Fitch Ratings affirmed Tunisia’s Long-term foreign and local currency IDRs at ‘BB-‘ and ‘BB’ respectively.
The issue ratings on Tunisia’s senior unsecured foreign currency bonds have also been affirmed at ‘BB-‘. The Outlooks on the Long-term IDRs are Negative.
Fitch explained Tunisia’s IDRs and Outlook by the political risk which remains high but has receded following the adoption of the new constitution and the nomination of a technocratic government early 2014, which Fitch considers as an important step in reducing political instability.
In Fitch’s view, the political transition remains long, however, and uncertainty remains over the timing of the presidential and legislative elections and over whether these elections can bring about political stability and economic revival.
Fitch also noted that the budget deficit widened to 6.5% of GDP in 2013 from 4.5% in 2012, pushing public debt to 45.4% of GDP from 44.3%. This is a higher level than BB-rated peers and Fitch expects it to exceed 50% of GDP by end-2015. The agency also expects moderate fiscal consolidation in the coming years, but likely bank recapitalization will weigh on public finances in 2014 and 2015.
It also said that Tunisia benefits from strong support from international financial institutions and bilateral creditors. After a pause in disbursements by official creditors at end-2013, international support has resumed since the adoption of the new constitution.
Fitch expects large disbursements by IMF and World Bank in 2014, as well as bilateral support from the US and Japan to finance budget and external borrowing requirements during the year and, to a lower extent, in 2015. Debt has long maturities but a significant share (57%) is in foreign currency.
The ratings agency considers external finances as a rating weakness.
Due to subdued exports to the EU and slowing tourism receipts, Tunisia’s current account deficit has widened steadily in recent years to 8.4% of GDP in 2013.
It also considered that moderate FDI inflows (2.8% of GDP on average over the past three years) have contributed to an increase in external debt, and international reserves, at 3.2 months of current account payment cover at end-2013, are weak.
Net external debt, at 61% of current account receipts at end-2013, will remain above the BB median (32.9%) in the coming years, it added.
Fitch also indicated that real GDP growth has recently been slower than ‘BB’ rated peers, decelerating to 2.6% in 2013 after a rebound in 2012 (3.7%). Fitch expects a gradual recovery in 2014 and 2015, supported by political normalization and EU recovery.
Despite economic turbulences following the Jasmine revolution, economic volatility remains lower than ‘BB’ peers, and Fitch expects inflationary pressures to gradually recede in 2014-2015 after a spike in 2013 to 6.1% on average.
The ratings agency also noted that d Development indicators, including GDP per capita, governance indicators, human development index as well as savings and investment rates, are broadly in line with ‘BB’ rated peers. Tunisia has a clean track record of debt repayment.
The weak banking sector weighs on the ratings. Given public banks’ NPL ratio of 21% at end-June 2013, fragile capital buffers and large exposures to vulnerable state-owned companies, it indicated, expecting the government will provide public banks with support for their recapitalization and restructuring. Fitch expects a 2%-3% of GDP recapitalization cost for 2014-2015.
Fitch also noted that the Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the rating:
– Renewed political tensions in the run-up to or after the presidential and legislative elections, or failure to form a coherent government
– Failure to narrow the budget and current account deficits over the medium term or rising uncertainty over deficit financing options
– Material recapitalization needs of the banking sector above our forecasts or materializing contingent liabilities from state-owned enterprises
The current Outlook is Negative. Consequently, Fitch’s sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to an upgrade. However, future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include:
– An easing of political and social tensions and improved confidence in the transition process, for example, related to the peaceful organization of elections and formation of a legitimate government
– A demonstrated gradual unwinding of economic imbalances, illustrated by a narrowing of budget and current account deficits, and improved growth prospects.
The ratings are sensitive to a number of assumptions:
Fitch assumed that progress towards political transition will continue until and beyond the next elections without a breakdown in the process or widespread violence.
It also assumed that multilateral and bilateral creditors will remain supportive of Tunisia in coming years. In particular, Fitch assumes that IMF and World Bank loan disbursements will cover a large part of Tunisia’s public and external financing needs in 2014 and, to a lower extent, in 2015.
Finally, Fitch assumed a gradual economic recovery in the euro zone, to 1.1% in 2014 and 1.4% in 2015 from -0.4% in 2013.
Fitch also assumed that the current authorities or the future government will not repudiate external public debt contracted under the former regime on grounds of illegitimacy.
