Rating and Investment Information (R&I) has downgrading Tunisia’s Foreign Currency Issuer Rating to B+, with outlook negative.
In a statement Tuesday, the rating agency said it will downgrade the rating further if the negotiation process with the International Monetary Fund (IMF) is prolonged and the situation raises concerns on a decline of certainty on debt repayments.
Though, there is a positive development that the government has resumed talks with the IMF, it is still difficult to predict when they will reach an agreement, the agency stresses.
Tunisia’s political situation has been uncertain since President Kais Saied assumed all executive authority. There is a growing concern that a return to a sustainable growth path will be delayed, the rating agency said. It added, given strong uncertainty over the outlook of fiscal consolidation, it may take considerable time to ensure a steady reduction in the government debt ratio. The government has a certain level of foreign reserves.
While no difficulties are anticipated with near-term liquidity, R&I considers financial assistance by the IMF to be vital to increase the likelihood of debt repayment over the medium term.
Real gross domestic product (GDP) contracted 8.8% in 2020 owing to the coronavirus pandemic and accompanying movement restrictions. In early 2021, infections spread further, dealing a blow to the economy in the first half. Although the economy is heading for recovery in line with the lifting of restrictions and the progress in vaccination, full-year growth is expected to be only 2.6%, according to the government. For 2022, the IMF projects 3.3% growth, as pent-up domestic demand and an economic recovery in the euro area, the country’s main export destination, would drive the economy.
The current account balance has been chronically in large deficit. In 2020, the current account deficit narrowed to 6.5% of GDP thanks to improvement in the trade deficit on the back of subdued domestic demand. Because structural reasons for deficits still exist, the deficit will likely widen again in tandem with an economic recovery. Outstanding external debt is high, standing at around 103% of GDP as of end 2020.
In 2020, the weak economy and responses to the pandemic widened the fiscal deficit to 9.9% of GDP. In its 2021 budget, the government projected that the deficit would narrow to 6.6% of GDP. Nevertheless, it now expects the deficit to widen to 8.4% of GDP due mainly to additional support measures for the further spread of the coronavirus and an increase in subsidy costs caused by higher crude oil prices.
Outstanding government debt likely reach about 85% in 2021
Outstanding government debt climbed to 79.5% of GDP in 2020 and will likely reach about 85% of GDP in 2021. As policy direction for 2022 and afterwards has not been announced, a path to debt reduction is unclear, including actions on structural fiscal issues such as cutting expenses for salaries and subsidies.
External borrowings account for approximately 60% of government debt. Against the backdrop of the central bank’s prudent policy management, foreign reserves have accumulated to a certain level, making it unlikely that external debt repayment will be disrupted in the near term.
That said, a considerable amount of debt will become due in the coming years. A strain on liquidity will increase, unless the government is able to secure the IMF’s financial assistance. The assistance is also important for the progress of efforts to solve structural problems, according to the rating agency.
