Fitch upgrades Tunisia’s outlook to stable, affirms BB-/BB ratings

By bne IntelliNews March 30, 2015

Fitch revised Tunisia's outlook to stable from negative, affirming its long-term foreign and local currency Issuer Default Ratings (IDRs) at BB- and BB respectively. Fitch underscored Tunisia’s successful democratic transition and strengthening financials as the two key reasons for improved outlook.

Fitch warned, however, that political and economic destabilisation risk from social unrest or terrorist attacks remains significant, citing the recent terrorist attack on Bardo museum as clear example.

Fitch underscored that Tunisia’s budget deficit is on an improving trend, narrowing to 4.5% of GDP in 2014 from 6.5% in 2013 (including grants). This helped constrain public debt to below 50% of GDP at end-2014, Fitch estimated. The budget consolidation, however, partially reflects ongoing low capital spending and a decline in subsidies in 2014 after payments of arrears the previous year. Still, Fitch views that the fiscal stance will slightly strengthen in coming years, supported by lower oil prices in 2015-2016 and gradually improving economic performance.

Fitch also underscored that Tunisia has a clean track record of debt repayment but external finances remain a key rating weakness. The current account deficit has sharply widened since the start of the revolution back in 2011, as exports have suffered from weak EU activity and supply shocks while consumption has driven imports up, Fitch noted.

The CA gap deteriorated to 8.9% of GDP in 2014, due to higher food and energy shortfalls, pushing net external debt to 34.8% of GDP in 2014, much higher than BB-rated peers (14.8%), according to Fitch.

The CA deficit, however, will narrow in 2015 amid lower international oil prices, but will remain high at 7.7% of GDP due to weak tourism revenues and the impact of a depreciating dinar on the cost of energy imports, Fitch forecast.

Fitch likewise highlighted that Tunisia has benefitted from strong international official support in recent years, providing cheap, long-term sources of external financing requirements. This, however, has reportedly boosted the share of public debt denominated in foreign currency (52.4% at end-2014). The recent USD1bn bond issue also marks Tunisia's return to capital markets, thus reducing the country's dependence on official lending, Fitch said.

As to the GDP outlook, Fitch argued that recovery in the EU will help spur economic activity in 2015 in Tunisia but revised down its GDP growth estimate for 2015 to 2.7% from 3.2% after the recent terrorist attack in Tunis. 

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