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Rating Action:

Moody's downgrades Tunisia's rating to B2, outlook changed to stable

14 Mar 2018

New York, March 14, 2018 -- Moody's Investors Service has today downgraded the long-term issuer rating of the Government of Tunisia to B2 from B1. The outlook was changed to stable from negative.

Moody's has also downgraded the foreign currency senior unsecured debt rating of the Central Bank of Tunisia to B2 from B1 and changed the outlook to stable from negative, in addition to downgrading the senior unsecured shelf/MTN rating to (P)B2 from (P)B1. The Government of Tunisia is legally responsible for the payments on all of the central bank's bonds. These debt instruments are issued on behalf of the government.

The key drivers for the downgrade are Moody's expectations that the further erosion in fiscal strength and foreign exchange reserve buffers will not reverse significantly in the next few years:

1) Central government debt has risen to about 70% of GDP in 2017, and will edge up gradually in 2018-19, amid declining debt affordability;

2) The current account deficit will remain wide, from 10.4% of GDP in 2017, and the economy's external debt has risen further above 80% of GDP, weighing on reserves adequacy.

The stable outlook reflects Moody's expectations that Tunisia's credit metrics will remain consistent with a B2 rating. Fiscal consolidation is underway and will mitigate the rise in the government's debt burden, while the recovery in external demand for Tunisia's services, manufacturing and agriculture will help narrow the current account deficit slowly, preventing a further erosion of foreign exchange reserves. The stable outlook also reflects Moody's assumption that Tunisia continues 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.

Moody's has also lowered the long-term local currency bond and bank deposit ceilings to Ba2 from Ba1. The long-term foreign currency bank deposit ceiling was lowered to B3 from B2, and the foreign currency bond ceiling to Ba3 from Ba2. The short-term foreign currency bond and bank deposit ceilings remain unchanged at NP.

RATINGS RATIONALE

FIRST DRIVER: CONTINUED DETERIORATION IN TUNISIA'S FISCAL STRENGTH

A gradually rising debt burden, from relatively high levels, weakening debt affordability, persistent contingent liability risks and a debt structure that makes Tunisia vulnerable to shifts in foreign creditors' willingness to finance its borrowing needs all contribute to weakening fiscal strength.

Moody's forecasts that central government debt will peak at 73% in 2019, from an estimated 70.2% in 2017 and 61.9% in 2016. The projections are based on the assumption that the deficit narrows gradually, to 4.9% of GDP in 2018 based on the approved budget, followed by 4.6% in 2019, after 6.1% in 2017. In particular, the 2018 budget introduced a 1 percentage point increase in the VAT rate and aims to control the large government wage bill. With an effective hiring freeze and early retirement scheme in the public sector, combined with moderate wage increases this year, this fiscal consolidation path entails a reduction in the wage bill to 14.2% of GDP in 2018, from 14.7% in 2017. Under the current multi-year wage agreement between the government and the main labor unions, the government expects the wage share to decline to 12% of GDP by 2020.

Tunisia's debt burden remains exposed to the materialization of contingent liabilities related to guarantees on debts of state-owned enterprises (SOEs) amounting to about 13% of GDP. Several SOEs remain loss-making and reliant on budgetary transfers which total 2% -2.5% of GDP annually. Separately, the introduction of a social solidarity contribution levied on companies' profits and overnight visitors is aimed at filling the funding gap at pension and health care funds which according to the IMF amounted to about 2.5% of GPD at the end of 2016.

Moreover, the structure of Tunisia's government debt weighs on fiscal strength. With over 65% of government debt denominated in foreign currency, the debt trajectory is susceptible to a marked depreciation of the Tunisian dinar. In addition, a limited domestic funding market implies that the government is reliant to a large and rising extent on continued willingness by foreign investors, both official lenders and capital markets, to finance its borrowing requirements. The increased recourse to capital markets to fund the government's borrowing needs underpins the increasing interest/revenue ratio to a projected 11.5% in 2019 from 9.4% in 2017.

SECOND DRIVER: PERSISTENT WIDE EXTERNAL IMBALANCES

Tunisia's external vulnerability is high, with a wide current account deficit that is largely debt-funded and weighs on foreign exchange reserves adequacy.

The current account dynamics have continued to deteriorate in 2017, resulting in a deficit at 10.4% of GDP from 8.8% in 2016. Foreign exchange reserves have declined further to 77 days of import cover in early March 2018. External debt rose to over 80% of GDP in 2017 from 68.6% in 2016 and the country's net international investment position was a negative 120% of GDP, one of the largest liability position amongst the sovereigns rated by Moody's.

Looking forward, Moody's forecasts only a gradual narrowing of the current account deficit, to 9.5% of GDP in 2018, followed by a further reduction to 8.3% in 2019 supported by stronger external demand as highlighted by the improving outlook for the tourism industry and bolstered by the recent depreciation in the domestic currency against major trading partners mainly in the euro area. Meanwhile, a persistent deficit in the energy balance and the loss of global market shares in phosphate will prevent a more rapid narrowing of the current account deficit.

The current account projections combined with broadly unchanged debt inflows, from international and bilateral lenders and regular debt issuances, point to a slow rise in foreign exchange reserves, from low levels. Moody's projects that Tunisia's External Vulnerability Indicator, which measures the ratio of short-term debt and long-term debt due over the next year to foreign exchange reserves will remain elevated, at around 185% in 2018, from 196% in 2017.

RATIONALE FOR THE B2 RATING

The B2 rating is supported by a moderately strong institutional framework that will support the implementation of some economic, fiscal and banking sector reforms as part of the country's IMF program, although implementation hurdles will remain in view of high unemployment and past expectations by the population for strong wage growth in the public sector.

A more broad-based economic recovery driven by a renewed expansion in market-based activity, with fewer instances of social unrest in internal regions, will also provide some support to Tunisia's credit metrics. 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.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectations that Tunisia's credit metrics will remain consistent with a B2 rating, with no significant changes in either fiscal or external metrics in the next few years.

The stable outlook also reflects Moody's assumption that Tunisia continues 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.

One of the IMF's key reform requirement concerns the reduction in the public sector wage bill mentioned above. Other reform areas concern the ongoing restructuring of the public banking sector and in particular the future system-wide compliance with international regulations regarding anti-money laundering and terrorist financing.

WHAT COULD CHANGE THE RATING UP/DOWN

A sustained improvement in fiscal and external imbalances would be credit positive. This could be related to a marked and durable economic recovery that lessened the demands for government spending and boosted export revenues and foreign exchange reserves.

Further delays in the implementation of the economic reform program agreed with the IMF that would lead to reduced access to official funding sources and deter market appetite, could lead to a downgrade. In general, renewed fiscal overruns, the materialization of sizeable contingent liabilities and/or a continued erosion of foreign exchange reserves would put downward pressure on the rating.

GDP per capita (PPP basis, US$): 11,987 (2017 Estimate) (also known as Per Capita Income)

Real GDP growth (% change): 1.9% (2017 Estimate) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 6.3% (2017 Estimate)

Gen. Gov. Financial Balance/GDP: -6.1% (2017 Estimate) (also known as Fiscal Balance)

Current Account Balance/GDP: -10.4% (2017 Estimate) (also known as External Balance)

External debt/GDP: 80.3% (2017 Estimate)

Level of economic development: Moderate level of economic resilience

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

On 09 March 2018, 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 fiscal or financial strength, including its debt profile, has materially decreased. 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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