- June 7, 2022
- Posted by: Charles Yeboah Nixon
- Categories: Banking and Finance, Economics, Finance
Tunisian banks’ asset quality will come under added pressure from the effects of rising interest rates on customers, Fitch Ratings has said.
Asset quality is already under pressure from loan seasoning after recent rapid lending growth, and from the effect of rising inflation on consumers and businesses.
The Central Bank of Tunisia raised its key interest rate by 75 basis points to 7% on 17 May 2022 to curb high inflation – the first increase since 2019.
Inflation increased to 7.5% year-on-year in April 2022, the highest level since June 2018, from 6.7% in January.
Fitch forecasts inflation to peak at 8% for the whole 2022, increasing the likelihood of further rate rises. Inflation could go even higher if energy and food subsidies are removed as part of Tunisia’s negotiations with the IMF for a US$4 billion loan.
Fitch also said Tunisian banks’ asset-quality metrics weakened in 2021.
The average impaired loans ratio for the largest banks was 13.8% at end-first half of 2021 (2020: 13%).
The deterioration could accelerate in 2022 as higher interest rates and inflation put more pressure on borrowers’ debt-servicing capacity, and potential support for borrowers is limited following the expiry of Tunisia’s pandemic-related loan deferral programme in December 2021.
Fitch again pointed out that an increase in impaired loans would have an amplified effect on asset-quality metrics given a likely slowdown in loan growth and the seasoning of recent loans following a recent increase in lending.
“We expect retail loan delinquencies to rise in 2022. Retail loans were about 30% of total loans at end-2021, and 15% of the retail loans were unsecured. Pressures on SME and corporate cash flow will lead to higher defaults, particularly in the sectors most affected by the pandemic”
It also said high household indebtedness (about 30% of GDP) will exacerbate the vulnerabilities of the banking sector. Disposable income is low in Tunisia, with 40% to 60% of households’ earnings consumed by debt repayment.
A large proportion of households are in low-income groups and are particularly vulnerable to higher interest rates and rising unemployment (18.4% in 2021; likely to remain high in 2022-2023).
Gross Domestic Product (GDP) per capita declined over 2017-2021, making the population poorer, and we expect the decline to continue until at least 2023.