In April, the level of foreign exchange reserves decreased to a new low with regard to import cover (2.3 months). At the same time, inflation accelerated to +7.7% y/y, mainly triggered by earlier TND depreciation, though domestic credit conditions (+13.2% y/y in Q4 2017) have also contributed to the inflation environment. The monetary policy interest rate was last tightened in March, by +75bps to 5.75%. This muted response has generated a credibility issue for the Central Bank (CB), in particular since average annual inflation is expected to post its strongest rate since 1991 this year (+7.5%). But the main difficulty is related to rising debt and financing needs. The CB has made a statement in favor of a USD1bn issuance, despite currently difficult market conditions (market tensions in Italy, Turkey and Argentina). Overall, this CB statement shows the increasing difficulty to cope with the financing needs generated by increasing debt levels (external debt is projected to reach 84% of GDP in 2018). Financing issues are a sizeable downside risk to our 2018 GDP growth forecast of +2.5%.
