With Europe’s woes undoubtedly solved (trifling quibbles aside) and sovereign integrity intact (R.I.P. CDS), Tunisia and Morocco–two frontier markets relatively and acutely tied to the EU’s ultimate fate (to wit, 75% of Tunisian exports are destined for the EU) in particular seem poised to benefit.  For even if the realities of moribund or at least muted growth as well as an entrenched downwards trajectory in manufacturing PMI remain in Europe’s cards, the illusion of sovereign stability may now be adequately vivid such that external financing–namely remittances (per Barclays, the EU remains the main source of remittances to most non-oil exporters in MENA, specifically up to 85-90% in Tunisia and Morocco) and net FDI flows (deemed critical to boosting growth and exports)–won’t turn fickle.  The situation looks especially precarious in Tunisia, where FDI fell more than 150% q/q following the spring uprising and is projected to fall from 1.4bn in 2010 to 0.3.  That said, the country’s “so-far-smooth plan for its transition to full democracy” looks hitherto credible, while GCC flows (chiefly from both Saudi Arabia and Qatar) coupled with multilateral lending by international financial organizations such as the World Bank and the IMF (not to mention support from the Deauville Partnership which involves, in addition to the G8, the UAE, Saudi Arabia, Kuwait, Qatar, and Turkey) should, at least in the near-term, help support macro fundamentals by partially offsetting deepening current account balance deficits (5.2 and 5.6% of GDP in 2011 in Morocco and Tunisia, from 4.2 and 4.7 percent respectively last year) with fiscal balance support and thus provide an implied ceiling to both CDS and z-spread.

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