Tunisia

Financial Markets…Spanish and Italian government bonds bounced back from their earlier losses, with their benchmark 10-year yields dropping 6 basis points to 5.17% and 4 bps to 4.36%, as a report showed German investor confidence surged to the highest level in nearly three years this month, boosting risk-appetite for the region’s high-yielding debt. Notably, Spain sold €4 billion ($5.35 billion) of 3- and 9-month bills with an average yield of 0.421%, down from 0.441% in January auction.

Asian equities advanced on Tuesday, with the benchmark MSCI Asia Pacific Index heading for an 18-month high closing, amid robust corporate-earnings reports. But gains were somewhat limited on worries that Chinese government will try to cool the property market, pushing China’s Shanghai Composite Index lower by 1.6%.
 
The Standard &Poor’s cut its sovereign credit rating on Tunisia by one level ‘BB-‘ (three notches below investment grade) from 'BB', citing increased political risk in the wake of the February 6 assassination of a prominent leftist opposition politician, Chokri Belaid. The downgrade was the third one by the rating agency since January 2011.

High-income Economies…Investor confidence in Germany rose to a three year high in February, with the ZEW Indicator of Economic Sentiment, jumping to 48.2 in February from 31.5 in January. This was the third consecutive increase for the index which aims to predict economic developments six months in advance, and the highest reading since April 2010. Economic expectations for the euro area climbed 11.2 to 42.4 in February.

Greece’s current account deficit narrowed sharply to €0.54 billion in December from € 0.85 billion in November helped by falling imports and lower interest payments after a sovereign debt cut. For the year as whole, the deficit shrank to 2.9% of GDP in 2012 from 9.9% the previous year - its lowest level since 1999 when it joined the euro.

Construction output in the Euro Area continued to fall in December, declining by 4.8% (y/y) compared to 4.7% in November, led by weakness in Portugal, Poland, Bulgaria and the UK. On a monthly basis, output decreased 1.7% (m/m) in December, after dropping 0.4% in the previous month.

Developing Economies…East Asia and Pacific: Thailand’s GDP grew briskly by 3.6% (q/q) in Q4 of 2012, up from 1.5% (q/q) in the previous quarter. Growth for the full year came in at 6.4% up from 0.1% in 2011, reflecting strong domestic demand following the government’s stimulus post 2011 floods.

Europe and Central Asia: Russia’s retail sales slowed in January, growing by 3.5% (y/y) compared to 5.5% (y/y) in December. This is the slowest pace in 35 months as private consumption is weakening.

Latin America and the Caribbean: Mexico’s GDP growth accelerated in the Q4 growing by 3.1% (q/q, saar) up from 1.4 (q/q, saar) in Q3. Growth for the entire year was flat at 3.9% in 2012 as strong domestic demand offset weaker exports.

Middle East and North Africa: Tunisia’s industrial production accelerated in November 4.2% (y/y) compared to 0.3% (y/y) in October 2012. Higher growth partly reflects base year effects, with the expansion led by growth in energy production and manufacturing.

Sub-Saharan Africa: Nigeria’s inflation dropped to 9% (y/y) in January from 12% in (y/y) in December 2012 bringing inflation in line with the central bank’s target (<10%).

Renewed concerns earlier in the week about the Greek bail-out plan and the possibility of a credit rating downgrade for several European economies drove borrowing costs up. The European Central Bank’s (ECB) announcement on Thursday to defend the Euro has helped ease concerns somewhat. As inflationary pressures abate and the global economy slows down, more developing countries are cutting interest rates, however, where inflationary pressures remain high, policy tightening continues. Notwithstanding the pick-up in tourism arrivals in the first four months of 2012, the recent slowdown in economic activity is likely to dampen tourism flows in the second half of 2012.
Borrowing costs for high-spread Euro Area governments rise. Renewed worries about Greece being able to reach set fiscal targets; Moody’s negative credit outlook for Germany, the Netherlands, and the European Financial Stability Mechanism; and increasing concerns related to regional finances in some countries caused bond yields to rise for Euro Area governments earlier this week. Ten-year Spanish government bond yields rose to fresh record highs at 7.621% and Italian bonds hit a 2012-high of 6.597%. Comparable yields also increased for French and even German bonds, albeit slightly. In contrast, U.S. government bonds yields touched record lows as investors sought safe haven. However, the announcement on Thursday by the ECB that it would defend the Euro has helped to push Spanish and Italian bond yields further down from earlier highs.
Interest rate cuts in developing countries continue. As inflationary pressures abate and the global economy slows down, interest rate cuts among developing countries have continued, unlike in large high-income countries where the policy space for interest rate cuts remains limited. In recent months some of the larger developing countries (Brazil, China, the Philippines, South Africa and Vietnam) have cut nominal policy rates, although real interest rates may be higher due to sharper declines in inflation. In contrast, policy tightening has occurred in developing countries where domestic factors (rapid credit growth, poor harvests, currency depreciation) are putting pressure on prices: Peru and Uruguay increased reserve ratios and Malawi increased its policy rate. Nonetheless, most developing countries continue to keep their interest rates on hold at relatively low levels, in a bid to balance the need to keep a lid on inflation and stimulate domestic demand.
The pick up in global tourist arrivals observed so far in 2012, is likely to slowdown in latter half of the year. The tourism sector remains an important source of revenue and job creation for several developing countries (accounting for up to 32% of GDP in Maldives, see chart). Data released by the United Nations World Tourism Organization shows international tourist arrivals increased by 5% in the first four months of 2012 (compared to 4.5% for same period in 2011). Among developing regions, the increase was strongest in the Middle East and North Africa, bouyed on by a strong rebound in Tunisia (48%, y/y) and Egypt (29%, y/y) – thanks to the ongoing stabilisation of the situation there. However, with the global economy slowing down, and consumer confidence weakening in major tourist-origin countries, the pace of increase in tourist flows is likely to slow down in the second half of 2012.

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