Fitch Ratings has affirmed Tunisia’s Long-term foreign currency Issuer Default Rating (IDR) at ‘BBB-‘ and Long-term local currency IDR at ‘BBB,’ the global rating agency reported Monday.
The Outlooks on the IDRs remain Negative. The agency has also affirmed Tunisia’s Country Ceiling at ‘BBB’ and Short-term foreign currency IDR at ‘F3’.
“The affirmation of Tunisia’s sovereign ratings reflects the relatively smooth political transition from the former Ben Ali regime to a newly elected interim government, notwithstanding the impact of instability in neighbouring Libya,” the agency indicated.
However, the economy has performed worse than expected, raising concerns about public and external debt sustainability in the context of a more uncertain global economic backdrop,” says Amelie Roux, Director in Fitch’s Sovereign Rating Group.
Political transition has remained on track so far, with free and fair elections to a constitutional assembly held in October 2011 that saw the victory of moderate Islamist party Ennahda, which formed an interim coalition government with two leftist parties, Ettakatol the Congress for the Republic Party (CPR).
Fitch says the maintenance of the Negative Outlook reflects a shift in the balance of risk away from the political to the economic arena. The economy performed worse than Fitch expected in 2011 with real GDP contracting by 1.8% and the current account deficit widening to 7.4% of GDP.
However, inflation remained under control and the budget deficit was contained at 3.7% of GDP.
Sovereign debt service was also maintained throughout the political transition, despite a further fall in reserves to USD 7.1bn or above three months’ import payments.
Tunisia faces a challenging economic outlook in 2012.
Economic recovery will be affected by the Eurozone crisis, protests and social demands are expected to impede mining output recovery and tourism is not likely to recover to pre-revolution highs. The government will also have to tackle two major structural weaknesses that deteriorated further in 2011: a high level of unemployment, estimated at around 20% at end-2011, and a weak banking sector that is likely to need public sector cash injections in 2012, Fitch said.
Against this background, the government plans to adopt an expansionary budgetary policy, with a fiscal deficit expected to widen to 6% of GDP by end-2012.
This will necessarily affect general government debt, which has been a perennial rating weakness over the past decade.
Fitch says higher than expected fiscal deficits leading to sharply elevated public debt could trigger a downgrade, as could a weakening in international support.
Delays in organising elections, reflecting resurgent political and social instability, would also be detrimental to the rating.
Conversely, a stronger than expected economic recovery and diminishing macro economic imbalances, coupled with continued progress on political transition, would likely result in a revision of the rating Outlook to Stable.