Tunisia rating discoloured by debt

Tunisia’s long-term foreign-currency issuer default rating (IDR) has been affirmed at B+ with a negative outlook by Fitch Ratings, as the country struggles with high fiscal and external debt.

The country’s rating is weighed down by wide current account deficits, high fiscal and external debt, a challenging political environment and subdued economic growth.

Tunisia’s negative outlook reflects ongoing vulnerability from large external funding needs, weak external and fiscal buffers and entrenched social opposition to macro-economic stabilisation policies.

Despite the inauguration of a new government in February 2020, following the October 2019 parliamentary elections, the implementation fiscal reforms will continue at a slow pace, according to Fitch.

Formation of the new government has delayed the review of the current arrangement with the International Monetary Fund (IMF), initially due in September 2019 and still to be completed.

Tunisia’s rating is balanced against strong governance indicators, continued support from official creditors underpinning the sovereign’s financing flexibility and a diversified economy.

Fitch expects the new cabinet to negotiate a new IMF programme to follow the 2016-2020 arrangement expiring in April.

The new government is also expected to adhere to fiscal reforms and consolidation policies initiated by its predecessor.

Fitch projects that the current account deficit (CAD) will narrow to 7.7% of GDP in 2021 – still double the forecast ‘B’ median of 3.9% – from an estimated 8.8% in 2019 and 11.1% in 2018.

Fitch also expects central government (CG) deficit to stabilise at 3.3% of gross domestic product (GDP) in 2020, overshooting the government target of 2.8%, before narrowing to 2.9% in 2021.

CG debt also declined to 72% of GDP in 2019 from 78% in 2018, mostly helped by the appreciation of the dinar.

Failure of external liquidity conditions to improve and persistent vulnerability from high external funding needs, would lead to a downgrade in the rating.

Political developments or social unrest undermining prospects for progress on macro-economic adjustment policies and reforms, may also lead to a downgrade in the rating.

The rating agency may also consider downgrading the rating if the government fails to narrow the fiscal deficit or materialisation of contingent liabilities, leading to further rise in debt.

A decline in external financing needs and a recovery in international liquidity buffers, would lead to an improvement in the rating.

Fitch may also consider upgrading the rating if the government makes further progress on fiscal consolidation, supporting macro-economic stability and stabilising the public debt/GDP ratio.

In 2018, Fitch affirmed Tunisia at B+, as the country struggled with high external debt , reflecting a wide twin deficit, subdued economic growth and a challenging political and social environment.