Tunisian Banks Can Help Meet Growing Sovereign Financing Needs (Fitch Ratings)

The Tunisian banking sector can continue to help meet the sovereign’s increasing financing needs in 2024 as healthy deposit growth and weak credit demand support sector liquidity, Fitch Ratings says. The sector’s total exposure to the sovereign should increase slightly as a result after declining in 2023.In the absence of an agreement with the IMF and given the scarcity of other sources of external funding, Tunisia has increasingly relied on the domestic financial sector, and banks in particular, to finance its budget.

The 2024 budget envisages a 20% increase in gross financing needs from last year to TND28.7 billion (USD 9.3 billion). Of that, up to 40% (about TND12.3 billion) would be met by domestic financing sources, and the balance by external financing. We expect fiscal financing needs to be at or over 16% of GDP a year in 2024-2025, one of the highest percentages among sovereigns rated ‘CCC+’ or lower. In February, the government borrowed TND1 billion from the domestic market, exceeding its TND750 million target for the first tranche of its 2024 national subscriptions programme.

This is in addition to TND7 billion (USD2.2 billion) that the Treasury borrowed from the Central Bank of Tunisia (BCT), ahead of a EUR850 million Eurobond repayment made on 17 February. Fitch believes the government may not be able to raise more than USD 2.5 billion from external financing sources in 2024, which would leave a gap of at least USD2.5 billion against its planned external financing. We do not factor in any IMF deal ahead of this year’s presidential election.

We therefore believe that almost 70% of 2024’s gross financing needs, or 12% of GDP, will have to be met by domestic sources, including banks and the BCT. The banking sector’s ability to help meet the sovereign’s domestic financing needs in 2024 is supported by healthy deposit growth (over 6%) and weak credit demand. Banks’ reliance on CBT refinancing was less than TND9 billion (about 7% of total sector funding) at end-8M23, suggesting adequate liquidity conditions.

Nevertheless, sustained high reliance on banks and the BCT to meet financing needs could pose macroeconomic risks, tighten liquidity conditions for banks, and increase their solvency risks in a sovereign default. Tunisian banks’ direct and indirect exposure to the sovereign (excluding deposits at the BCT) reduced slightly at end-2023 to TND30 billion, representing 21% of sector assets and 1.9x regulatory capital.

TunisianMonitorOnline (Fitch Ratings)

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