Dec 12 - Fitch Ratings has downgraded Tunisia's Long-term foreign currency
Issuer Default Rating (IDR) to 'BB+' from 'BBB-' and Long-term local currency
IDR to 'BBB-' from 'BBB'. The Outlooks on the IDRs are Negative. The agency has
also downgraded Tunisia's Country Ceiling to 'BBB-' from 'BBB' and Short-term
foreign currency IDR to 'B' from 'F3'.
The downgrade of Tunisia's sovereign ratings by one notch reflects the agency's
view that the country's economic and political transition is proving longer and
more difficult than anticipated and downside risks around the process have
therefore increased. In addition large twin budget and current account deficits
are leading to deteriorating public and external debt ratios.
Social unrest and political tensions are persisting, adding uncertainty to the
political transition in the country. Legislative and presidential elections have
been postponed to June 2013 and could be further deferred to end-2013 and the
risks around Fitch's base case of a successful transition have increased. Longer
transition periods and election campaigns are not conducive for macroeconomic
reforms and could fuel social unrest.
Loose economic policies, combined with high oil prices have fuelled twin
deficits, with the budget and current account deficits expected to widen to 7.2%
and 7.5% of GDP respectively in 2012. Credit growth is rapid, weakening bank
liquidity and driving inflation up to an expected 5.5% by year-end. Although
monetary policy is tightening, the twin deficits are expected to remain at 6.6%
and 6.8% respectively in 2013, putting strain on official foreign currency
reserves, which currently only cover three months of current external payments.
Additionally, asset quality is weak in the banking sector due to a legacy of
mismanagement, transparency is poor and it is suffering from a prolonged strain
on liquidity. It requires urgent recapitalisation and restructuring which will
affect public finances and delay economic recovery.
These macroeconomic imbalances will result in higher public and external debt in
2012 and 2013. Financing and refinancing risks are, however, mitigated by a
favourable repayment schedule and by the strong support of official bilateral
and multilateral creditors, which will finance most of Tunisia's large borrowing
needs in coming years.
After a recession in 2011, real GDP growth is expected to rebound to 2.8% in
2012 and 3.5% in 2013, thanks to rapid consumption, fuelled by accommodating
monetary and fiscal policies. This has helped the country to partly offset the
recession in the eurozone and crisis in Libya, its main trading partners, but
growth remains below historical trends.
RATING OUTLOOK - NEGATIVE
The Negative Outlook reflects the following risk factors that may, individually
or collectively, result in a downgrade of the ratings:
- A generalisation and intensification of social violence generating political
destabilisation and jeopardising the political transition or preventing an
appreciable economic recovery.
- A significant further erosion of international reserves, e.g. resulting from
widening current account deficit.
- A failure to correct large budget and current account deficits and to
stabilise public and external debt ratios.
- Significantly larger than currently anticipated recapitalisation needs in the
banking sector (which the IMF estimate at 3% - 7% of GDP) or material delays in
its recapitalisation and restructuring.
Future developments that may, individually or collectively, lead to a
stabilisation of the Outlook include the following elements:
- The smooth election of a legitimate and stable government which would
implement key economic and structural reforms.
- An alleviation of macroeconomic imbalances, illustrated by a decline in the
current account deficit, a progressive reduction in budget deficit and a
strengthening of international reserves.
KEY ASSUMPTIONS AND SENSITIVITIES
The ratings are sensitive to a number of assumptions.
- Fitch assumes that the eurozone remains intact and that there will be no
materialisation of severe tail risks to global financial stability that would
severely affect Tunisia's external position. Such a scenario could trigger a
- 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. If the likelihood of such a repudiation increased, a sovereign
downgrade would follow.
- Fitch's ratings are also based on the assumption that the country will benefit
from continuing international support by multilateral and bilateral creditors,
including the IMF if required. It this support were to falter, this would change
the agency's assessment of the rating.
Additional information is available on www.fitchratings.com.
The ratings above were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been compensated for the provision of the ratings.
Applicable criteria, 'Sovereign Rating methodology', dated August 2012, are
available at www.fitchratings.com.
Applicable Criteria and Related Research:
Sovereign Rating Methodology
Tunisia: Political and Economic Uncertainties Keep Ratings Under Pressure