Fitch Affirms Tunisia’s BB-/BB ratings with stable outlook

By bne IntelliNews September 28, 2015

Fitch Ratings has affirmed Tunisia's Long-term foreign and local currency Issuer Default Ratings (IDR) at BB- and BB, respectively, with stable outlooks. The issue ratings on Tunisia's senior unsecured foreign bonds have also been affirmed at BB-.

Fitch underscored that Tunisia ranks well within the BB rating category on structural features such as development and governance indicators. GDP per capita and human development index are also in line with peers. The country’s financial depth and ease of doing business indicators compare likewise favourably with peer medians.

The picture is not that rosy though. Political risk in Tunisia remains high with the two recent terrorist attacks in Tunis and Sousse highlighting the challenges to security, Fitch noted. The government’s crackdown on security and the ongoing social unrest likely test the coalition government's unity. Fitch, however, assesses that political consensus building in Tunisia has proven to be effective since the 2011 revolution and will likely support political stability in this difficult environment.

The economic outlook, however, remains volatile as Tunisia’s macroeconomic performance has been lacklustre since the early 2011 revolution compared with both historical standards and peers, as real GDP growth decelerated while inflation has climbed above peers, Fitch warned.

Tunisia’s inflation has been gradually cooling in 2015 (to an expected 4.7% on average), but economic growth will cool to below 1% as the terrorist attacks in H1 will weigh on tourism and transport (which together account for 12% of GDP), according to Fitch.

Looking beyond 2015, the persistency of the negative growth shock induced by terrorism remains uncertain though. Unless the GDP growth rate accelerates, the Tunisian government will find it difficult to address social pressures, Fitch warned.

On the fiscal stance, Fitch forecasts the budget deficit to be below 5% of GDP in 2015, in line with the initial budget despite the retreat in fiscal revenue induced by weaker growth. Low international oil prices, however, will help cut the subsidy bill and investment spending will again be reduced, Fitch said.

The ratings agency underscored that although Tunisia’s public debt remains higher and increasingly diverging from peers, with an expected rise to 52.3% of GDP by end-2015, its maturity and cost structure remains favourable amid the strong support provided by official creditors since the revolution.

This donors’ support will continue covering the largest part of the country's external financing needs in the coming years (e.g. through a renewal of IMF's SBA), which represents a clear support to the rating, Fitch underscored.

Tunisia’s external finances remain a key rating weakness, according to Fitch. Despite the large drop in international oil prices, the current account deficit will marginally narrow to 8.5% of GDP in 2015 from 8.8% of GDP last year, Fitch forecast. The print will be dented by the decline in oil production, weak light manufacturing exports to the EU and the expected 30% drop in tourism receipts. Such unfavourable parameters will push Tunisia’s net external debt to an expected 42.4% of GDP by end-2015, well above its rating peers' median of 7%, Fitch said.

The scenario will continue exerting pressure on FX reserves, which will only cover three months of current external payments at year-end, Fitch estimated.

As to the turbulent banking sector, the authorities have started tackling the restructuring of the three public banks as their weak solvency is a rating weakness, according to Fitch. Recapitalisation of the two largest banks has finally been achieved following long delays and will cost approximately 1% of GDP to the state, and their governance structure has been reshaped.

“Given that NPLs account for 23.9% of gross loans in public banks (due to the massive impairments in the tourism industry), their restructuring will be a lengthy process despite the recent rise in provisioning, all the more so if the project to create an asset management company is cancelled. Further recapitalisation needs can therefore not be ruled out,” Fitch stated.

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