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Fitch downgrades Tunisia to “B-”; Negative outlook

Fitch Ratings on Thursday downgraded Tunisia’s long-term default rating of foreign currency issuers (IDRs) to “B-” instead of “B”. The Outlook is Negative.

The downgrade to “B-” and the negative outlook reflect increased fiscal and external liquidity risks in the context of further delays in agreeing to a new program with the IMF, which is required to access budget support from the IMF. most official creditors.

The fragmented political landscape and entrenched social opposition limit the government’s ability to adopt strong fiscal consolidation measures, complicating efforts to secure the IMF program.

In the absence of strong reforms, public creditors may find that debt restructuring is necessary before they can provide additional support. The government has firmly asserted that it is not considering debt restructuring and Tunisia has never committed to a Paris Club treatment.

Fitch predicts that the central government deficit will remain high at 8.9% of GDP in 2021, up from 9.9% in 2020 and the category “B” median of 6.2%. He predicts that revenues will pick up in 2021, but this will be more than offset by increased spending to fight the pandemic, increased gas price subsidies, a growing interest charge, and wage bill increases as a result of the an agreement with the unions in 2019. These last two elements will absorb nearly 75% of revenue, which considerably limits fiscal flexibility.

The recent rise in Covid-19 infections adds to the downside risks in income. The rating agency predicts the budget deficit will shrink to 6.7% of GDP in 2022 and 5.5% in 2023 as pandemic-related spending is phased out and some spending cuts are implemented , but the wage bill remains above its pre-2019 level as a percentage of GDP. In May 2021, unions rejected a government plan to reduce the wage bill mainly through attrition and voluntary departures.

The financing needs stemming from the large budget deficits and the amortization of the debt are high compared to the identified sources. The maturities of the public debt will be between 7.3% and 9.2% of GDP over 2021-2023, including between 3.2% and 5.1% of external amortization.

An agreement on an agreement with the IMF to succeed the program which expired in 2020 remains essential for Tunisia’s external financing. Although the commitment of external public creditors to help Tunisia’s democratic transition and contain migratory flows across the Mediterranean remains strong, the financial support of many partners is linked to an agreement with the IMF.

Uncertainty about reaching an agreement with the IMF

The rating agency stresses that its forecast assumes an agreement on an IMF program before the end of 2021, but the persistence of strong social opposition to tax reforms and the fragility of parliamentary support for the government means that a deal may fail. not be found and highlights the challenges of sustaining scheduled disbursements. Tunisia’s performance under the two previous agreements with the IMF has been weak, with reviews of the last program consistently showing significant delays.

In February, the IMF estimated that Tunisia’s debt “would become unsustainable unless a strong and credible reform program is adopted with broad support.” In a non-reform scenario, Tunisia could ultimately be seen as in need of Paris Club treatment before being eligible for additional IMF financing, with implications for private sector creditors.

The authorities are increasingly relying on domestic financing as Tunisia struggles to renew its external deadlines. Tunisia offset close to zero net external financing in 2020 by mobilizing a record net amount of 7.3% of GDP from domestic sources. This compares to a total stock of domestic debt of 21% of GDP at the end of 2019, half of which was held by the banking sector. Tunisia first resorted to direct monetary financing from the central bank last year, over central bank objections, highlighting funding tensions.

The planned access to international markets (2.2% of GDP in 2021) would be complicated by the absence of an IMF program. Two US government guaranteed bonds of $ 500 million each will mature in late July and early August 2021. A new US guarantee for international issues is being discussed, but according to Fitch it is unlikely to materialize. before 4Q21 and could be linked to the success of the IMF. negotiations.

Bilateral financing intervened in the first half of the year, but the amounts remain modest, with 1.2% of GDP disbursed by European counterparts. The authorities also raised 1.2% of GDP in foreign currency through syndicated loans from local banks.

Failure to come to terms with the IMF and access international financial markets, resulting in continued heavy reliance on domestic financing, would put pressure on external cushions, Fitch said.

This in a context of amortization of the external public debt (4% of GDP per year on average over 2021-2023), large current account deficits (8% per year) and modest net inflows of FDI. Foreign exchange reserves fell to $ 8.1 billion at the end of May 2021, from about $ 9.4 billion at the end of 2020.

Current account deficit close to 8% of GDP

Fitch expects Tunisia’s current account deficit to widen in 2021 to nearly 8% of GDP and remain at that level over the medium term, up from 6.8% in 2020.

Tunisian workers’ remittances abroad increased in 2020 and will remain an important source of foreign exchange. We expect the services balance to be close to zero in 2021, as the current wave of infections deters international tourism during peak season. The rating agency said it expects external debt to rise to 83% of GDP in 2023 from 77% in 2021, propelled by the resumption of external public borrowing.

Given the high budget deficits, general government debt (GG) will reach 89% of GDP in 2021, up from 72% in 2019, and will continue to increase to 93% by 2023, well above the median ” B ”expected by 70%. Large contingent liabilities of financially weak state enterprises and the banking sector pose upside risks to the debt trajectory. The debt of public enterprises guaranteed by GG is high, at 16% of GDP, half of which comes from the ailing electricity company, STEG. Transfers to ailing SOEs are straining the budget and the IMF estimates the government was in arrears of around 8% of GDP to SOEs by mid-2020, although some of these have been cleared. and that state-owned enterprises also have significant arrears to the state. The government plans to push ahead with the restructuring of a multitude of state-owned enterprises, but this is not factored into the budget projections. Transparency on the financial health indicators of public enterprises is low.

Fitch predicts that the Tunisian economy will grow by 3.4% in 2021 after contracting 8.8% in 2020 and below the “B” median of 4.2%. This reflects low agricultural production due to adverse weather conditions, a rebound in merchandise exports to Europe and a slight increase in tourism at the end of 2021.

The recent surge in Covid-19 infections and associated containment measures increase downside risks to growth forecasts and could also negatively affect public and external finances. After rebounding to 4% in 2022, we expect growth in 2023 to normalize at a rate closer to trend, around 2%.

Public banks account for one-third of banking sector assets, have lower asset quality and capitalization indicators than their private sector counterparts, and may require government capital injections over the medium term. Broad banking sector health indicators are lower than the “B” medians, with a high proportion of non-performing loans (13.6% of total loans at the end of 2020). Asset quality is likely to deteriorate as forbearance measures expire, Fitch concludes.

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