Moody’s Investors Service has today downgraded the long-term issuer rating of the Government of Tunisia to B2 from B1. The outlook was changed to stable from negative.
Moody’s has also downgraded the foreign currency senior unsecured debt rating of the Central Bank of Tunisia to B2 from B1 and changed the outlook to stable from negative, in addition to downgrading the senior unsecured shelf/MTN rating to (P)B2 from (P)B1.The key drivers for the downgrade are Moody’s expectations that the further erosion in fiscal strength and foreign exchange reserve buffers will not reverse significantly in the next few years:
1) Central government debt has risen to about 70% of GDP in 2017, and will edge up gradually in 2018-19, amid declining debt affordability;
2) The current account deficit will remain wide, from 10.4% of GDP in 2017, and the economy’s external debt has risen further above 80% of GDP, weighing on reserves adequacy.
The stable outlook reflects Moody’s expectations that Tunisia’s credit metrics will remain consistent with a B2 rating. Fiscal consolidation is underway and will mitigate the rise in the government’s debt burden, while the recovery in external demand for Tunisia’s services, manufacturing and agriculture will help narrow the current account deficit slowly, preventing a further erosion of foreign exchange reserves. The stable outlook also reflects Moody’s assumption that Tunisia continues to meet the objectives of the IMF programme, ensuring the continuity of planned official sector disbursements which the government expects to cover almost 50% of fiscal funding requirements.
Moody’s has also lowered the long-term local currency bond and bank deposit ceilings to Ba2 from Ba1. The long-term foreign currency bank deposit ceiling was lowered to B3 from B2, and the foreign currency bond ceiling to Ba3 from Ba2. The short-term foreign currency bond and bank deposit ceilings remain unchanged at NP.Tunisia’s external vulnerability is high, with a wide current account deficit that is largely debt-funded and weighs on foreign exchange reserves adequacy.
The current account dynamics have continued to deteriorate in 2017, resulting in a deficit at 10.4% of GDP from 8.8% in 2016. Foreign exchange reserves have declined further to 77 days of import cover in early March 2018. External debt rose to over 80% of GDP in 2017 from 68.6% in 2016 and the country’s net international investment position was a negative 120% of GDP, one of the largest liability position amongst the sovereigns rated by Moody’s.
Looking forward, Moody’s forecasts only a gradual narrowing of the current account deficit, to 9.5% of GDP in 2018, followed by a further reduction to 8.3% in 2019 supported by stronger external demand as highlighted by the improving outlook for the tourism industry and bolstered by the recent depreciation in the domestic currency against major trading partners mainly in the euro area. Meanwhile, a persistent deficit in the energy balance and the loss of global market shares in phosphate will prevent a more rapid narrowing of the current account deficit.
The current account projections combined with broadly unchanged debt inflows, from international and bilateral lenders and regular debt issuances, point to a slow rise in foreign exchange reserves, from low levels. Moody’s projects that Tunisia’s External Vulnerability Indicator, which measures the ratio of short-term debt and long-term debt due over the next year to foreign exchange reserves will remain elevated, at around 185% in 2018, from 196% in 2017.A more broad-based economic recovery driven by a renewed expansion in market-based activity, with fewer instances of social unrest in internal regions, will also provide some support to Tunisia’s credit metrics.
Moody’s forecasts GDP growth at 2.8% in 2018 and 3.0% in 2019, after 1.9% in 2017. The significant improvement in the security environment in the aftermath of the 2015 terror attacks and the implementation of reforms in the business environment including via the earlier adoption of the investment law that aims to level the playing field between the on- and off-shore sectors, and the public-private partnership framework legislation sets the stage for renewed investment activity.
The stable outlook reflects Moody’s expectations that Tunisia’s credit metrics will remain consistent with a B2 rating, with no significant changes in either fiscal or external metrics in the next few years.
The stable outlook also reflects Moody’s assumption that Tunisia continues to meet the objectives of the IMF program, ensuring the continuity of planned official sector disbursements which the government expects to cover almost 50% of fiscal funding requirements.
One of the IMF’s key reform requirement concerns the reduction in the public sector wage bill mentioned above. Other reform areas concern the ongoing restructuring of the public banking sector and in particular the future system-wide compliance with international regulations regarding anti-money laundering and terrorist financing.
A sustained improvement in fiscal and external imbalances would be credit positive. This could be related to a marked and durable economic recovery that lessened the demands for government spending and boosted export revenues and foreign exchange reserves.