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Rating Action:

Moody's changes the outlook on Tunisia's rating to negative, affirms B2 rating

16 Oct 2018

New York, October 16, 2018 -- Moody's Investors Service has today changed the outlook to negative from stable on the Government of Tunisia's issuer ratings and affirmed the ratings at B2.

Moody's has also changed the Central Bank of Tunisia's outlook to negative from stable, and affirmed the B2 rating, in addition to affirming the B2 rating of the senior unsecured shelf/MTN rating at (P)B2. 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 negative outlook reflects the fact that, despite meaningful progress on fiscal and macroeconomic reforms in recent quarters, Tunisia finds itself experiencing intensifying pressures in an increasingly adverse external environment with diminishing buffers to sustain resilience. Moody's would consider returning the outlook to stable should a combination of continued reforms under the IMF program, a restoration of fiscal and external buffers and continued international community commitment appreciably alleviate external liquidity pressures.

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 remain 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 THE OUTLOOK TO NEGATIVE FROM STABLE

WEAKENED EXTERNAL POSITION IN THE CONTEXT OF INCREASINGLY CHALLENGING EXTERNAL ENVIRONMENT

The negative outlook on Tunisia's rating reflects an increase in external vulnerability risks in an environment of markedly tightening global financing conditions at a time when Tunisia's foreign exchange reserves position is weakened by higher oil prices and a slower pace of net capital inflows as compared to last year.

Tunisia's foreign exchange reserves continue to erode, declining to 2.5 months of goods imports cover at the end of September 2018 from 3.3 months one year earlier. This reflects not only a slower pace of net cross-border loan disbursements as compared to last year and the postponed issuance of the Eurobond budgeted for this year, but also the impact of the larger than anticipated increase in oil prices which continues to weigh on Tunisia's external accounts.

The trade balance continued to deteriorate to 13.3% of estimated full-year GDP over the first nine months of this year as compared to 11.9% of full-year GDP over the same period last year, even as the non-oil trade balance broadly stabilized at 8.9% of full-year GDP over the first nine months from 9.1% over the same period last year.

Moody's forecasts the current account deficit to narrow slightly, supported by rising services (tourism) exports and improving labor income balances, but to remain wide at 9.7% of GDP at the end of 2018 and 8.5% in 2019, from 10.2% in 2017.

FDI inflows at about 2% of GDP only finance a small part of the current account deficit. This leaves Tunisia exposed to confidence-sensitive capital flows at a time when increasingly adverse global financial market conditions raise the risk of a further deterioration in the foreign exchange buffer, although the financial support from the international investor community conditional on reform implementation remains in place, and the existing capital flow restrictions reduce the risk of sudden capital flow reversals.

In light of economy-wide external financing needs at over 30% of GDP over the next two years, Moody's estimates external liabilities maturing over the following year (plus foreign currency long-term deposits) to amount to over 250% of foreign exchange reserves by the end of 2019 from 220% in 2018, a much lower reserves coverage than for most B-rated sovereigns. Tunisia's net international liability position at -145% of GDP in 2017 is also significantly larger than those of most B-rated sovereigns, denoting sensitivity to delays in the availability or higher cost of external funding.

The government's own balance sheet is sensitive to external financing conditions and in particular the exchange rate. With over 65% of government debt denominated in foreign currency, the debt trajectory is susceptible to a marked depreciation of the Tunisian dinar, which has depreciated 11% against the US dollar and by 9.2% against the euro by the end of September 2018.

RATIONALE FOR RATING AFFIRMATION AT B2

The affirmation of the B2 rating is underpinned by Moody's expectation that Tunisia will continue to meet the objectives of the IMF program, ensuring the continuity of planned official sector disbursements which the government expects to cover almost 50% of fiscal funding requirements until the expiration of the program in June 2020. The ongoing and broadening economic recovery also support Tunisia's economic strength and the B2 rating.

Despite the higher than budgeted international oil price, budget execution over the first seven months of this year remains on track to reach the budgeted 4.9% of GDP fiscal deficit from 6.1% in 2017 owing to the effective implementation of the revenue measures adopted in the budget and in light of the significant fuel, energy and gas price hikes already implemented over the course of this year in order to rein in the subsidy bill, with further hikes planned in 2018 and 2019.

The wage bill remains within budgeted amounts and agreed structural reforms, including passage of laws supporting public bank restructuring and extension of assistance to vulnerable families have been implemented, in addition to the adoption of the public pension reform by the Council of Ministers. Significant progress was also achieved in the areas of system-wide compliance with international regulations regarding anti-money laundering and terrorist financing.

Moody's expects the primary deficit to narrow to 1.6% of GDP in 2019, from 2.3% and 3.9% in 2018 and 2017 respectively. This is slightly slower than the government currently projects, taking into account likely social spending demands in particular in the run-up to the presidential and parliamentary elections scheduled for November 2019. The overall deficit will narrow more slowly as debt servicing costs rise. Together with foreign exchange valuation effects, this points to a broadly stable debt burden at around 74% of GDP this year and next.

Tunisia's B2 rating is also supported by a more broad-based economic recovery driven by a renewed expansion in market-based activity. Moody's forecasts GDP growth at 2.8% in 2018 and 3.0% in 2019, after 1.9% in 2017. The significant improvement in the security environment in the aftermath of the 2015 terror attacks and the implementation of reforms in the business environment including via the earlier adoption of the investment law that aims to level the playing field between the on- and off-shore sectors, and the public-private partnership framework legislation sets the stage for renewed investment activity.

After several years of declines in energy production due to maturing oil fields and a lack of new license agreements, domestic supply levels have stabilized since February 2018 and Moody's expects new licenses in the hydrocarbon and renewable energy sector and maturing projects over the next two years to support economic activity and contribute to alleviating external imbalances. One example is the commissioning of the Nawara natural gas pipeline and processing facility scheduled for July 2019 which will cover 17% of Tunisia's domestic natural gas demand with the potential to reduce the energy import bill by up to 1% of GDP annually, according to IMF estimates. Under the G20 Compact with Africa agreement, Tunisia has also signed five new investment agreements with Germany worth $1.9 billion in the dairy, tourism and textile industries.

WHAT COULD CHANGE THE RATING UP/DOWN

Evidence of a sustained reduction in external and fiscal imbalances, accompanied by a stabilization in and prospects of a steady increase in foreign exchange reserves would support a change in the outlook to stable. It would strengthen Moody's confidence that Tunisia will be able to face a period of challenging international financing conditions and relatively high oil prices with financial buffers consistent with a B2 rating.

Conversely, a downgrade would be likely if there were delays in the availability of, or a marked increase in the costs of, external funding, possibly linked to incomplete implementation of the economic reform program agreed with the IMF, fiscal overruns or the materialization of sizeable contingent liabilities, that would further weaken Tunisia's foreign exchange reserves adequacy.

GDP per capita (PPP basis, US$): 11,936 (2017 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 6.4% (2017 Actual)

Gen. Gov. Financial Balance/GDP: -6.2% (2017 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -10.2% (2017 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: Moderate level of economic resilience

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

On 12 October 2018, 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 not materially changed. The issuer's institutional strength/ framework, 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 not materially changed. 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 Bond Ratings published in December 2016. 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 or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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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