After still-weak growth in Tunisia in the first quarter of 2019, Moody’s Investors Service expects annual growth of 2.3% in 2019 and 2.6% in 2020 and draws attention to the deterioration of the country’s fiscal strength and the sharp increase in the debt ratio, it says in a statement on Thursday.
Moody’s said the sharp increase in debt ratio to 77% of GDP is among Tunisia’s credit challenged, adding that “Credit supports include the nascent economic recovery driven by tourism, agriculture and manufacturing.”
It also projects inflation to decline gradually to 6.2% year-on-year at the end of 2019 and to 5.7% year-on-year in December 2020 and also expects the government to achieve the 3.9% deficit target this year, given the track record of budget execution over the last two years.
However, for Moody’s ” Tunisia’s (B2 negative) credit challenges include the structural deterioration in its fiscal strength, with the debt ratio having increased sharply to 77% of GDP at the end of 2018 from 70.4% in 2017.
“Current account dynamics continued to deteriorate in 2018, exacerbating external funding pressures and weighing on foreign-exchange reserve dynamics,” it also noted.
For Moody’s, “A heavy public sector wage bill and subsidies limit the government’s spending flexibility without cutting back on public investment projects.”
It reiterated that “evidence of a sustained reduction in external and fiscal imbalances, accompanied by a stabilization in and prospects of a steady increase in foreign exchange reserves would support a change in the outlook to stable. “
“Conversely, a downgrade would be likely if there were delays in the availability of, or a marked increase in, the costs of external funding, possibly linked to incomplete implementation of the economic reform program agreed with the IMF, ” also reads the statement.
Moody’s had affirmed Tunisia’s ratings unchanged at B2 in October 2018, but changed the country’s economic outlook from “stable” to “negative”.
It noted that the negative outlook on Tunisia’s rating reflects an increase in external vulnerability risks in an environment of markedly tightening global financing conditions.