The divergence in rating dynamics between Morocco (BBB-/stable) and Tunisia (BB-/negative) since the beginning of the Arab Spring in early 2011is due to different developments originating from the political transition in each country and their impact on economic performance, Fitch said in a report.
The ratings agency underscored that the political transition in Tunisia has been long and difficult with recurrent violence and popular protest. Marked political instability (with four PMs in three years) has dented confidence in the economy and in Tunisia's ability to reform and finance its widening twin deficits (budget and current account).
Morocco's transition, however, was a more open and smooth, Fitch noted. A new constitution that awarded more power to the elected parliament was adopted in mid-2011. The following elections brought to power a coalition dominated by the “Parti de la Justice et du Developpement.” Social and political stability has also allowed the government to introduce difficult reforms, as seen by the gradual increase in subsidised energy prices.
The smoother political transition in Morocco, moreover, was supported by a tradition of political pluralism, the permanence of the monarchy (with King Mohammed VI seen as a reformer and legitimate among the population), and economic and social reforms launched after the accession of the King to the throne in 1999, Fitch underscored.
Stability in Morocco has also supported growing tourist arrivals (10mn in 2013) and FDI inflows. Non-agricultural GDP has grown steadily above 4.0%, except in 2013 when it expanded by just 3.1% due to slower growth in the Eurozone, Fitch noted.
In contrast, Tunisia's GDP shrank 1.9% in 2011 and growth has since remained well below the levels prior to the 2011 uprising that toppled the Bin Ali regime. Tourist arrivals that reached 6mn in 2013 remain well below the 2010 level of 7mn and FDI has declined. Rising inflation has also added to instability, Fitch said.
Fitch underscored that accommodative policies coupled with high oil prices and a weak Eurozone has led to a sharp deterioration in budget and current account deficits in both countries. In Morocco, the deterioration was bigger and sharper but deficits began to narrow in 2013 (to 5.4% and 7.5% of GDP respectively). This was due to fiscal reforms, the strong performance of new exporting sectors, and lower oil prices, according to Fitch.
In Tunisia, the twin deficits were bigger at 6.5% and 8.4% of GDP respectively in 2013 given the slower reform process and a more challenging economic environment, Fitch said. Tunisia’s budget and current account deficits, however, will start narrowing from 2014.
Both Morocco and Tunisia have benefited from official grants and loans from bilateral and multilateral creditors and are supported by IMF programmes. In Morocco, the IMF’s USD 6.2bn (6% of GDP) Precautionary Liquidity Line has been a key anchor for the reform agenda, but the authorities do not intend to draw on it, Fitch noted. In contrast, Tunisia has drawn on its IMF’s USD 1.8bn (4% of GDP) Stand-By-Arrangement. It has also used partial guarantees from Japan and the USA to issue bonds, Fitch said.
Ratings dynamics in Tunisia and Morocco will crucially depend on their ability to narrow their twin (budget and current account) deficits, rebuild policy buffers, implement reforms and accelerate growth, Fitch noted.
In Morocco, the stable outlook anticipates a gradual narrowing of the twin deficits, supported by continuing reforms. Tunisia's negative outlook reflects sustained uncertainty over the political transition despite this year's adoption of a constitution. Tunisia's sovereign rating would benefit from peaceful elections (by end-Year) and the formation of a long-lasting government able to implement reforms, Fitch said.
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