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Rating Action:

Moody's downgrades Tunisia's ratings to Caa1, maintains negative outlook

14 Oct 2021

New York, October 14, 2021 -- Moody's Investors Service ("Moody's") has today downgraded the Government of Tunisia's long-term foreign-currency and local-currency issuer ratings to Caa1 from B3 and maintained the negative outlook.

Moody's has also downgraded the Central Bank of Tunisia's senior unsecured ratings to Caa1 from B3 and the senior unsecured shelf rating to (P)Caa1 from (P)B3 and maintained the negative outlook. 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 downgrade to Caa1 reflects weakening governance and heightened uncertainty regarding the government's capacity to implement measures that would ensure renewed access to funding to meet high financing requirements over the next few years. There is a risk that, if significant funding is not secured, high liquidity pressure may lead to default. This risk is partly mitigated by the past build-up of the foreign exchange reserve buffer that provides some backstop to upcoming external debt service payments in the short term.

The negative outlook captures downside risks related to possible protracted delays in reforms and reform-dependent funding which would erode FX reserves through drawdowns for debt service payments, thereby exacerbating balance of payment risks. In this scenario, the probability of a public sector debt restructuring that would entail losses for private sector creditors would rise.

Tunisia's country ceilings have been lowered by one notch. Namely, Tunisia's local-currency country ceiling was lowered to B1 from Ba3. The three-notch gap to the sovereign rating reflects weakening institutions, a broadening public sector footprint, external competitiveness constraints and a challenging political and social environment which hamper the business environment. The foreign-currency ceiling was lowered to B3 from B2. The two-notch gap to the local currency ceiling reflects persistent external imbalances and reliance on foreign inflows which increase firms' exposure to potential transfer and convertibility risks.

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE TO Caa1

WEAKENING GOVERNANCE INCREASES UNCERTAINTY REGARDING THE GOVERNMENT'S CAPACITY TO IMPLEMENT FISCAL AND ECONOMIC REFORMS

The downgrade is underpinned by weakening governance, in particular lower quality of Tunisia's institutions, significantly raising liquidity risks which could lead to default over time.

The constitutional crisis that erupted on July 25 following President Kais Saied's suspension of the former government and parliament based on temporary emergency powers is being exacerbated by the absence of a constitutional court with authority to settle disputes between executive and legislative powers. Continued uncertainty regarding the institutional framework reduces the prospect for structural fiscal and economic reform upon which hinges renewed access to official and commercial funding sources to meet the government's upcoming funding needs.

While the recent formation of a new government led by Prime Minister Najla Bouden Romdhane sets the stage for renewed negotiations with official and bilateral lenders, a consensus on long-standing reforms, including the public sector wage bill, energy subsidy reform and reform of state-owned enterprises, will be challenging to secure among all stakeholders, including civil society institutions. Such reforms are critical to rebalance Tunisia's fiscal accounts and ensure debt sustainability in the future amid a subdued growth outlook.

LOSS OF INTERNATIONAL CAPITAL MARKET ACCESS EXACERBATES GOVERNMENT LIQUIDITY RISK

External and domestic liquidity conditions have tightened significantly in the wake of the constitutional crisis, leading to uncertainty regarding the government's capacity to meet its upcoming funding needs. Moody's fiscal deficit estimate of 7.7% of GDP in 2021 and 5.9% in 2022 implies gross borrowing requirements of about 18% of GDP this year and 16% in 2022.

Budget execution data to July 2021 show an execution rate of 30% for external borrowings, reflecting prohibitive financial market access (spreads have widened to over 1,000 basis points), with a budgeted $2.3 billion (5.2% of GDP) outstanding through this channel. The government may seek alternative sources of funding such as bilateral loans and a drawdown of the IMF's recently allocated Special Drawing Rights amounting to $740 million. On the domestic side, a renewed increase in commercial banks' refinancing needs at the central bank indicates increasing absorption constraints.

For 2022, renewed access to multilateral and bilateral loans will most likely rely on the successful negotiation of an IMF program that has remained elusive since the previous four-year program was cancelled in April 2020.

In the short term, the Caa1 rating remains supported by the $7.8 billion foreign exchange reserve buffer as of September 2021 that offers a backstop for the government's remaining funding needs this year and estimated external refinancing needs at about $1.5 billion in 2022 before increasing thereafter.

HIGH DEBT BURDEN REDUCES AFFORDABILITY, INCREASES SHOCK SENSITIVITY

Taking into account a weaker than previously expected economic expansion by 3.5% this year, followed by 2.5% thereafter, Moody's expects the debt/GDP ratio to increase to almost 90% of GDP this year from 84.7% in 2020, and stabilizing below 95% over the next few years.

Moody's expects the affordability of the debt stock to decline amid increasing borrowing costs while the high foreign currency share of government debt, at over 65%, exposes the debt trajectory to adverse currency movements. In addition, outstanding guarantees to state-owned enterprises at over 15% of GDP in 2020 add to contingent liability risks.

RATIONALE FOR THE NEGATIVE OUTLOOK

Tunisia's large external imbalances and reliance on continued inflows limits the degree to which reserves can be drawn down further without jeopardizing currency and price stability.

The negative outlook captures downside risks related to possible protracted delays in reforms and reform-dependent funding which would erode FX reserves through drawdowns for debt service payments, thereby exacerbating balance of payment risks. In this scenario, the probability of a public sector debt restructuring that would entail losses for private sector creditors would rise.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Tunisia's ESG Credit Impact Score is highly negative (CIS-4), reflecting high exposure to social risks and a moderate governance profile. While remittances partially compensate for weak income prospects, the sovereign's capacity to respond to social risks is increasingly threatened by the government's balance sheet constraints.

Tunisia's credit profile is moderately exposed to environmental risks, reflected in its E-3 issuer profile score and driven by its exposure to rising sea levels in coastal areas and to increasing water and desertification risks in internal regions. Coastal regions account for 80% of total output, driving exposure. Climate variability, erratic precipitation patterns and severe droughts pose threats to Tunisia's agricultural sector, which accounts for more than 15% of total employment.

Exposure to social risks is high (S-4) and is mainly related to rigid labor markets and weak employment generation which result in high unemployment rates, including among young graduates. These constraints make it difficult to absorb the well-educated workforce, contributing to negative net migration flows every year and to brain drain. While remittances partially compensate for weak income prospects, the issuer's shock resilience is increasingly threatened by the government's balance sheet constraints.

Tunisia's governance is weak (G-4 issuer profile). Although the country's consensus-building orientation has been instrumental in securing the successful democratic transition with all stakeholders involved, in recent years the policy decision making process has been significantly impaired. In addition, recurring social tensions inhibit policy effectiveness by reducing political consensus for reform, including from the part of civil society institutions. Moreover, the quality of executive and legislative institutions has weakened through successive governments failing to deliver a policy agenda.

GDP per capita (PPP basis, US$): 10,120 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -9.3% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 4.9% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -10.2% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -6.5% (2020 Actual) (also known as External Balance)

External debt/GDP: 100.9% (2020 Actual)

Economic resiliency: b1

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

On 12 October 2021, a rating committee was called to discuss the rating of Tunisia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially decreased. The issuer's institutions and governance strength have materially decreased. The issuer's fiscal or financial strength, including its debt profile 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. The outlook would likely be changed to stable if Moody's concluded with sufficient confidence that the government's economic and fiscal reform implementation capacity will lead to a stabilization and eventual reduction in the debt trajectory. Relatedly, high confidence in Tunisia's ability to access official and capital market funding at affordable costs to meet its upcoming debt service payments in the next few years could also support the ratings at the current level.

Conversely, a downgrade would be likely if constraints on the availability and/or cost of funding persist, potentially related to further protracted negotiations for a new IMF program and insufficient progress on reform implementation. Increased external vulnerability risks that result in currency depreciation pressures that keep the debt burden rising higher and for longer than Moody's currently expects would raise debt sustainability concerns and increase the likelihood of a public debt restructuring.

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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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