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Rating Action:

Moody's confirms Tunisia's B2 rating, changes outlook to negative

06 Oct 2020

New York, October 06, 2020 -- Moody's Investors Service ("Moody's") has today confirmed the B2 issuer rating of the Government of Tunisia and changed the outlook to negative. Moody's has also confirmed the Central Bank of Tunisia's B2 senior unsecured rating, (P)B2 senior unsecured shelf rating and changed the outlook to negative. 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. This concludes the review for downgrade initiated on 17 April 2020.

The confirmation of the B2 ratings reflects the resilience of the foreign exchange reserve buffer observed since the opening of the review, as a backstop for maturing external liabilities over the next year. The installment of a new technocratic government in September supports Moody's assessment that Tunisia's institutions and governance will contribute to policy continuity, likely to be reflected in medium-term fiscal and economic reform implementation under a new IMF program. In turn, indications that monetary and fiscal policy will continue to be aimed at containing Tunisia's external and fiscal imbalances will support access to official and market financing.

The negative outlook reflects the economic, financial, social and political challenges the government faces in implementing fiscal consolidation and structural reforms required to secure official support and maintain confidence-sensitive funding options as refinancing risks prevail ahead of upcoming eurobond maturities. While Tunisia's institutions have built a track record of maintaining policy direction and some progress in implementing reforms, governance weaknesses and social challenges have also contributed to slow progress.

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 CONFIRMATION OF THE B2 RATING

CONTINUED ACCUMULATION OF FOREIGN EXCHANGE RESERVES PROVIDES BACKSTOP FOR SIGNIFICANT EXTERNAL MATURITIES FROM NEXT YEAR

Over the first eight months of this year Tunisia's external accounts have adjusted in a more balanced way to the pandemic than envisaged when the review for downgrade was initiated and financial market turmoil at the time implied. Foreign exchange reserves have continued to increase, reaching 4.7 months of imports.

While current account receipts have declined sharply over the first eight months of this year in light of pandemic-related lockdown measures, imports and other current account payments have declined by more, leading to a narrowing current account deficit to a cumulative 5.0% of full-year GDP over the first eight months of this year compared to 5.9% of GDP over the same period last year, alleviating pressure on the balance of payments.

Net foreign assets have increased to $7.7 billion (141 days or 4.7 months of import cover) in September 2020 from $6.9 billion in December 2020 (109 days or 3.6 months of import cover). These recent developments support the view that the shift in monetary policy towards more effective support of macroeconomic stability, observed over the past two years is maintained. The commissioning of the Nawara gas field and pipeline in February 2020 will also support a permanent narrowing of the current account deficit by substituting for gas imports of about $500 million (1.3% of GDP).

A resultant higher FX reserve buffer serves as backstop for the significant external debt service payments due from next year, with 2021 maturities including two USAID-guaranteed eurobonds of $500 million each and a Qatari loan installment at $250 million.

Moreover, because of the high foreign currency share of total government debt at almost 75%, Tunisia's debt trajectory is highly sensitive to adverse currency movements. As a result, preserving external stability has significant implications for Tunisia's debt sustainability.

INSTALLMENT OF TECHNOCRATIC GOVERNMENT IMPROVES PROSPECTS FOR POLICY CONTINUITY AND MEDIUM-TERM REFORMS UNDER AN IMF PROGRAMME

The installment of a technocratic government led by Prime Minister Hichem Mechichi on 2 September supports Moody's expectations of policy continuity and paves the way for medium-term reforms under the umbrella of a new IMF program over the remainder of this year, supporting continued access to official external funding sources and supporting the restoration of international capital market access at affordable terms.

Tunisia's institutions have demonstrated a track record of successful democratic transition with the support of civil society organizations that continue to participate in the political and policy discourse. While fiscal and economic reform progress has been slow, pluralist participation in policymaking supports continued progress towards reform implementation, sufficient to catalyze official funding and secure market financing.

Beside stated intentions to enter a new IMF programme, the government's priorities include the consolidation of public finances and the expansion of the sovereign's funding sources; the implementation of public sector reform including efficiency enhancements at state-owned enterprises; the preservation of households' purchasing power and the maintenance of social stability, including via targeted income support for qualifying households.

As explained below, this programme will be challenging for the government to deliver on. Nonetheless, Moody's assesses that it provides continuity in directing policy towards mitigating Tunisia's fiscal and external imbalances.

CREDIT PROFILE CONSTRAINED BY A HIGH AND RISING DEBT STOCK

The B2 rating captures risks associated with Tunisia's elevated debt burden, structural policy constraints, and slowing trend growth.

Taking into account weaker revenues as a result of the pandemic shock, Moody's expects the fiscal deficit to widen to 7% of GDP in 2020, followed by 4.5% in 2021 from 3.6% in 2019. Moody's expects Tunisia debt burden to increase to over 80% of GDP in 2020 and stabilize within the 80-85% range around 2024.

Reliance on concessional financing helps mitigate the impact of a higher debt burden on debt affordability. While debt affordability will deteriorate because of lower revenue and an increasing interest bill, it will be in line with peers as indicated by an interest payments/revenue ratio of 14% in 2024.

However, a number of structural weaknesses weigh on public finances including a large public-sector wage bill amounting to over 15% of GDP, which remains to be addressed over the long term; energy subsidies that are being phased out (with a 2022 target), and government guaranteed debts of SOEs amounting to about 16% of GDP (mostly in foreign currency) representing sizable contingent liabilities. Moody's expects pending SOE reforms will form part of any new IMF programme.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects the economic, financial, social and political challenges the government faces in implementing reforms required to secure official support and maintain confidence-sensitive funding options as refinancing risks emerge ahead of upcoming eurobond maturities starting 2021.

With gross borrowing requirements of 14% of GDP, Tunisia remains reliant on both continuing official sector support but also confidence-sensitive capital market funding. The newly-instituted government's policy effectiveness has yet to be proven. Achieving fiscal consolidation amid subdued growth will be difficult.

Over the longer term, the inability to boost trend growth entails the risk of increased social instability, which would further dent prospects for fiscal consolidation. Moody's expects the economy to contract by 6.5% this year as a result of the coronavirus outbreak, followed by 4% growth in 2021 and a return to the 2-3% range thereafter. The pandemic exacerbates a decline in trend growth over the past decade. The government's high debt ratio constrains scope for a rapid increase in public investment as a means to boost growth potential. In turn, GDP growth remains insufficient to significantly expand employment, particularly for young graduates, increasing the risk of social discontent.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Environmental considerations are material 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 and most 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 under the prior programme with the IMF and in response to persistently slow growth and employment trends. The threat of social unrest can affect the government's capacity to implement 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 track record of functioning even during times of social unrest and major societal and political change. The country's consensus-building governance orientation has been instrumental in securing the successful democratic transition with all stakeholders involved, but can slow the policy decision-making process. Tunisia's governance is impeded by relatively weak policy effectiveness. In particular, fiscal policy while maintaining a prudent direction in recent years has been slow at addressing the government's high and rising debt burden.

GDP per capita (PPP basis, US$): 12,661 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 5.9% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -3.5% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -8.5% (2019 Actual) (also known as External Balance)

External debt/GDP: 94.8% (2019 Estimate)

Economic resiliency: ba2

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

On 01 October 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 not materially changed. 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 not materially changed. The systemic risk in which the issuer operates has not materially changed. The issuer has become increasingly susceptible to event risks.

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

Given the negative outlook a rating upgrade is unlikely in the foreseeable future. The outlook would likely be changed to stable if Moody's concluded with sufficient confidence that, over the medium term, the coronavirus shock will not materially alter Tunisia's external position and ability to access official and capital market funding to meet its upcoming debt service payments at affordable costs.

Conversely, a downgrade would be likely if delays in the availability of or marked increases in the cost of external funding became increasingly likely, potentially related to a more significant deterioration in Tunisia's fiscal and external accounts than Moody's currently assumes. This scenario could also unfold if delays in the negotiation of a new IMF program and/or insufficient progress on agreed reform implementation were to occur. A renewed outbreak of social unrest that undermines the government's capacity to stabilize Tunisia's fiscal accounts and debt dynamics would also put negative pressure on the rating.

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 action(s) 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: 44 20 7772 5456
Client Service: 44 20 7772 5454

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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