecast is optimistic. Moreover, repercussions affect not only the growth outlook, but also the pace of fiscal consolidation and external adjustment as the services balance surplus mitigates the trade balance deficit.

Our base-case assumption is that the current account deficit reached its peak in 2014 and will narrow gradually to 7.3% of GDP at the end of 2015, falling further to 6.3% of GDP in 2016. This assumes a sustained turnaround in foreign direct investments, which languished over the past few years amid investors’ wait-and-see attitude. The attacks threaten to keep investors on the sidelines, introducing downside risks to our forecast. On the fiscal side, additional security-related expenditures and support measures for the tourism industry will weigh on the country’s fiscal consolidation path agreed with the International Monetary Fund.

Following the attack, the Tunisian government ordered the closure of mosques that are not under government supervision and effective 1 July, about 1,000 armed security officers will be deployed to guard tourist sites and hotels. Tunisia is also receiving important international assistance to enhance its security capabilities, especially from the US, which has singled out Tunisia as a key partner in regional counterterrorism efforts and intends to designate the country as a major non-NATO ally.

Source: Moody’s Credit Outlook, 2 July 2015