Economies across North Africa have endured severe balance of payments strains this year and governments in Egypt and Tunisia finally secured staff-level agreements with the IMF over the past month. Markets have welcomed the news with sovereign dollar bond spreads narrowing sharply. Egypt has already made good progress on the IMF’s demands, particularly in adopting a flexible exchange rate last month. And while the country’s debt dynamics are fragile, we think that the sovereign will muddle through. But investors seem to share our concerns about the outlook for Tunisia. In contrast to Egypt, Tunisia has made little headway with pushing through the IMF’s policy recommendations and we still think a debt restructuring is on the cards. The risks are skewed towards a messy balance of payments crisis and an outright sovereign default.
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