Fitch cuts Tunisia’s ratings by two notches to BB- on political uncertainty, outlook negative

By bne IntelliNews October 31, 2013

Fitch downgraded Tunisia's long-term foreign currency Issuer Default Rating (IDR) by two notches to BB- from BB+ and local currency IDR to BB from BBB-, the ratings agency said in a statement. The outlook on both IDRs is negative. The political uncertainty and its potential damaging economic impact coupled with rising terrorist attacks and related worsening security and stability are the main reasons for the ratings downgrade, Fitch said. Further cuts could occur if the political crisis heightens or if the budget and current account deficits don't narrow sharply, Fitch warned.

The presidential and parliamentary elections initially expected in 2013 have been postponed, Fitch noted. The result of negotiations between the government and opposition parties to form an interim government, which started in late October, also remains uncertain. Elections, thus, are unlikely to be held before the second half of 2014, Fitch said.

Downside risks such as further delays in the political transition process or escalation in protests and violence are reportedly high. Even if elections are held, they won’t guarantee future stability amid risk of social and political fragmentation, Fitch said.

Delays in the political transition are also denting economic growth prospects for 2013 and 2014. Fitch revised down its real GDP growth forecasts to 2.8% in 2013 and 3.0% in 2014. The CPI inflation has risen and is expected to reach 6.0% on average in 2013, according to Fitch.

The current account deficit will also remain high at 8.1% of GDP in 2013 and 7.7% in 2014. Net external debt is rising, FX reserves are under pressure and the Tunisian dinar has started depreciating, Fitch warned. The IMF’s USD 1.75bn standby agreement will offer some relief in 2013 and 2014, if the program remains on track. But the budget deficit will likely overshoot the budget target in 2013 and exceed 7.0% of GDP.

Fitch expects the government to resort to modest fiscal consolidation in 2014 and public debt will rise moderately to nearly 50% of GDP by end-2014, which is higher than its rating peers. Tunisia’s debt is 60% FX-denominated, meaning that public finances are exposed to balance of payment shocks, Fitch underscored.

Tunisia’s outlook, however, is not that gloomy. Fitch noted that the North African country has a history of resilience to external and domestic shocks. “Volatility of real GDP growth, inflation and fiscal revenues still compare favourably with peers despite the 2011 recession,” Fitch added.

Private external borrowing and external short-term debt are also reportedly moderate, limiting the risk of sudden outflows of hot money. External debt service likewise compares favourably with peers given the large share of official debt. Tunisia’s debt service record is clean, Fitch underscored.

Tunisia is rated Ba2 by Moody’s and B by S&P. 

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