North African investors must brace for heightened risks

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The year began on a sour note for North African investors as many of the region’s popular investor domains were downgraded by economists and other risk experts taking part in Euromoney’s crowd-sourcing survey.

Risk scores for Egypt, Libya, Morocco and Tunisia deteriorated, with only oil-producing Algeria bucking the trend.

The risks increased mostly in Tunisia, sliding 18 places so far this year to a lowly 137th in Euromoney’s global rankings of 174 countries. The second-largest downgrade occurred for Egypt, in 112th place.

The three most sought-after locations, Egypt, Morocco and Tunisia, are considered more exposed than their regional peers when multiple economic dimensions are considered, says Mohamed Chemingui, senior economist and chief of regional integration section at the United Nations economic and social commission for West Africa (UNESCWA).

These dimensions include “fiscal space, external financial flows (such as foreign direct investment, overseas development assistance, tourism and remittances), external debt, the banking sector and equity market,” he says.

“The stronger US dollar and further tightening of global financial conditions will lead to a further increase in debt-service costs as well as higher import bills, thus exacerbating debt sustainability risks.”

The longer the war continues, the greater the political and economic deterioration resulting in increased social unrest, and its accompanying adverse effects 

 - Marco Vicenzino, Global Strategy Project

Marco Vicenzino, director of the Global Strategy Project (GSP), notes that the fallout from Russia’s invasion of Ukraine is having a devastating global impact, particularly for those Middle East and North Africa (MENA) states that are most dependent on Russian and Ukrainian energy and food supplies.

“The longer the war continues, the greater the political and economic deterioration resulting in increased social unrest, and its accompanying adverse effects,” he says. “Existing high youth unemployment further exacerbates the declining status quo.”

Vicenzino believes these factors threaten domestic stability and present geopolitical risks for the broader region and beyond.

“Just as these countries were struggling to establish fiscal order post-Covid, the Ukraine war has further derailed them exponentially with staggering debt distress,” he says.

Vicenzino goes on to warn, alarmingly, that in some places the risks of severe malnutrition and famine are a worst-case scenario, particularly as some food-exporting nations begin to impose export restrictions to protect their domestic supply.

“In order to provide a softer landing, these governments have no other option but to subsidize basic food and energy costs upon which their masses survive daily,” he says. “As the situation worsens, governments will have to increase direct subsidies to reduce the risks of impending unrest that food shortages can unleash.”

Furthermore, he says deteriorating conditions in the region could trigger a reinvigorated migration crisis on Europe’s southern shores, in addition to the current crisis on its eastern frontiers with Ukraine.

Morocco, the region’s safest prospect lying 51st in the global rankings, had seen its risks steadily improve on a five- and 10-year trend basis.

However, a high unemployment rate of around 12%, an under-performing tourism sector and the rising cost of living are negative signs that could easily spark social unrest.

In April, annual inflation measured by the consumer price index accelerated to 5.9%, as food, clothing and transport prices increased at a faster pace.

The effects of the war in Ukraine, and not least local drought conditions – pointing to the effects of climate change – are contributing to lower forecasts for economic growth this year.

In April, the IMF predicted just 1.1% real GDP growth for this year following last year’s solid rebound from the pandemic that led to an expansion of 7.2% after a 6.3% drop in 2020.

Despite progress on economic diversification, the agricultural sector in Morocco still accounts for 14% of GDP and a third of all employment, and Morocco is running a balance-of-payments current-account deficit that is predicted to widen to 6% of GDP this year, according to the IMF.

The government is planning to invest more and is spending more on subsidies, but the informal sector is large, with under-employment high, so the country could see a backlash if inflation pressure cannot be tamed.

Egypt is facing similar problems, but with inflation even higher at 13.1% in April, culminating from higher food prices and devaluation of the currency by almost 17% on March 21.

The central bank has continued to tighten monetary policy, most recently announcing a 200-basis-point rise in its overnight interest rates in May, which is sure to squeeze economic growth.

Non-oil private-sector activity is contracting and the country’s foreign debt increased in the fourth quarter of last year to $145.5 billion.

Noting there are also domestic liabilities, the debt-to-GDP ratio now exceeds 90% and roughly half the 2022-23 budget is to be used for debt servicing, worth a staggering $16 billion, depriving key services of public funding.

All of Egypt’s economic and political risk indicators have been downgraded in Euromoney’s country risk survey, notably the experts’ scores for government non-payments/non-repatriation, emphasizing heightened debt-repayment risks.

Tunisia is also facing intense political pressure after the shock events of last year when president Kais Saied removed the government, suspended parliament and later dissolved it.

Many feel he is undermining democracy, despite planning to stage a referendum next month to replace the poorly functioning 2014 Constitution ahead of parliamentary elections due in December.

Saied is showing no diminished appetite for tightening his grip on authority, most recently embarking on a purge of the judiciary by removing 57 judges he says are tied to corruption and terrorism.

Mongi Boughzala, professor of economics at the University of Tunis El Manar, says Tunisia has enormous potential, but political issues are key; a fact underlined by sharp falls in scores for all of Tunisia’s political risk indicators, none of which scores more than four points out of a maximum 10 in the survey.

Most Tunisians approved of Saied’s actions last year, and even regained hope, but unfortunately the outcome has been disappointing and confusing, and it has led to more uncertainty and even to the serious threat of falling back to autocracy.

“An inclusive debate about the political adjustments and reforms is needed,” says Boughzala. “It took the president more than nine months to open up for a national debate, but his own way, partial and restrictive. It is going to be hard to build a solid consensus this way.”

The referendum will take place, but the turnout is likely to be low. The risk of political uncertainty remains persistently high 

 - Mongi Boughzala, University of Tunis El Manar

It is good news, he believes, that the team working with the president is asserting that the constitutional amendment they are projecting is fundamentally democratic and modern.

The trouble is that the proposed process for writing the amendments – a fully fledged new constitution is not excluded – is rejected by most political partners.

“I think that the referendum will take place, but the turnout is likely to be low,” says Boughzala. “The risk of political uncertainty remains persistently high.”

He goes on to mention that, like everywhere else – and more so in Tunisia and in other neighbouring countries – food and energy prices are generating economic pressures in terms of inflation, government finances and the balance of payments.

“Inflation, already around 7%, is likely to increase and the current financial crisis is going to be worse,” says Boughzala. “However, this is not the main challenge for Tunisia. People will suffer more, but there will not be a major food crisis and no threat of famine.”

GSP’s Vicenzino agrees that economic uncertainty and continuing political instability remain the reality for Tunisia.

He notes the political opposition remains highly fragmented – particularly along secular-Islamist fault-lines – and it does not present a viable or coherent alternative.

In theory, he says, the ideal outcome is for all parties to make the necessary compromises to reach a broad-based national consensus resulting in a new constitution.

“However, in practice, bridging the gaps remains an enormous undertaking,” says Vicenzino. “Even if a political compromise is achieved on paper, carrying it out will remain an enormous task. Furthermore, it would require effective management skills and a minimum level of trust, which are both seriously lacking.”