Tunisia: Ensuring stability in banking
In October, the Central Bank of Tunisia (Banque Centrale de Tunisie, BCT) issued new restrictions for consumer credit that stand to tighten lending in the short to medium term. The new restrictions are meant to solidify the base of the banking industry at a difficult time for the economy; in the past year, the country has seen rising import bills and an uptick in inflation, while new investment projects are slow to get off the ground.
The new restrictions put in place by the BCT increase the amount of required reserves for banks, stipulating that they must hold back reserves equal to the volume of new consumer loans, thus making it more expensive for banks to extend such credit. The same restrictions do not apply to credit for investment and projects. While this will restrain banks’ lending capacity, the measures were introduced in an effort to bring back a balance in consumer and investment spending.
The consumer price index rose to 5.7% in September 2012, up from 5.6% the previous month and from 3.9% in September 2011. BCT authorities have indicated in public statements that inflation levels in excess of 5% are considered unsustainable. Furthermore, a high volume of imports, particularly of luxury goods, combined with slow recovery of exports and a muted performance in key earners like tourism, has reduced Tunisia’s foreign exchange reserves to one of its lowest levels in decades. Foreign currency reserves fell to $7.2bn in 2012, according to projections from the IMF, the equivalent of 94 days of imports; this is down from reserves of $9.5bn in 2010, the equivalent of 145 days of imports.
By making it more expensive for banks to extend consumer loans, the BCT intends to temper consumer spending, particularly on luxury imports that are sapping reserves, and ensure that outstanding consumer credit and inflation do not outpace economic recovery. In a statement carried by Reuters, Chadli Ayari, the governor of the BCT, raised the concern of excessive consumer spending. According to Ayari, “Credit growth is around 9-10%, but 80% of that growth goes on consumption and only 20% into equipment and investment”.
There is some concern in the sector that reduced consumer credit may erode the client base for conventional banking by pushing businesses and individuals to seek financing outside the banking system. A similar move in Algeria in 2010 and 2011 to reduce access to consumer credit, designed to limit the country’s import bill, dampened demand for basic financial services.
The move comes after a year of surprisingly steady performance by the country’s financial institutions. While the turbulence of the Arab Spring in early 2011 negatively impacted operations, a Banking Industry Country Risk Assessment released in September by the ratings agency Standard & Poor’s held banks’ risk rating unchanged at eight (10 being the highest risk), while overall economic risk was raised one point from seven to eight.
The banking sector’s rating was lowered from nine to eight in October 2007 and has held steady since then, despite the uncertain political and economic context in 2011 and slow recovery in 2012. The fact that the banking industry rating remained unchanged is, in part, a reflection of the confidence in a package of reforms that has been introduced to strengthen governance in recent years.
Several reforms have been introduced to strengthen compliance with Basel II requirements, such as improving oversight of the central bank, boosting sector-wide transparency and increasing banks’ collective provisions for latent risk. In addition, the BCT regulation 91-24 of 1991 was reworked to gradually increase the minimum solvency ratio and work toward conformity with Basel III. Under the new regulation, the solvency threshold will be increased to 9% by the end of 2013 and 10% by 2014.
Finally, in August the state launched a call to tender for a comprehensive external audit of the three major public banks, with the view to reform fiscal, organisational or operational processes according to the audit’s results.
Therefore, while the economy continues to struggle, Tunisia’s banking system appears to be on a solid regulatory footing. However, this does not negate the fact that consumer credit will be tightened in the short to medium term, which runs the risk of stifling private domestic expenditure at a time when the economy is getting back on its feet. However, the BCT’s move to reduce inflation and maintain fiscal sustainability bodes well for sector stability in the long term.