New York, February 14, 2020 -- Moody's Investors Service has today changed the outlook to stable
from negative on the Government of Tunisia's issuer rating and affirmed
the rating at B2.
Moody's has also changed the outlook on the Central Bank of Tunisia's
ratings to stable from negative, and affirmed the B2 senior unsecured
rating and the (P)B2 senior unsecured MTN program and senior unsecured
shelf ratings. 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 stable outlook reflects the stabilization in the balance of payments
and the debt burden that Moody's expects to be maintained as tighter
monetary policy stabilizes the currency and fiscal policy prudence is
likely to remain, despite significant constraints to rapid consolidation.
The affirmation of the B2 rating reflects external vulnerability risk
that remains elevated in light of large external financing needs,
and a high debt burden still vulnerable to potential currency and financing
shocks. It also takes into account the relative strength of Tunisia's
institutions and governance and the potential for the economy to return
to stronger growth rates, given a diversified economic base and
educated labor force.
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
RATIONALE FOR THE CHANGE IN OUTLOOK TO STABLE FROM NEGATIVE
IMPROVING BALANCE OF PAYMENTS DYNAMICS, REDUCING MACROECONOMIC STABILITY
RISKS
Moody's expects the stabilization in the current account and foreign
exchange reserves that started last year to be maintained. After
a period of significant balance of payments pressure, with reserves
adequacy declining to very low levels, a reduction in the current
account deficit and tighter monetary policy during 2019 allowed a build-up
of reserves buffers.
The current account deficit narrowed to 8.8% of GDP in 2019
from over 11% in 2018 on account of a narrowing non-energy
trade balance, a significant recovery in tourism revenues and higher
current transfers. Tighter monetary policy contributed to restrain
imports. On the funding side, a broadening of the government's
official funding sources and capital market issuances in October 2018
and July 2019 contributed to the build-up of foreign exchange reserves
to $7 billion at the end of 2019 from $5.2 billion
one year earlier. While, at three months of import cover,
reserves adequacy remains fragile, it has improved markedly in the
course of the past year.
Looking forward, Moody's expects the energy trade deficit
to narrow as well owing to the inauguration of the Nawara natural gas
field which started in February 2020. The government estimates
that production from the field will reduce the energy import bill by about
20% and result in annual savings of about $500 million (1.3%
of GDP per year). While the current account deficit will remain
wide, in high single digits as a ratio to GDP, assuming continued
access to external funding sources, Moody's expects foreign
exchange reserve coverage to remain in the 3-3.5 months
range. The shoring up of reserves reduces the macroeconomic instability
risks and the likelihood of a sharp depreciation of the currency.
DEBT BURDEN STABILIZATION
In turn, Moody's expects a relatively stable currency,
combined with a gradual further fiscal consolidation, to facilitate
a stabilization of the government's debt burden around the current
levels.
The tighter monetary policy stance adopted by the Central Bank of Tunisia
over the past two years has contributed to exchange rate stability,
helping to arrest the upward trajectory in the debt/GDP ratio that peaked
at over 77% of GDP in 2018. In 2019, Moody's
estimates that government debt declined to 72.5% of GDP
mainly as a result of the appreciation of the dinar.
Over the next three years, Moody's expects spending cuts,
especially in the energy subsidy bill, to reduce the fiscal deficit
to 3.0% of GDP in 2020, from 3.5% in
2019, 4.8% in 2018 and around 6% in 2016 and
2017, with the deficit narrowing slightly further in subsequent
years. Faster fiscal consolidation will likely be prevented by
social considerations, the government's focus on supporting
the economy and a rigid structure of government expenditure with public
sector wages and interest payments accounting for over 50% and
almost 9% of total spending, respectively.
RATIONALE FOR THE RATING AFFIRMATION AT B2
While the downside risks to Tunisia's external position and its
fiscal strength have diminished, both factors remain credit constraints.
Moody's external vulnerability indicator (EVI) for Tunisia,
the ratio of foreign exchange reserves to forthcoming external debt payments
and non-resident deposits, has arrested its upward trajectory
but remains elevated at 175%. Even taking into account mitigating
factors such as the high share of non-resident deposits that have
proven resilient over the past decade, reserves coverage of external
debt payments remains fragile while the government continues to rely on
external funding sources.
Continued access to official and market financing at affordable terms
is key for Tunisia's B2 rating. The government relies to
a large degree on external official funding sources to meet its gross
financing needs at about 10-15% of GDP, with significant
debt refinancing needs every year for the next several years. The
expiration of the four-year IMF program in June 2020 raises the
possibility of extended program renewal negotiations which could lead
to delays in disbursements from other official funding sources and potentially
jeopardize market access at moderate costs.
With a government not having been formed yet, after the presidential
and parliamentary elections in September/October 2019, Moody's
political risk assessment includes the possibility that new elections
take place and raise uncertainty about the orientation of macroeconomic
and fiscal policy in Tunisia. Political risk for Tunisia's
sovereign rating also includes lingering social tensions in light of the
subdued growth outlook at an average 2.5% over the next
four years which remains too weak to significantly improve labor market
conditions, especially for youth with a tertiary degree.
Nevertheless, Tunisia's strength of institutions and governance
support its creditworthiness relative to B-rated peers.
The strength of civil society supports transparent and predictable policymaking.
Moreover, policymakers have shown their capacity to adjust the design
of policies to meet their objectives under significant constraints.
In particular, on the fiscal side, the government has been
able to compensate for delays in spending cuts, State-Owned
Enterprise reform or comprehensive pension reform with higher revenue
generation, although this option is in Moody's assessment
now largely exhausted.
Finally, while the economy's competitiveness has declined
significantly over the past decade, its diversification and an educated
workforce set the stage for a broad-based recovery if accompanied
by business environment reforms that incentivize non-energy foreign
direct investments.
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.
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 LEAD TO AN UPGRADE
A significant and sustained reduction in external and fiscal imbalances
would likely lead to an upgrade. High confidence in Tunisia's
ability to secure funding to meet its upcoming debt service payments over
the next decade at favorable terms would also be credit supportive.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Conversely, a downgrade would be likely if there were delays in
the availability, or a marked increase in the costs, of external
funding, fiscal overruns or the materialization of sizeable contingent
liabilities, that would weaken Tunisia's fiscal strength and
foreign exchange reserves adequacy. This could be the result of
protracted policy paralysis or the inability to form a government that
delays the implementation of outlined fiscal and business environment
reforms.
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: -11.1% (2018 Actual)
(also known as External Balance)
External debt/GDP: 87.9% (2018 Actual)
Economic resiliency: ba1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 11 February 2020, a rating committee was called to discuss the
rating of the Government of Tunisia. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have increased. The issuer's institutions
and governance strength, have not materially changed. The
issuer's fiscal or financial strength, including its debt profile,
has increased. The issuer's susceptibility to event risks has not
materially changed.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019. 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 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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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
