A recently published IMF working paper (“Spillovers from Europe into Morocco and Tunisia”) examines “the effect of growth shocks in European countries on economic activity in Morocco and Tunisia” and concludes that while the recent credit crisis did not cause a recession in these two countries (the authors point to their “relatively insulated financial systems, exceptional agricultural production and strong domestic demand”), going forward both nevertheless “rely on Europe for a large share of their external receipts (exports, tourism receipts, workers’ remittances and FDI), and growth is likely to be significantly influenced by events in their main European partners.”  Against the backdrop of a decline in real output across Europe of 4 percent in 2009, per headlines of late said events have revolved almost exclusively around various austerity measures

Besides documenting the strong correlation over the previous decade between growth rates in Morocco and Tunisia and those of their key European partners, the paper shows specifically that:

 “Transmission channels appear to be different between the two countries.  In the case of Tunisia, growth shocks are mainly transmitted through exports and, to a much lesser extent, tourism. Exports, tourism receipts and remittances play equally important roles in Morocco. These results are confirmed by the evolution of export, tourism, and remittances in the wake of the recent slowdown in Europe.  A similar exercise at the sectoral level indicates that the sectors related to services are the most responsive to EU’s GDP in Morocco, while in Tunisia the most responsive sectors are more export-oriented.”

The piece concludes that given that European imports–which represent the main source of external demand for Morocco and Tunisia—are projected to be “less than half compared to the pre-crisis period in 2010 and 2011,” the key to future robustness will hinge on “increasing competitiveness and [the] further diversification of trade flows.”  That said, there is a question in regards to Tunisia at least as to how much domestic demand can grow given that, per one of the piece’s authors Mr. De Bock, “the government seems very committed to further consolidate [spending]” while on the private front non-performing loans remain stubbornly high, indicating that credit expansion may not be the answer.  Yet per the IMF Article IV consultation piece with Tunisia from September, “the public debt ratio has fallen significantly over the past decade and is now slightly below the average for comparable emerging markets. In the event that downside risks materialize and cause a deterioration in economic activity and budget revenue, the staff saw scope for a small additional widening of the fiscal deficit of up to ½ percent of GDP in 2010.”  Public debt levels in Morocco, on the other hand, look much higher.