(The following statement was released by the rating agency)
The USD1.75bn stand-by arrangement (SBA) agreed by the Tunisian authorities and IMF staff on Friday provides crucial underpinning for the sovereign’s economic programme and will be an important catalyst for further international support, says Fitch Ratings. This will help the country face another year of political transition against a challenging economic backdrop featuring large twin deficits.
According to the press release by the IMF, and contrary to our expectations, the SBA facility extended to Tunisia will not be precautionary. This is in contrast with the Precautionary Liquidity Line (PLL) signed with Morocco (BBB-/Stable) in August 2012, which the Moroccan authorities do not intend to use unless necessary. SBA conditionality should also be heavier than that attached to the PLL.
The recent example of Egypt shows that approval can be delayed unexpectedly after staff-level agreement has been reached. In Tunisia, a sudden threat to political stability would be the most likely cause of any delay, whereas in Egypt this arose from political opposition to some of the conditions attached to the agreement.
Tunisia has run a large current account deficit since 2011 (estimated at 8.1% of GDP in 2012), resulting from weak exports to the EU, low tourism receipts and sustained demand for imports. This has put pressure on the exchange rate and has affected foreign exchange reserves, which have declined since 2011 and stabilised at around three months of current account payments, a low level that we consider the main external risk facing the country. We expect the current account deficit to remain large in 2013 (7.4% of GDP), maintaining pressure on foreign exchange reserves.
In these circumstances the availability of the SBA adds comfort to the country’s ability to face its external financing needs over the coming years, all the more so as additional multilateral and bilateral financing could be extended during the year. This, together with the easing in political tensions since the forming of a new government in March 2013, somewhat alleviates pressure on the sovereign ratings. However, risks surrounding the political transition and the economic recovery remain significant, and are reflected in the Negative Outlook on the sovereign rating.
Our downgrade of Tunisia’s IDR to ‘BB+’/Negative in December 2012 reflected the long and difficult economic and political transition facing the country, and the risks surrounding the process. Our rating decision relied on the assumption that the country would benefit from continuing international support from multilateral and bilateral creditors, including the IMF, if required.
The agreement with the IMF established a 24-month USD1.75bn SBA, equivalent to around 4% of GDP. It is subject to IMF Executive Board approval, expected in May. The Tunisian authorities have agreed to a number of structural reforms, including strengthening the vulnerable banking sector, streamlining public expenditures (including subsidies), reforming monetary and exchange rate policies, and promoting private investment.
