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Rating Action:

Moody's places Tunisia's B2 rating on review for downgrade

17 Apr 2020

New York, April 17, 2020 -- Moody's Investors Service ("Moody's") has today placed the Government of Tunisia's B2 issuer ratings on review for downgrade.

Moody's has also placed the Central Bank of Tunisia's B2 senior unsecured rating and the (P)B2 senior unsecured MTN program and senior unsecured shelf ratings on review for downgrade. The Central Bank of Tunisia is legally responsible for the payments on all of the government's bonds. These debt instruments are issued on behalf of the government.

The decision to place the ratings on review for downgrade reflects the acute tightening in global financing conditions that risks precipitating a sustained period of high financing risk, exacerbated further by Tunisia's weakened near-term economic growth prospects, deteriorating fiscal position, and fragile external position.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

For Tunisia, the shock transmits mainly through wider risk premia, a drop in tourism revenue and a sharp slowdown in GDP growth that weaken the sovereign's liquidity and external position and raise its debt burden. The shock increases the risks to Tunisia's credit profile significantly compared to increasing confidence that macroeconomic stability would be sustained at the time of Moody's change in the outlook on Tunisia's ratings to stable from negative last February.

The review period, which may extend beyond the usual three-month horizon, will focus on assessing the authorities' capacity to manage such a significant shock in the context of existing economic, financial and social pressures, and evaluating the options to address the resulting fiscal and external funding gap.

Tunisia's local currency and foreign currency long-term bond and deposit ceilings remain unchanged: the long-term local currency bond and bank deposit ceilings at Ba2, long-term foreign currency bank deposit ceiling at B3, and the foreign currency bond ceiling at Ba3. The short-term foreign currency bond and bank deposit ceilings remain unchanged at Not Prime.

RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

INCREASED FINANCING RISKS

Elevated credit spreads increase financing risks for Tunisia in view of the government's significant funding needs every year over the next few years and in light of a limited FX reserve buffer, with a rigid budget spending structure and challenging social conditions suggesting minimal scope to enact wide-ranging adjustment to reduce the fiscal and external financing gap.

Yields on outstanding Tunisian instruments have risen to over 900 basis points (bp) (compared to about 500 bp at the time of the February rating action where Moody's changed the outlook on the B2 rating to stable from negative), indicating impaired market access at this point. In comparison with peers, Tunisia's immediate exposure to refinancing risk is relatively high with the government's international bond maturities due this year amounting to 10% of reserves. These financing needs continue over the next several years, with low reserves coverage of economy-wide external debt payments.

The government relies to a large degree on external official funding sources to meet its gross financing needs at about 10-15% of GDP. While negotiations for a follow-up IMF program are underway after the cancellation of the remainder of the previous four-year Extended Fund Facility that started in May 2016, the government has secured a $745 million disbursement under the IMF's Rapid Financing Instrument (RFI) and a $280 million loan from the Islamic Development Bank (Aaa stable) to address the additional fiscal costs of its coronavirus response program.

However, wider fiscal and current account deficits than previously expected due to marked shortfalls in government revenue risks raising Tunisia's financing needs beyond what has been secured so far at a time when financing options are constrained. In particular, a weak banking system limits the capacity for the government to tap domestic sources of funding over an extended period.

The review period will focus on the government's adjustment capacity in the context of such a significant shock that aggravates existing economic, financial and social pressures, including progress in negotiating a new funded IMF program that may provide a backstop to immediate financing requirements.

CORONAVIRUS SHOCK DELAYS FISCAL CONSOLIDATION PROGRESS AND PUSHES DEBT TOWARD 80% OF GDP

The government's coronavirus response program of about $1 billion (2.7% of estimated 2020 GDP), combined with a revenue shortfall, drives Moody's projected fiscal deficit to more than 5% of GDP in 2020 from 3.5% in 2019 and against a previously anticipated improvement to 3% at the time of the February rating action. Combined with slower nominal GDP growth, the debt ratio will increase towards 80% of GDP against Moody's previous expectation of a stabilization at below 75%. The debt trajectory will be highly dependent on exchange rate developments at a time of increased pressure on emerging market currencies. So far, Moody's assumes broad stability in the Tunisian dinar.

Among the announced measures, the government will raise health spending, strengthen social safety nets, and support small- and medium-sized firms via tax relief measures and interest subsidies—all of which will weigh on the budget deficit.

Moreover, the president ordered a general lockdown until April 19, limiting citizens' free movement in an effort to curb the spread of the coronavirus, which will weigh on economic activity and government revenues, further aggravating the budget deficit and debt burden.

Long-delayed reforms of state-owned enterprises (SOEs) that carry a government guarantee and account for about 16% of GDP add to the risk of contingent liabilities materializing on the government's balance sheet.

The review will assess the government's capacity to arrest a rising debt trend, depending on exchange rate movements and the potential materialization of contingent liabilities.

SHARP DECLINE IN TOURISM WEIGHS ON GROWTH PROSPECTS, EXTERNAL ACCOUNTS, RAISING SOCIAL RISKS

The tourism industry in Tunisia contributes about 10% of GDP and accounts for a similar share of employment. The restoration of the tourism industry over the past five years has been key in creating new employment, in driving services activity and in generating foreign exchange reserves. A prolonged slump would not only weigh on Tunisia's growth outlook but risk jeopardizing social stability in light of persistently weak employment.

Moody's anticipates a sharp economic contraction in 2020, followed by a recovery in 2021, assuming global growth and travel return, and a reversion to a trend growth rate of 1.5-3% in future years. Under this scenario, the level of economic activity will be markedly below what could have been expected before the shock for years to come. Rigid labor markets mean productivity will be constrained, while limited employment prospects especially for young graduates increases the risk of social discontent in the future.

Risks to these projections are on the downside. In particular, the tourism sector may take longer than other sectors of the global economy to recover from the coronavirus shock, further constraining employment prospects, and reducing a key contributor to FX generation.

The review period will allow Moody's to assess the depth, duration and spillover effects of the domestic and global shock, and potential implications for potential growth and social stability.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Environmental considerations are relevant for Tunisia's credit profile because the effects of climate change can significantly impair economic growth and development. Coastal regions account for 80% of total output, the majority of which are exposed to rising sea levels. Climate variability, erratic precipitation patterns, and severe droughts pose significant threats to Tunisia's agricultural sector, which accounts for more than 15% of total employment.

Social considerations are material for Tunisia's credit profile. In recent years, social tensions have increased in response to fiscal adjustments made under the current program with the IMF and in response to persistently slow growth and employment trends. The threat of social unrest can impact the capacity of the government to implement necessary reforms. Moody's views the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. For Tunisia, the shock materializes primarily through a sharp tightening in financing conditions and a drop in tourism revenue and growth.

Governance considerations are material for Tunisia's credit profile and relate to the administration's demonstrated capacity to function even during times of social unrest. The country's consensus-building governance orientation has been instrumental in securing the successful democratic transition with all stakeholders involved, but it can slow down the policy decision making process.

FACTORS THAT COULD RESULT IN CONFIRMATION OF THE CURRENT RATING

The rating would likely be confirmed at the current B2 level if the review concluded with sufficient confidence that the coronavirus shock will not materially alter Tunisia's debt trajectory and/or erode the recently restored foreign exchange reserve buffer. Similarly, high confidence in Tunisia's ability to secure funding to meet its upcoming debt service payments in the next few years at affordable costs could also support confirmation of the rating at the current level.

FACTORS THAT COULD LEAD TO A DOWNGRADE

Conversely, a downgrade would be likely if there were delays in the availability of or marked increase in the cost of external funding, or a significantly more severe deterioration in Tunisia's fiscal and debt metrics that would weaken Tunisia's fiscal strength and foreign exchange reserves adequacy.

Evidence that the coronavirus shock would reduce potential growth, thereby exacerbating social tensions and lower the prospect for fiscal consolidation could also result in a downgrade.

GDP per capita (PPP basis, US$): 12,384 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.5% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 7.5% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -4.8% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -11.2% (2018 Actual) (also known as External Balance)

External debt/GDP: 88.2% (2018 Actual)

Economic resiliency: ba2

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 15 April 2020, a rating committee was called to discuss the rating of the Tunisia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially decreased. The issuer's institutions and governance strength, have not materially changed. The issuer's governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The systemic risk in which the issuer operates has materially increased. The issuer has become increasingly susceptible to event risks.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating outcome announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Elisa Parisi-Capone
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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