November 17, 2017 / 9:24 PM / a year ago

Fitch Affirms Tunisia at 'B+'; Outlook Stable

(The following statement was released by the rating agency) PARIS/LONDON, November 17 (Fitch) Fitch Ratings has affirmed Tunisia's Long-Term Foreign-Currency Issuer Default Ratings (IDRs) at 'B+' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS Tunisia's 'B+' IDRs reflect the following key rating drivers: Tunisia's 'B+' ratings balance high income per capita, ease of doing business and governance indicators relative to the 'B' peers' category, against high government and external debts. In a difficult economic and security context after the 2011 political transition, the authorities have been unable to prevent a rise in the budget and current account deficits. However, Fitch assumes an improvement in security and economic conditions since 2016 is maintained, which should help reduce the twin deficits in the coming years. Fitch expects GDP growth will accelerate to 2.2% in 2017 from 1.0% in 2016. Improved security conditions relative to the post-2015 terrorist attacks have supported a recovery in tourism (tourist receipts were up 19% y/y in the nine months to September) and foreign direct investment (+13% y/y). The agency expects growth to be 2.8% in 2018 and 3% in 2019 as increased confidence allows a gradual economic recovery. Deterioration in security and political conditions remain the main downside risk to the outlook. Fitch expects the general government deficit will decline gradually, to 5.8% in 2018 (including 5.4 % of GDP for the central government deficit) and 5.3% in 2019 from 6.4% in 2017 (6.0% for the central government). The reduction will be primarily driven by the recovery in the economy and its effects on revenues. Under its current IMF programme, the country has committed to cut its deficit via increased taxes and reduced public spending, including a reduction in public sector workers. The draft budget for 2018, yet to be approved by parliament, is in line with these objectives. However, given Tunisia's weak track record for fiscal reforms in recent years, implementation risk remains high. Fitch expects general government debt will be 70% of GDP at end-2017 from 62% in 2016 and 59% for the 'B' peers' median. The increase reflects the impacts of the government deficit and the exchange rate depreciation (-18% vs. the euro and -10% vs. the USD since the start of the year) on foreign currency debt (65% of the total at end-2016). Given continued high deficits, Fitch expects debt will continue to rise and only peak in 2024, at 76% of GDP. The agency expects the current account deficit will be 9% of GDP in 2017 and will remain high at 8% by 2019. The improvement reflects stronger tourism, a weaker exchange rate and tighter fiscal policy. Fitch expects net external debt will increase to 56% of GDP at end-2017, and reach 62% of GDP by 2019 versus the 'B' peers' median of 21% in 2017. The concessional nature of most external loans has limited the rise in the external debt service burden and alleviates refinancing risk. Tunisia is highly reliant on the international community to fund its current account deficit and Fitch expects support to continue. However, potential delays in disbursements, for example due to inability to achieve reforms under the IMF programme, or weaker international support in future, constitute downside risks to access to external funding. Foreign reserves at the central bank were equivalent to 96 days of imports in October 2017. The central bank aims to keep reserves at around 110 days of imports. To support reserves, and in line with its commitment to allow more exchange rate flexibility, the central bank has made limited interventions on the foreign currency market despite the shortage of foreign currency liquidity. The improvement in the current account position combined with continued donors' inflows should support a stabilisation in reserves over the forecast horizon. The banking sector, particularly state-owned banks, is weak following decades of mismanagement and is exposed to the ailing tourism sector. NPLs were 15.1% in 2Q17, driven up by the public banks. Restructuring the banks is a key focus of the current IMF programme. The improved security apparatus has so far succeeded in averting further terrorist attacks following the series of attacks in 2015. Security risks remain high and are aggravated by the fragile situation in neighbouring Libya. A key issue is the rising threats emanating from Tunisian fighters returning home after waging wars abroad. Domestically, episodes of social unrest will likely persist fuelled by the high level of unemployment (15.2% in 2Q17). SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Tunisia a score equivalent to a rating of BB- on the Long-Term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: Structural factors: -1 notch, to reflect high security, social, and political risks, which continue to impact growth, external and public finances, including by making reform implementation more difficult. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Outlook is Stable, which means Fitch does not expect developments with a high likelihood of leading to a rating change. However, the main factors that could lead to negative rating action are: - Political destabilisation of the country, for example from social unrest or major terrorist attacks, with adverse impact on economic growth. - Continued weakening in external finances, such as a widening of the current account deficit and renewed pressure on international reserves leading to a marked increase in net external debt-to-GDP. - Worsening of the fiscal deficit or a materialisation of contingent liabilities, for example from the weak state-owned banks, leading to an increase in government debt/GDP. The main factors that may individual or collectively lead to positive rating action are: - Improved growth prospects, for example related to structural improvements in the business environment and/or the security situation. - Reduction in budget deficits consistent with lowering the debt-to-GDP ratio in the medium term. - A structural improvement in Tunisia's current account deficit, leading to reduced external financing needs and stronger international liquidity buffers. KEY ASSUMPTIONS Fitch assumes continued financial support from the donor community in the form of large inflows from multilateral and bilateral lenders. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'B+'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'B+'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'B' Short-Term Local-Currency IDR affirmed at 'B' Country Ceiling affirmed at 'BB-' Issue ratings on long-term senior-unsecured foreign-currency bonds affirmed at 'B+' Contact: Primary Analyst Arnaud Louis Director +33 1 44 29 91 42 Fitch France S.A.S 60 rue de Monceau 75008 Paris Secondary Analyst Mahmoud Harb Director +852 2263 9917 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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