London, September 30, 2022 -- Moody's Investors Service ("Moody's") has today placed the Government of Tunisia's Caa1 long-term foreign-currency and local-currency issuer ratings on review for downgrade. Prior to this rating action, Tunisia's rating was Caa1 with a negative outlook.
Moody's has also placed the Central Bank of Tunisia's Caa1 senior unsecured rating and (P)Caa1 senior unsecured shelf rating 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. Prior to this rating action, the Central Bank of Tunisia's rating was Caa1 with a negative outlook.
The decision to place the ratings on review for downgrade reflects Moody's assessment that in the absence of timely agreement on a new International Monetary Fund (IMF) programme, Tunisia's increasingly elevated government liquidity risks and fragile external position raise the risk of default. Tunisia's large fiscal and external imbalances and elevated refinancing risks represent significant credit weaknesses, which alongside social tensions have been exacerbated by the global implications of the Russia-Ukraine military conflict. The review period will focus on evaluating the authorities' progress in securing Executive Board approval of a new IMF programme - key to alleviating financing and external vulnerability risks, and ultimately social risks - before the end of the year; and the likelihood of maintaining sufficient official financing sources in the coming years to avert a balance of payments or fiscal crisis with negative social implications.
Tunisia's ceilings remain unchanged at B1 for the local-currency ceiling and B3 for the foreign-currency ceiling. The three-notch gap between the local currency ceiling and the sovereign rating reflects a broad public sector footprint, external imbalances and a challenging political and social environment which hampers the business environment; balanced against relatively predictable, albeit weakened, institutions. The two-notch gap of the foreign currency ceiling 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 / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
RATIONALE FOR INITIATING THE REVIEW FOR DOWNGRADE
Very tight domestic and external funding conditions and the Tunisian government's challenging debt-service profile elevate refinancing risks. Moody's estimates the government's gross financing needs for this year at around 17% of GDP, remaining above 15% of GDP in 2023 as a result of rising debt amortization payments and a still-high fiscal deficit. In the absence of international market access at affordable costs - sovereign spreads have remained extremely wide for more than a year - and in view of domestic financing constraints, meeting these levels is in Moody's view achievable only through the concessional financing that would be unlocked by a new IMF programme. Beyond the financing provided by the IMF itself, further funds would likely be catalyzed through a broad base of multilateral and bilateral partners. Because Tunisia's financing needs will stay close to 15% of GDP for the foreseeable future, without access to market financing at affordable costs it will remain reliant on a steady and timely flow of sizeable official sector financing.
The successful signing of an IMF programme has remained elusive since the previous four-year arrangement was terminated in April 2020. The publication of a reform programme by the government in June, and the conclusion on 15 September of a salary agreement with social partners implying some containment of the public sector wage bill in real terms over the next three years, represent important signs of progress in that direction. However, the Fund is likely to seek further commitments on other reform areas to be covered under a programme, including the restructuring of loss-making state-owned enterprises and the gradual phasing out of consumption subsidies in favour of more targeted financial transfers. The degree of consensus among stakeholders and social interest groups on the government's reform agenda remains uncertain, while a track record of past reform delays dims expectations of success in a less conducive political and economic environment.
Tunisia's foreign exchange reserves, which stood at $7.7 billion as of August, have remained relatively resilient to date and represent an important, but finite, backstop for external debt principal repayment needs amounting to $2.1 billion in 2023 alone. However, challenging balance of payments dynamics could rapidly pressure the foreign exchange buffer in the absence of prompt agreement on a new IMF programme. Moody's expects the current account deficit to reach close to 10% of GDP this year and remain around 8% of GDP in 2023, from 5.9% of GDP in 2021. The external vulnerability indicator (the ratio between the sum of external debt payments due over the next year and non-resident deposits, and foreign exchange reserves) will remain above 200% this year and next, indicating significant exposure to potential balance of payments disruptions to meet upcoming external liabilities. High global energy and food prices have exacerbated external imbalances by widening Tunisia's import bill and need for external financing, and also risk making the pursuit of reform even more difficult under a more challenging social environment.
Fiscal trends have been relatively favourable in the year to date, with preliminary execution data showing a small budget deficit – equivalent to around 0.3% of GDP – in the first half of the year on the back of strong revenue gains and relative containment of the public-sector wage bill. However, Moody's expects the budget deficit to widen over the remainder of the year, reaching 8.6% of GDP for 2022 as a whole, as the significant impact of high global energy and food prices on the subsidy bill materializes. This underscores the importance of securing an IMF agreement to avert fiscal stress, a development that Moody's expects to gain greater visibility of during the review period. Subject to an IMF programme being agreed, Moody's expects the budget deficit to begin narrowing from next year but remain elevated, at 6.8% of GDP in 2023. Tunisia's public debt burden would continue to increase over the next few years from 79.2% of GDP in 2021 and reach close to 88% of GDP by the end of 2023.
Moody's expects risks to Tunisia's credit profile to remain skewed to the downside even under an eventual IMF agreement. Access to international capital markets is likely to remain closed over 2023, and official sector financing prospects would remain dependent on timely implementation of the reforms targeted under a programme. Tunisia's performance under past IMF programmes has been mixed, and recurring social tensions over the past decade against a backdrop of weak growth and employment creation, weakening governance and a fragmented political landscape have challenged successive governments' capacity to implement economic reforms and address fiscal imbalances. Protracted delays in reforms and reform-dependent funding would erode foreign exchange reserves through drawdowns for debt service payments, thereby exacerbating balance of payment risks and the probability of a debt restructuring that would entail losses for private sector creditors. The review will assess the likelihood of Tunisia maintaining sufficient official financing sources in the coming years to avert a balance of payments or fiscal crisis with negative social implications.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Tunisia's ESG Credit Impact Score is very highly negative (CIS-5), reflecting very high exposure to social risks and a weak 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 around 15% of total employment. Physical climate risk is moderately negative, carbon transition risks and waste and pollution risks are neutral-to-low while natural capital and water management risks are highly negative.
Exposure to social risks is very high (S-5), driven by risks related to labour and income. Rigid labour markets and weak employment generation 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. Resilient remittances are a supportive factor and partially compensate for weak income prospects, but the issuer's shock resilience is increasingly threatened by the government's balance sheet constraints. More generally, progress on reforms, and as a result, fiscal strength, liquidity risks and to some extent external vulnerability risks, are shaped by social considerations and the capacity of the government and civil society stakeholders to align behind credible policy plans or not.
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. 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 adopt and deliver a coherent policy agenda. Tunisia's institutional structure is highly negative, while policy credibility & effectiveness and budget management are moderately negative and transparency and disclosure is neutral-to-low.
WHAT COULD CHANGE THE RATINGS DOWN
A downgrade of the rating would be likely if the sovereign were unable to secure in a timely manner multilateral financing, through the conclusion of an IMF agreement that is sustained and large enough to materially and durably ease liquidity pressures. 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, exacerbate social risks, and increase the likelihood of a debt restructuring that would entail losses for private sector creditors.
WHAT COULD LEAD TO CONFIRMATION OF THE RATINGS AT THE CURRENT LEVEL
The rating would likely be confirmed at the current Caa1 level if the review concluded with sufficient evidence in Tunisia's ability to secure funding to meet its upcoming debt service payments in the next few years at affordable costs. Relatedly, confidence that the government's economic and fiscal reform implementation capacity will lead to a stabilisation and eventual reduction in the debt trajectory, alongside a material reduction in financing needs, would support confirmation of the rating at the current level.
GDP per capita (PPP basis, US$): 11,424 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 3.3% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 6.6% (2021)
Gen. Gov. Financial Balance/GDP: -7.5% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: -5.9% (2021) (also known as External Balance)
External debt/GDP: 91.6% (2021)
Economic resiliency: b1
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 27 September 2022, 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 institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. 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://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.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 on https://ratings.moodys.com/rating-definitions.
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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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://ratings.moodys.com/documents/PBC_1288235.
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 https://ratings.moodys.com.
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Mickael Gondrand
Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London, E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
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 Ltd.
One Canada Square
Canary Wharf
London, E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
