What does Tunisia’s current instability mean for investment?
Tunisia is grappling with social and political instability not seen since the 2011 protests which gripped the North African state and ushered in the Arab Spring. To help explain how recent events in Tunisia affect the country’s investment climate, GRI sat down with University of Denver Middle Eastern specialist Rob Prince.
Tunisia remains an attractive investment destination, despite challenges
GRI: There is little doubt that Tunisia offers ample potential for investors, from tourism to phosphate extraction. What should investors know about Tunisia, as well as the benefits and drawbacks of investing in the North African state?
Rob Prince: Tunisia remains one of the more fruitful places for investment. There are a number of challenges that are pretty obvious. The security situation has deteriorated significantly. That’s one element. The second element is the failure of economic vision since Ben Ali. This has included pretty much every government [since the Arab Spring]. And the third element is Tunisia’s role in the global and regional economy, which is overlooked. And which, in certain ways, straightjackets Tunisia’s economic possibilities.
Tunisia is a semi-peripheral economy. Its economic life is not based on the production of raw materials and basic foodstuffs. In fact, it [has] one of the most diversified economies in all of Africa and the Middle East. This is the good thing that it has going for it. The structural problem has been its literally century-or-more dependence on two markets: France and Italy. When France and Italy go into economic doldrums, it’s very, very difficult for Tunisia to make great progress. But [still], Tunisia has more economic, financial, and managerial expertise than pretty much any country in the Middle East and Africa.
Until recently, [Tunisia had] virtually no oil and natural gas. It is surrounded by two of the largest oil and natural gas producers in the world – Libya and Algeria. In a way, this paucity of oil has been one of the great benefits [for Tunisia]. It has forced Tunisia to be more innovative.
My whole take on Tunisia is that it’s a country whose potential has not yet been recognized economically. It has tremendous entrepreneurial spirit, combined with probably the most cosmopolitan people in the region. This is a crossroads between Africa and North Africa, between sub-Saharan Africa and Europe, with a long history.
I mention these things because: one, this is not a country in which Islamic fundamentalism has any major base, in spite of all these [Tunisians] joining ISIS. Tunisians are moderate: they’re moderate in their religion, they’re moderate in their politics. Two, this is not a society where socialism has had any real attraction. It’s an entrepreneurial, capitalist society which has needed the state to get off the ground.
Sector-specific considerations
GRI: What sectors of the Tunisian economy should investors be looking out for?
RP: Tunisia could be the engine of North African economic development. There are all kinds of investment possibilities in Tunisia. Solar energy is going to grow. There also are a fair number of Tunisian-based startups partnering with American and European companies. I see these investments, regardless of the political climate, very hopeful and worth the risk. A second area of investment that will have support regardless of the political environment is refining. Tunisia refines its own phosphates. Building refining capacity for natural gas is [another] area of investment. It’s going to be important regardless of the levels of political instability.
For the country’s sake, it has to develop its internal communication system – roads, telecoms, IT. There has been very little investment [in these sectors] in the last 30 years. Tunisia is a country whose economic reality is lopsided. 85% of its GDP comes from basically four cities along the coast, and this lopsided reality was at least in part created by former investment schemes, like the overbuilding of real estate.
The sector that I really don’t think has a future in terms of adding a lot to the country is tourism. Tourism will always be a large part of the Tunisian economy. [But] every country on the Mediterranean has olive oil, Roman roads, and tourism! Tunisia was able to compete by advertising the lowest cost vacations. What did that mean in terms of salaries and working conditions? It’s pretty obvious. As a result of where investment was coming, that was a sector that was horribly overbuilt, even without the [recent] terrorist attacks. One of the best things that can happen for Tunisia is for funds to leave tourism [and move to other sectors].
You now have Ezzeddine Saidane, the former CEO of the Arab Banking Corporation in Tunisia; Habib Karaouli, CEO of La Banque d’Affaires de Tunisie, and other major banking, finance, and industrial figures in Tunisia begging for an economic vision. The long-term vision of the country [needs to focus on] solar energy, infrastructural development in the interior, and finally, creating some kind of buffer to its dependency on Europe.
Living in a “rough neighborhood”
GRI: What were the effects of last year’s two major terrorist attacks in Tunisia – on the Bardo Museum in March 2015 and at a beach in Sousse three months later – on the country’s investment climate?
RP: Tunisia lives, as they say, in a rough neighborhood. That’s been true for its whole history. In the medium- and long-run, until the situation in Libya stabilizes, Tunisia is a risky investment. It’s well-known the rather startling numbers of jihadists that come out of Tunisia – they’re trained in Libya then funneled on over to Turkey, Syria, and all over North Africa as well. We shouldn’t expect to see much investment in Tunisia until the security situation improves, and that’s tied to resolving the crisis in Libya.
On Habib Essid’s departure
GRI: Does the recent sacking of Habib Essid and the installment of Tunisia’s new prime minister, Youssef Chahed, signal any change in the country’s investment policies?
RP: The three priorities of this new government are no different than those of the previous Essid government: 1) stabilizing the country’s security situation and neutralizing the radical Islamic military threat; 2) countering corruption; and 3) addressing the country’s destabilizing unemployment.
Chahed has put together a large cabinet, [with] some 26 ministers [and] 14 state secretaries. While [it is] a younger cabinet than that of the previous Essid administration, with a few representatives from Tunisia’s left[ist] parties and more women (8 of the 40), the overall political/economic orientation of the cabinet has changed little. The key ministries (Finance, Interior, Foreign Affairs) remain in more or less the same political hands.
Political musical chairs? Cosmetic changes? Or something of more substance? It remains to be seen. The challenges amount to a heavy load, in need of both emergency, short-term solutions along with some kind of long-term plan to take the Tunisian economy in a new direction.
The prospects of the energy industry
GRI: Swedish oil and gas explorer PA Resources, Australia’s Cooper Energy, and Dualex Energy from Canada have all recently announced their withdrawal from the country’s rich southern fields. In addition, the industry only spent $733,000 last year, compared to $2.2 million in 2008. How concerning is this for Tunisia’s oil and gas sector?
RP: Why did they get out of there? One, the price of oil collapsed globally. Secondly, bureaucratic incompetence of the Tunisian government – certain agreements [to help safeguard their investments] weren’t signed. Yes, Tunisia could have made drilling more attractive by giving the companies better terms, but it’s basically the collapse of the price of oil that killed the whole deal. These were small companies whose own financing was somewhat limited. I don’t see that as all that serious. [The sector] will rebound in time.
Tunisia’s public sector
GRI: Will the Tunisian government be able to both promote stability and deliver on its plans for expanded public-private partnerships, especially in infrastructure, if it doesn’t tackle its public debt (now at 52% of GDP) and bloated civil service (nearly half of the government’s budget goes to wages)?
RP: Unquestionably, the public sector in Tunisia is bloated, in part because the private sector has been unable to produce the kind of economic growth needed. I think you need to be very careful in cutting the public sector. We’re talking about an official employment rate of 15%, and among youth it’s 35-40%. Of course, it’s that element of society that has been radicalized by Salafist elements. Given the great security needs right now, I wouldn’t move too quickly in terms of cutting public sector jobs. If you look at it from the social and political point of view, [the public sector] is probably what’s keeping that society from complete collapse. Yes, Tunisia’s debt ratio is high, but there are an awful lot of countries where it’s higher.
On the future of Ennahda
GRI: As the biggest member of Parliament, the Islamist Ennahda party has worried some investors who fear negative impacts to the country’s business and investment climate should it gain more power within the current coalition government, or rule on its own in the near future. Should investors be wary of Ennahda?
RP: I respect Ennahda, particularly what they went through in the Ben Ali years – unconscionable repression. What they suffered caused widespread sympathy. What’s interesting is that Ennahda did its organizing in Ben Ali’s prisons. It emerged from the Ben Ali period as the most organized [political] group in Tunisia. The other groups that emerge in the aftermath of Ben Ali’s collapse are thrown-together, and aren’t political parties in the sense of the discipline and organization that Ennahda has. [But] Ennahda had no economic policy – a classic example of political factionalism. They tried to take over as many of the [state] institutions as possible, and [were] successful up to a certain point. Five years on, have they learned some lessons? I think so.
Ennahda is, for all intents and purposes, the Muslim Brotherhood of Tunisia. [Its leader], Rached Ghannouchi, is afraid that what happened in Egypt will happen to it. Ennahda, despite mistakes and a bumbling beginning, has proven more flexible and resilient than [the Egyptian Muslim Brotherhood]. It has wisely tempered some of its ideological, factional approaches of 2011-2013, which nearly torpedoed the whole Tunisian post-Ben Ali experiment. They have given economic questions somewhat more emphasis and opened up the doors of power to those with far more economic experience than the [Muslim Brotherhood] did. Ennahda also had to make a clear, but undoubtedly irreparable break with the country’s more militant Salafist elements with which it was allied early on. So, it is a party that has evolved and grown to a certain extent. Part of its maturing process comes precisely from its awareness that its earlier policies severely restricted investment opportunities, other than from such partisan players as the Emiratis, the Saudis, Qataris, etc.
Rob Prince is a retired senior lecturer of international studies and political economy at the University of Denver’s Korbel School of International Studies. He was a former US representative to the World Peace Council, and served as the co-chair of the Nuclear Disarmament Task Force, which helped facilitate discussions between the US and USSR in the late 1980s.
