New York, April 17, 2020 -- Moody's Investors Service ("Moody's") has today placed the Government
of Tunisia's B2 issuer ratings on review for downgrade.
Moody's has also placed the Central Bank of Tunisia's B2 senior unsecured
rating and the (P)B2 senior unsecured MTN program and senior unsecured
shelf ratings on review for downgrade. 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 decision to place the ratings on review for downgrade reflects the
acute tightening in global financing conditions that risks precipitating
a sustained period of high financing risk, exacerbated further by
Tunisia's weakened near-term economic growth prospects,
deteriorating fiscal position, and fragile external position.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. Moody's regards
the coronavirus outbreak as a social risk under its ESG framework,
given the substantial implications for public health and safety.
For Tunisia, the shock transmits mainly through wider risk premia,
a drop in tourism revenue and a sharp slowdown in GDP growth that weaken
the sovereign's liquidity and external position and raise its debt
burden. The shock increases the risks to Tunisia's credit
profile significantly compared to increasing confidence that macroeconomic
stability would be sustained at the time of Moody's change in the
outlook on Tunisia's ratings to stable from negative last February.
The review period, which may extend beyond the usual three-month
horizon, will focus on assessing the authorities' capacity
to manage such a significant shock in the context of existing economic,
financial and social pressures, and evaluating the options to address
the resulting fiscal and external funding gap.
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 / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE
OF THE RATINGS
INCREASED FINANCING RISKS
Elevated credit spreads increase financing risks for Tunisia in view of
the government's significant funding needs every year over the next
few years and in light of a limited FX reserve buffer, with a rigid
budget spending structure and challenging social conditions suggesting
minimal scope to enact wide-ranging adjustment to reduce the fiscal
and external financing gap.
Yields on outstanding Tunisian instruments have risen to over 900 basis
points (bp) (compared to about 500 bp at the time of the February rating
action where Moody's changed the outlook on the B2 rating to stable
from negative), indicating impaired market access at this point.
In comparison with peers, Tunisia's immediate exposure to
refinancing risk is relatively high with the government's international
bond maturities due this year amounting to 10% of reserves.
These financing needs continue over the next several years, with
low reserves coverage of economy-wide external debt payments.
The government relies to a large degree on external official funding sources
to meet its gross financing needs at about 10-15% of GDP.
While negotiations for a follow-up IMF program are underway after
the cancellation of the remainder of the previous four-year Extended
Fund Facility that started in May 2016, the government has secured
a $745 million disbursement under the IMF's Rapid Financing
Instrument (RFI) and a $280 million loan from the Islamic Development
Bank (Aaa stable) to address the additional fiscal costs of its coronavirus
However, wider fiscal and current account deficits than previously
expected due to marked shortfalls in government revenue risks raising
Tunisia's financing needs beyond what has been secured so far at
a time when financing options are constrained. In particular,
a weak banking system limits the capacity for the government to tap domestic
sources of funding over an extended period.
The review period will focus on the government's adjustment capacity
in the context of such a significant shock that aggravates existing economic,
financial and social pressures, including progress in negotiating
a new funded IMF program that may provide a backstop to immediate financing
CORONAVIRUS SHOCK DELAYS FISCAL CONSOLIDATION PROGRESS AND PUSHES DEBT
TOWARD 80% OF GDP
The government's coronavirus response program of about $1
billion (2.7% of estimated 2020 GDP), combined with
a revenue shortfall, drives Moody's projected fiscal deficit
to more than 5% of GDP in 2020 from 3.5% in 2019
and against a previously anticipated improvement to 3% at the time
of the February rating action. Combined with slower nominal GDP
growth, the debt ratio will increase towards 80% of GDP against
Moody's previous expectation of a stabilization at below 75%.
The debt trajectory will be highly dependent on exchange rate developments
at a time of increased pressure on emerging market currencies.
So far, Moody's assumes broad stability in the Tunisian dinar.
Among the announced measures, the government will raise health spending,
strengthen social safety nets, and support small- and medium-sized
firms via tax relief measures and interest subsidies—all of which
will weigh on the budget deficit.
Moreover, the president ordered a general lockdown until April 19,
limiting citizens' free movement in an effort to curb the spread
of the coronavirus, which will weigh on economic activity and government
revenues, further aggravating the budget deficit and debt burden.
Long-delayed reforms of state-owned enterprises (SOEs) that
carry a government guarantee and account for about 16% of GDP add
to the risk of contingent liabilities materializing on the government's
The review will assess the government's capacity to arrest a rising
debt trend, depending on exchange rate movements and the potential
materialization of contingent liabilities.
SHARP DECLINE IN TOURISM WEIGHS ON GROWTH PROSPECTS, EXTERNAL ACCOUNTS,
RAISING SOCIAL RISKS
The tourism industry in Tunisia contributes about 10% of GDP and
accounts for a similar share of employment. The restoration of
the tourism industry over the past five years has been key in creating
new employment, in driving services activity and in generating foreign
exchange reserves. A prolonged slump would not only weigh on Tunisia's
growth outlook but risk jeopardizing social stability in light of persistently
Moody's anticipates a sharp economic contraction in 2020,
followed by a recovery in 2021, assuming global growth and travel
return, and a reversion to a trend growth rate of 1.5-3%
in future years. Under this scenario, the level of economic
activity will be markedly below what could have been expected before the
shock for years to come. Rigid labor markets mean productivity
will be constrained, while limited employment prospects especially
for young graduates increases the risk of social discontent in the future.
Risks to these projections are on the downside. In particular,
the tourism sector may take longer than other sectors of the global economy
to recover from the coronavirus shock, further constraining employment
prospects, and reducing a key contributor to FX generation.
The review period will allow Moody's to assess the depth,
duration and spillover effects of the domestic and global shock,
and potential implications for potential growth and social stability.
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. 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 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 RESULT IN CONFIRMATION OF THE CURRENT RATING
The rating would likely be confirmed at the current B2 level if the review
concluded with sufficient confidence that the coronavirus shock will not
materially alter Tunisia's debt trajectory and/or erode the recently
restored foreign exchange reserve buffer. Similarly, high
confidence in Tunisia's ability to secure funding to meet its upcoming
debt service payments in the next few years at affordable costs could
also support confirmation of the rating at the current level.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Conversely, a downgrade would be likely if there were delays in
the availability of or marked increase in the cost of external funding,
or a significantly more severe deterioration in Tunisia's fiscal
and debt metrics that would weaken Tunisia's fiscal strength and
foreign exchange reserves adequacy.
Evidence that the coronavirus shock would reduce potential growth,
thereby exacerbating social tensions and lower the prospect for fiscal
consolidation could also result in a downgrade.
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%
Gen. Gov. Financial Balance/GDP: -4.8%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -11.2% (2018 Actual)
(also known as External Balance)
External debt/GDP: 88.2% (2018 Actual)
Economic resiliency: ba2
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 15 April 2020, 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 materially decreased. 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 materially decreased. 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 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.
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
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Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
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MD - Sovereign Risk
Sovereign Risk Group
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Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653