The decision by the President of the Republic to suspend parliament and dismiss the prime minister may add further delays to an IMF program that would alleviate the country’s large financing pressures, says Fitch Ratings.
According to the agency, Tunisia will need to obtain large amounts of official creditor funding before the end of the year in order to stem the deterioration in its external liquidity position.
Prospects for reforms that would lower fiscal deficits, stabilize debt and contain external liquidity pressures were poor before this crisis. The fragile coalition in parliament, tensions between key political leaders, and entrenched social opposition – including opposition from the labor union movement – to substantial fiscal consolidation measures complicated efforts to secure fiscal consolidation and IMF support.
The president’s actions raise new political uncertainties. However, Fitch believed it was unlikely that he would use his powers to push through difficult measures to address financing pressures, such as cuts to the large public-sector wage bill (17% of GDP in 2020), as such action would be unpopular and could coalesce social pressure against him.
Decisions that discourage Tunisia’s partners to support it
The president’s moves may reduce western partners’ willingness to support Tunisia; the country’s access to official funding has previously benefited from being the only democracy to emerge from the Arab Spring. Nonetheless, European concerns over migration across the Mediterranean will remain an important motivation for external support.
Fitch downgraded Tunisia to ‘B-’ with a Negative Outlook earlier in July due to heightened fiscal and external liquidity risks in the context of further delays in agreeing on a new program with the IMF, which for most official creditors is a prerequisite for a renewal of budget support.
Tunisia plans to draw on official creditor budget support equivalent to around 4.7% of GDP and access the Eurobond market for funds equivalent to about 2.2% of GDP in 2021. We believe that these goals are unlikely to be achieved, and the government will have to continue to rely on local financing.
Creditors might consider a debt restructuring via the Paris Club
Financing pressures will continue to mount in the absence of strong reforms and external support. Official creditors might consider a debt restructuring via the Paris Club, with potential repercussions for private creditors, necessary before additional support can be extended, but would be reluctant to agree on a debt reduction without reforms addressing the high fiscal deficit as the source of Tunisia’s solvency issues.
The previous government had stated that it was not considering a debt restructuring, and Tunisia has never received a Paris Club treatment.
Fitch believes a failure to agree a deal with the IMF, resulting in continued heavy reliance on domestic funding, would add to pressures on international liquidity. Tunisia faces significant external public-debt amortization (equivalent to around 4% of GDP per year on average over 2021-2023) and large current account deficits (which we project at around 8% of GDP annually over the same period on average).
Foreign-exchange reserves dropped to USD8.9 billion by end-June 2021, down from about USD9.8 billion at end-2020. Fitch reminds that in its July assessment it indicated that an aggravation of external liquidity pressures, for example illustrated by a substantial drawdown in reserves or significant pressures on the exchange rate, could lead to a rating downgrade.