Tunisia bond gets moderately weak rating

The government of Tunisia is working on plans to issue a euro-denominated bond – with the note being assigned a moderately weak B+ expected rating by Fitch.

Tunisia will use the new capital for the country’s general budgetary purposes.

Fitch’s expected rating has been set in line with the country’s long-term foreign-currency issuer default rating (IDR) of B+, which has a negative outlook.

The notes’ rating is sensitive to changes in Tunisia’s long-term foreign-currency IDR.

Earlier in 2019, Fitch affirmed Tunisia’s long-term foreign-currency IDR at B+, with a negative outlook. This was on the back of rising public and external debt, reflected by wide twin deficits, subdued economic growth and a challenging political and social environment.

The rating is balanced by strong governance indicators, diversified economic structure and continued support from official creditors.

Tunisia’s negative outlook reflects persistent pressures on external liquidity arising from large financing needs that will average 17% of GDP per year between 2019 and 2021, according to Fitch’s forecasts.  This has also been reflected by a large current account deficit (CAD) averaging 10% of GDP. The country is also struggling with weak external and fiscal buffers and uncertainty about further progress on reforms, in particular with the upcoming general elections.

The country’s foreign direct investment (FDI) is expected to average 2.5% of GDP, which will entail that Tunisia’s external financing needs will be covered by borrowing. Fitch projects the country’s external debt to rise from 70.5% of GDP in 2018 to 91.4% in 2021.

Tunisia’s international reserves are low, at 2.6 months of current account payments as of year ended 2018. This has raised the country’s vulnerability to shocks such as a rise in oil prices, tighter external funding conditions or slower Eurozone growth.

Fitch expects the central government (CG) deficit including grants to narrow from 4.5% in 2018 to 4% in 2019, versus its official target of 3.7%. The government also plans to offset the impact of unplanned civil service wage increases of 0.6% of GDP in 2019.

The rating agency also expects the budget gap to further shrink to 3.3% of GDP in 2021. This is driven by a continued restrictive hiring policy and further energy subsidy reform which will more than offset the impact of rising debt interest costs.

On the upside, Tunisia has received strong support from the official creditor community partly driven by the country’s geopolitical significance amid an immigration crisis in the Mediterranean basin and instability in Libya. This has been key in supporting the rating and helps mitigate external liquidity risks, according to Fitch.

Tunisia has also seen improvement in the CAD, which is expected to narrow from 11.2% of GDP in 2018 to 9.3% of GDP in 2021. This improvement has been driven by in the country’s local currency’s depreciation, a tighter policy mix, the recovery in phosphate extraction and the coming online of the Nawwara gas field.

Improvements in Tunisia’s current account deficit, leading to lower external financing needs and stronger international liquidity buffers would improve the country’s rating, according to Fitch.

The rating agency added that implementation of adjustment policies and reforms supporting macroeconomic stability and reducing downside risks for the economy may also lead to an improvement in the rating.

Reduction in budget deficits consistent with stabilising the public debt/GDP ratio over the medium term would also help improve Tunisia’s rating.

The country’s rating could be worsened by increased external liquidity pressures, such as a widening of the CAD or further drawdown in international reserves, according to Fitch.

Political developments or social unrest undermining prospects for progress on macroeconomic adjustment policies and reforms could also worsen the rating, Fitch adds.

The country’s failure to narrow the fiscal deficit leading to a faster rise in government debt/GDP ratio may also lead to a downgrade of the rating.