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Tunisia’s anger boils over as Covid batters economy

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Nightly riots by Tunisian youths this week have underscored the depth of the country’s economic crisis as it grapples with rising poverty and widespread unemployment even as it is feted as the Arab world’s only democracy.

Violent protests have swept at least 15 cities and police have clashed with teenage demonstrators, using tear gas and water cannon to disperse stone-throwing youths. Hundreds have been arrested and the army has been deployed to prevent the looting of shops and banks.

“The protests reflect the extremely tense atmosphere in the country,” said Ons Benabdelkarim, senior associate in Tunisia of Expectation State, an international development group.

“These are teenagers protesting and there is despair and a sense of lack of perspective over what their future will look like. It comes on top of the economic stress of the pandemic and the lockdowns which makes the situation flammable.”

The explosion of anger — sparked by footage of police mistreating a shepherd — comes as the country marks the 10th anniversary of the revolution that toppled Zein el-Abidine Ben Ali, the long-serving dictator.

But Tunisians are not in a celebratory mood, as the coronavirus pandemic further scars an economy that has been ailing for the past decade.

The economy contracted last year by around 8 per cent, according to Fitch, the rating agency — its biggest drop since independence in 1956. Economic growth since the revolution has averaged 1.8 per cent — not enough to dent high unemployment levels, especially among the young, where it reached 36.5 per cent in 2020, according to the International Labour Organization.

The Tunisian National Guard stands watch during clashes with demonstrators in a Tunis suburb on Sunday © Fethi Belaid/AFP/Getty

The pandemic has decimated the crucial tourism industry, cut exports to Europe, Tunisia’s main trading partner, and caused thousands of companies to shut down, according to the government and international organisations. Tourism revenues plunged in 2020 by 65 per cent, and a recent survey by the International Finance Corporation showed that 5.4 per cent of Tunisian firms had permanently closed because of the health crisis.

Officials have hinted they will seek a new IMF loan because the country’s external financing needs have shot up. Fitch expects public debt to reach 89 per cent of gross domestic product in 2021 — up from 72.5 per cent in 2019. Increased government spending to mitigate the impact of the virus has driven up the budget deficit to an estimated 10.5 per cent of GDP, from 3.3 per cent the year before, according to Fitch.

But IMF borrowing would hinge on painful reforms that previous governments have not been able to implement.

“The immediate priority is to save lives and livelihoods until the effects from the pandemic wane,” said Chris Geiregat, IMF mission chief for Tunisia. “[But also] restoring sustainability to public finances is something that cannot wait and this needs to start happening this year.”

Areas for reform include the civil service wage bill, which at 17.6 per cent of GDP is “among the highest levels in the world”, energy subsidies and lossmaking state-owned enterprises. “When you have little or no fiscal space you will need to strictly prioritise your spending for health and social protection and that means that something has to give,” he said. 

The high turnover of governments — there have been 10 since the revolution — has made reform difficult. Many have been underpinned by weak coalitions in fragmented parliaments in which no single party holds a majority.

“Meeting IMF conditions will be difficult, given previous flare-ups between unions and the government over public sector salaries,” said James Swanston, Middle East and north Africa economist at Capital Economics, the London-based consultancy.

“Given the global pandemic and the likelihood of increasing consumer prices, the unions might demand pay hikes again and the government might feel it has little option but to succumb to the pressure.”

Protesters block a street during clashes with security forces in a Tunis suburb © Fethi Belaid/AFP/Getty

While coronavirus has exacerbated the crisis, Hichem Mechichi, the prime minister, said in a November speech that the country’s economic woes were only partly caused by the virus.

“Our country has not been able to establish an economic route which enables us to emerge from the economic difficulties we experienced since 2011,” he said, pointing to what he described as “a loss of hope in the future” exemplified by the increasing numbers of Tunisian illegal migrants making the perilous sea journey to Italy. 

The government’s response to protests has attracted criticism. “Poverty, marginalisation and exclusion should be dealt with through fairness and dignity, not smears and criminalisation,” said the Tunisian Forum for Economic and Social Rights, a civil society group

The deteriorating economy has undermined confidence in the political system and the politicians who emerged after the revolution. This has contributed to the meteoric rise in the opinion polls of Abir Moussi, a controversial party leader and former official in Ben Ali’s ruling party. She has been able to tap into a well of nostalgia for a period of perceived economic stability under dictatorship.

“Democracy is not yet under threat but it needs to deliver for people,” said Ms Benabdelkarim.

“They have to see that it can create better lives for them. There is a danger that people will stop believing in this. We are not there yet, but the government can at least start with reforms that are not controversial like cutting bureaucracy to make it easier for foreign investors to come here.”



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Emerging Markets

Tech-heavy Taiwan stock index plunges on Covid outbreak

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Taiwan’s stock market, home to some of the world’s biggest tech companies, suffered one of the largest drops in its history as investors were rocked by a worsening Covid-19 outbreak.

The Taiex fell as much as 8.55 per cent on Wednesday, the index’s worst intraday fall since 1969, according to Bloomberg. It finished down 4.1 per cent.

Construction, rubber, automotive and financials — sectors retail investors had been shifting into from technology in recent months — were the worst hit in the sell-off.

The world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing Company, which has a 30 per cent weighting in the index, fell as much as 9.3 before recovering ground to be down 1.9, while Apple supplier Hon Hai Precision Industry, also known as Foxconn, dropped 9.8 per cent before paring losses to be down 4.7 per cent.

While Taiwan’s sell-off was related to domestic Covid-19 problems, it followed recent declines in global markets as investors worried about possible inflationary pressures.

The falls came as Taiwan’s government was expected to partially close down public life to contain a worsening coronavirus outbreak — something the country had managed to avoid for more than a year.

“The reason that triggered the escalated sell-off during the trading session is the new [Covid-19] cases to be reported this afternoon, and probably the raising of the pandemic alert level,” said Patrick Chen, head of Taiwan research at CLSA. “On top of that, the market before today was already at a point where the index was at an inflection point.”

Taiwan’s strict border controls and quarantine system and meticulous contact tracing measures had helped it avoid community spread of Covid-19 until recently.

That success, which allowed Taipei to forego lockdowns, helped boost the local economy, which grew about 3 per cent last year and 8.2 per cent in the first quarter of 2021.

But health authorities announced 16 locally transmitted confirmed cases on Wednesday, for three of which the infection source was unclear — a sign of widening spread in the community. Authorities had confirmed seven untraced cases on Tuesday, and domestic media reported that the government might introduce partial lockdown measures.

President Tsai Ing-wen called on the public to be vigilant but avoid panicking.

Taiwan’s stock market rose almost 80 per cent over the past year, peaking at a historical high late last month. It is now down 8.5 per cent from that mark.

Retail investors have increasingly moved out of technology stocks in recent weeks, reducing the sector’s weight in trading volume from almost 80 per cent at its height to just over 50 per cent.

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China factory gate prices climb on global commodities boom

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The price of goods leaving factories in China rose at the fastest pace in more than three years, on the back of a rally in commodities supported by the country’s economic recovery.

The producer price index rose 6.8 per cent in April year-on-year, beating economists’ expectations and surpassing March’s increase of 4.4 per cent.

The rate was driven in part by comparison with a low base last year in the early stages of the pandemic. But it also reflects a global surge in the prices of raw materials that was first stoked by China and now incorporates expectations of recovering global demand.

While PPI prices in China have leapt, economists suggested there was limited spillover into consumer prices and that the central bank was unlikely to react. China’s consumer price index added just 0.9 per cent in April, the National Bureau of Statistics said on Tuesday, although it touched a seven-month high.

“It tells us that demand at this moment is super strong,” said Larry Hu, head of greater China economics at Macquarie, of the PPI data, although he suggested policymakers would see the increase as “transitory” and “look through it”.

“We’re going to see some reflation trends,” he added.

Signs of tightening in China’s credit conditions have drawn scrutiny from global investors eyeing the prospect of higher inflation as the global economy recovers from the pandemic, especially in the US, which releases consumer price data on Wednesday.

China’s PPI index remained mired in negative territory for most of 2020 following the outbreak of coronavirus, but has started to gather momentum this year. Gross domestic product growth in China returned to pre-pandemic levels in the final quarter of 2020.

An industrial frenzy in China has stoked demand for commodities such as oil, copper and iron ore that make up a significant portion of the index and have helped to push it higher. 

Policymakers in China have moved to tighten credit conditions, as well as attempted to rein in the steel sector. Ting Lu, chief China economist at Nomura, said the relevant question now was “whether the rapid rise of raw materials prices will dent real demand, given pre-determined credit growth”.

Retail sales in China have lagged behind the growth rate of industrial production, putting downward pressure on CPI, which has also been weakened by lower pork prices that rose sharply on the back of African swine fever. Core CPI, which strips out food and energy, rose 0.7 per cent in April 

Julian Pritchard-Evans, senior China economist at Capital Economics, said that producer prices were feeding through into the rebound in consumer prices, but also suggested that pressures on the former were “likely to be mostly transient”.

He added that output prices for durable consumer goods were rising at their fastest level on record.

China’s rapid recovery has been driven by its industrial sector, which has churned out record quantities of steel and fed into a construction boom that policymakers are now trying to constrain. On Monday, iron ore prices hit their highest level on record, while copper prices also surged.



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Iron ore hits record high as commodities continue to boom

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The price of iron ore hit a record high on Monday in the latest sign of booming commodity markets, which have gone into overdrive in recent weeks as large economies recover from the pandemic.

The steelmaking ingredient, an important source of income for the mining industry, rose 8.5 per cent to a record high of almost $230 a tonne fuelled by strong demand from China where mills have cranked up production.

Other commodities also rose sharply, including copper, which hit a record high of $10,747 a tonne before paring gains. The increases are part of a broad surge in the cost of raw materials that has lasted more than a year and which is fanning talk of another supercycle — a prolonged period where prices remain significantly above their long term trend.

The price of timber has also hit a record high as US sawmills struggle to keep pace with demand in the run-up to peak homebuilding season in the summer.

“Commodity demand signals are firing on all cylinders amid a synchronised recovery across the world’s economic powerhouses,” said Bart Melek, head of commodity strategy at TD Securities.

Strong demand from China, the world’s biggest consumer of commodities, international spending on post-pandemic recovery programmes, supply disruptions and big bets on the green energy transition explain the surge in commodity prices.

Commodities have also been boosted by a weaker US dollar and moves by investors to stock up on assets that can act as a hedge against inflation.

The S&P GSCI spot index, which tracks price movements for 24 raw materials, is up 26 per cent this year.

Strong investor demand pushed commodity assets held by fund managers to a new record of $648bn in April, according to Citigroup. All sectors saw monthly gains with agriculture and precious metals leading the way, the bank said.

Agricultural commodities have had an especially strong run owing to rising Chinese demand and concerns of a drought in Brazil. Dryness in the US, where planting for this year is under way, is also adding to the upward rise in prices. Corn, which is trading at $7.60 a bushel and soyabeans at $16.22, are at levels not seen since 2013.

“From a macro economic environment to strong demand and production concerns, the ingredients are all there for the supercycle,” said Dave Whitcomb of commodity specialist Peak Trading Research.

Rising copper and iron ore prices are a boon for big miners, which are on course to record earnings that will surpass records set during the China-driven commodity boom of the early 2000s.

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JPMorgan reckons Rio Tinto and BHP will be the largest corporate dividend payers in Europe this year, paying out almost $40bn to shareholders. Shares in Rio, the world’s biggest iron ore producer, hit a record high above £67 on Monday.

Brent crude, the international oil benchmark, has crept back up
towards $70 a barrel, which it surpassed in March for the first time in
more than a year, recovering ground lost as the pandemic
slashed demand for crude and roiled markets.

Supply cuts by leading oil producers have helped to bolster the market
as consumption has begun to recover around the world.

While some Wall Street banks have hailed the start of a new supercycle, with some traders talking of a return to $100 a barrel oil, others are less convinced. The International Energy Agency said oil supplies still remain plentiful meaning any talk of a supercycle is premature.



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