Tunisian banks exposed much more to the indirect effects of the Ukrainian conflict than to its direct fallout, according to S&P

Rating agency Standard&Poor’s &P Global Ratings expects rated banks in the Middle East and Africa to suffer little direct fallout from the Russia-Ukraine conflict due to their limited dealings with counterparties Russians and Ukrainians.

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However, it believes that the banking sectors in Tunisia and Turkey are the most likely to suffer negative indirect effects, while banks in Saudi Arabia, the United Arab Emirates and South Africa are expected to remain relatively isolated.

According to S&P, the main indirect effects of the conflict will be the following:

– A rise in oil prices, which will support oil-exporting economies and weigh on oil-importing countries;

– Rising food prices, leading to inflationary pressures and current account deficits;

– Increased risk aversion among investors, which could increase the vulnerability of banking systems with significant net foreign debt.

As for Tunisia, the agency Standard & Poor’s, while noting a “significant twin deficit” and that negotiations with the International Monetary Fund have been underway for a year, provides that national subsidies for fuels and foodstuffs will increase external financing needs at a time when the market is tight.

The weight of political uncertainty

S&P also notes that “the slow recovery from the Covid-19 pandemic and political uncertainty are weighing heavily on the economic situation”, expressing concern that “the high sovereign risk could significantly harm the financial and commercial profile of the Tunisian banks.

The rating agency predicts that “retail lending will only increase by 2% in 2022 and that inflationary pressures and economic policy uncertainties will weigh on the recovery.

The agency assures that rated Tunisian banks have minimal direct exposure to Russian or Ukrainian counterparties, adding that “we do not foresee any significant direct effects of the conflict on their asset quality indicators”.

However, the indirect effects cloud the future, she said, citing rising oil and food prices that are likely to weaken the country’s already limited ability to meet its financial obligations and an IMF program that could be conditional on major reforms of public enterprises. Exposure to the public sector represented 16.5% of banks’ total assets at the end of 2020.

On the other hand, S&P forecasts that the bad debt ratio will reach 13% in 2022 and that credit losses will remain high over the next 12 to 24 months.

“We expect credit losses of around 150 basis points in 2022, compared to 140 basis points in 2020,” said the agency, which refers to capitalization under pressure, stressing that “weak revenues in a context of sluggish economic activity, high credit losses and rising costs will put pressure on banks’ capital ratios”.

Finally, with regard to dependence on external financing, S&P considers it “limited”, on the grounds that net foreign debt represented less than 14% of domestic loans in 2021 and consisted mainly of deposits from offshore companies, Tunisian expatriates and lines of credit from multilateral lending institutions.

Moreover, Tunisian banks continue to depend on funding from the Central Bank of Tunisia due to the small size of the local capital market and the insufficient local deposit base, says Satandard & Poor’s.

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