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Rating Action:

Moody's changes Tunisia's outlook to stable from negative, affirms B2 rating

14 Feb 2020

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

No Related Data.
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