Fitch Downgrades Tunisia to 'BB-'; Outlook Negative

Wed Oct 30, 2013 1:37pm EDT

Link to Fitch Ratings' Report: Tunisia - Rating Action ReportLONDON, October 30 (Fitch) Fitch Ratings has downgraded Tunisia's Long-term foreign currency Issuer Default Rating (IDR) to 'BB-' from 'BB+' and local currency IDR to 'BB' from 'BBB-'. The Outlooks on both IDRs are Negative. Fitch has also affirmed Tunisia's Short-term rating at 'B' and downgraded the Country Ceiling to 'BB' from 'BBB-'. KEY RATING DRIVERS The downgrade of Tunisia's IDRs reflects the following key rating drivers and their relative weights: High - The political transition has been further delayed and uncertainty over the ultimate success of the process has increased. The assassinations of two opposition leaders in February and July 2013 triggered a political crisis, paralysing decision making and delaying the political transition. Attacks and killings by terrorist groups have gained momentum in recent months, worsening security and stability. - The presidential and parliamentary elections initially expected in 2013 have been postponed. The outcome of negotiations between the government and opposition parties to form an interim government, which started in late October, remains uncertain. Elections are unlikely to take place any sooner than H214. Downside risks such as further delays in the political process or escalation in protests and violence are material. In addition, elections are no guarantee of future stability amid risk of social and political fragmentation. Medium - Delays in the political transition are damaging economic growth prospects for 2013 and 2014. Fitch has revised down its real GDP growth projections to 2.8% in 2013 and 3% in 2014, while inflation has risen and is expected to reach 6% on average in 2013. - Fitch expects the current account deficit to remain high at 8.1% of GDP in 2013 and 7.7% in 2014. Net external debt is rising, international reserves are under pressure and the dinar has started depreciating. The signature and disbursement of a USD1.75bn standby agreement with the IMF in June 2013 offers some relief in 2013-2014, if the programme remains on track. - The budget deficit will overshoot the budget target in 2013 and is likely to exceed 7% of GDP. Fitch expects the authorities to opt for modest fiscal consolidation in 2014 and for government debt to rise moderately to around 50% of GDP by end-2014, somewhat higher than its rating peers. With around 60% of government debt foreign currency-denominated, public finances are exposed to balance of payment shocks. - The banking sector is weak, with high exposure to impaired loans, particularly in the tourism sector, and will require recapitalisation by the public sector in coming years. - The authorities' budget and external financing flexibility has narrowed, as official lending, which has been the main source of financing since 2011, will gradually recede. Tunisia's IDRs also reflect the following key rating drivers: - Governance and development indicators, including GDP per capita and human development index, are in line with 'BB' rated peers. - Tunisia has a history of resilience to external and domestic shocks. Volatility of real GDP growth, inflation and fiscal revenues still compares favourably with peers despite the 2011 recession. - Private external borrowing and external short-term debt are moderate, limiting the risk of sudden outflows of hot money. External debt service also compares favourably with peers given the large share of official debt. The debt service record is clean. RATING SENSITIVITIES The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a further downgrade of the rating: - An intensification in the political crisis, for example leading to heightened violence and political fragmentation. - A failure to reduce significantly the budget and current account deficits or heightened uncertainty over deficit financing options. - Material recapitalisation needs of the banking sector or 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 success of the transition process, for example related to the peaceful organisation of elections and formation of a legitimate government. - A demonstrated gradual unwinding of macroeconomic imbalances, illustrated by a reduction of budget and current account deficits, and improved growth prospects. KEY ASSUMPTIONS The ratings are sensitive to a number of assumptions: Fitch assumes that progress towards political transition continues without a breakdown in the process or widespread violence, even if progress is uneven and amid continuing political and social tensions. Fitch assumes that official creditors will remain supportive of Tunisia in coming years. In particular, Fitch assumes that the IMF standby agreement agreed on in June 2013 will be fully disbursed, financing a large share of Tunisia's public and external financing needs in 2014. Fitch also assumes that the current authorities or the future government will not repudiate external public debt contracted under the former regime on grounds of illegitimacy. Contact: Primary Analyst Amelie Roux Director +33 144 299 282 Fitch France S.A.S. 60 rue de Monceau 75008 Paris Secondary Analyst Arnaud Louis Associate Director +44 20 3530 1539 Committee Chairperson Edward Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.