BMI View: The announcement that a number of Gulf-based investors have bid for a US$308mn tourism project in Tunisia reflects our view that the country is becoming an increasingly stable and attractive market for commercial construction activity. We expect 2012 to experience a significant uptick in construction activity following on from a post-revolution slump, with government commitments to reform and rebuilding being backed by diverse investment flows. However, we note political uncertainty is threatening the economic progress made over H112, and has the potential to significantly dampen the rate of industry growth.
The proposed Hergala resort will incorporate hotels, restaurants, housing and parks in a 450 hectares plot off the Gulf of Hammamet. The Tunisian government is undertaking an ambitious programme of development which it hopes will establish the area as a desirable location for second homes and luxury tourism. According to the Ministry of Regional Development and Planning, bids have been received from investors in Kuwait, Saudi Arabia and the UAE.
Tunisia's Place In The Sun
We forecast that construction related to Tunisia's tourism industry - which consistently accounts for around 6.5% of GDP annually - will experience a boon on the back of a stabilisation in macroeconomic performance and an economic restructuring with youth employment at its core. The industry has experienced a dramatic upsurge in activity following January 2011's revolution, with figures from the Tunisian Tourism Ministry showing that revenues increased by 35.3% year-on-year (y-o-y) over H112. Although this is largely due to base effects, the figure represents an upturn which we believe represents a gradual return to trend.
Investors are looking to capitalise on renewed growth from a market that is consistently popular with tourists across the entire Eurasian region. According to Algerian newspaper , the number of Algerian tourists to Tunisia has increased by 28% since 2011. The news comes after Tunisair announced daily flights connecting Tunis and Algiers between March and October. Indeed, with a decade of tourism infrastructure development in place the country is well placed to garner an increasing share of the MENA market in light of broader regional insecurity, especially with ongoing disquiet in the region's major tourism market, Egypt.
|Industry Likely To Return To Trend|
|Tunisia - Building and Civil Engineering, Real Growth, y-o-y|
Foreign Investment Improves Picture
Our optimistic assessment of Tunisia's commercial construction market is further based on the relative openness of the country's economy. According to the African Development Bank (AfDB) the rate of openness is 107% - higher than that of Turkey, Israel and Morocco. As such, foreign direct investment (FDI) inflows are geographically varied. As this latest announcement shows, in the face of a decline in receipts from Europe amid regional macroeconomic weakness, the country is in a good position to capitalise on interest from GCC state funds increasingly looking to benefit from investment opportunities outside the Gulf region - a relationship which has a precedent in the significant amount of investment in Tunisia garnered from the UAE pre-2008. Reflecting a cautious uptick in investor confidence, FDI climbed 44.9% y-o-y over H112 according to the Foreign Investment Promotion Agency. Again significant base effects are in play here, but it is a notable increase nonetheless.
The construction industry will be further buoyed by an announcement from the government that it is setting aside budgetary and grant monies to fund the development of 30,000 new homes.
Clouds On The Horizon
Despite a generally optimistic outlook for Tunisia's construction industry, we highlight a number of risks which have the potential to seriously limit the pace of the industry's recovery.
Although the country's New Law on Economic Initiative has worked to cut down on commercial red tape and simplify investment, the anecdotal record suggests that the Ben Ali administration applied rules arbitrarily, especially in the context of the tourism industry, grant land, cheap loans and licences only to those with close ties to the government. It remains to be seen how the new regime will treat existing players, yet many barriers are likely to persist.
As the industry's development over the last decade was state driven and reliant on subsidies and cheap credit, banks and businesses alike have taken a huge hit with the removal of Ben Ali and a collapse in tourism over H210 and 2011. It therefore remains to be seen how existing players will weather the storm, and whether demand for new builds will gain the necessary funding. An increase in FDI across the whole sector will be reliant upon political stability and reforms to the business environment that are undertaken once stability is achieved.
In the short term, we highlight the potential for disruption to investment plans from ongoing tensions between the president and the prime minister at a time where the country urgently requires consensus on plans for reform. In this respect, donors of international aid, whom the government is heavily reliant upon, could become less willing to support Tunisia's expansionary fiscal policy, forcing Tunis to cut back on non-priority capital expenditures ( see BMI's online service, 30 August, Political Outlook Q4 12.)
As such, we forecast the economy to grow only 2.1% in real terms in 2012. However, BMI's Middle East and North Africa Country Risk analysts believe that Tunisia's political transition in 2012 will have a profound impact on the country's long-term political and economic future, and are optimistic regarding the country's ability to evolve into a stable democracy, boding well for long-term industry growth.