Login to your account

Username *
Password *
Remember Me

Fitch Ratings-Paris/London/New York-27 March 2015: Fitch Ratings has revised Tunisia's Outlooks to Stable from Negative. Its Long-term foreign and local currency Issuer Default Ratings (IDRs) have been affirmed at 'BB-' and 'BB' respectively. The issue ratings on Tunisia's senior unsecured foreign currency bonds are also affirmed at 'BB-'.

The Country Ceiling is affirmed at 'BB' and the Short-term foreign currency IDR at 'B'.

KEY RATING DRIVERS

The revision of Outlook of Tunisia's IDRs reflects the following key rating drivers and their relative weights:

High

The smooth legislative and presidential elections in late 2014 enabled the formation of a new, democratically-elected coalition government in early 2015, which benefits from a large majority (more than 70%) in a Parliament elected for five years. This puts an end to a four-year political transition process and lays the ground for better political stability in the country. Political and economic destabilisation risk from social unrest or terrorist attacks remains significant, however, as illustrated by the recent attack in Tunis.

Medium

Budget deficit is on an improving trend, narrowing to 4.5% of GDP in 2014 from 6.5% in 2013 (including grants), constraining public debt to just below 50% of GDP at end-2014. Although the consolidation partly reflects continuously low capital spending and a natural decline in subsidies in 2014 after payments of arrears the previous year, Fitch believes that the fiscal stance will slightly strengthen in coming years, helped by lower international oil prices in 2015-2016 and gradually improving economic performance.

Tunisia's IDRs also reflect the following key rating drivers:-

-Development indicators, including GDP per capita, human development index and investment rate, as well as governance indicators are in line with 'BB'-rated peers. Tunisia has a clean track record of debt repayment.

-External finances are a key rating weakness. The current account deficit (CAD) has significantly widened since the start of the revolution, as exports have suffered from weak EU activity and supply shocks while consumption has driven imports up. The CAD further deteriorated to 8.9% of GDP in 2014, mostly on account of higher food and energy shortfalls, pushing net external debt to 34.8% of GDP in 2014, much higher than 'BB'-rated peers (14.8%).

Fitch expects the CAD to narrow in 2015 in line with lower international oil prices, but to remain elevated at 7.7% of GDP due to weak tourism revenues and the impact of a depreciating dinar on the cost of energy imports.

-Tunisia has benefitted from strong international official support since the revolution, providing cheap, long-term sources of external financing requirements. This has come at the expense of a higher share of public debt denominated in foreign currency (52.4% at end-2014). The recent USD1bn bond issue marks Tunisia's return to capital markets, therefore reducing the country's dependence on official lending, but Fitch expects the international community will continue supporting the country in coming years.

-Economic performance has been mediocre since the revolution despite fiscal and monetary stimulus, with real GDP growth averaging 1.7% over the past four years (compared with 4.4% in the previous five years); inflation has started cooling down in 2014 to 5.5% on average but remains above pre-revolution levels.

Recovery in the EU will slightly spur activity in 2015 but Fitch has revised down its GDP growth estimate for 2015 to 2.7% from 3.2% after the recent terrorist attack in Tunis. We expect that growth prospects over the medium-term will be dependent on social stability, security and the implementation of structural reforms improving the investment climate and the banking sector.

Recapitalisation and restructuring of Tunisia's three highly vulnerable public banks, which account for around a third of bank assets, has been delayed. Fitch expects recapitalisation will take place in 2015 but broader restructuring will be long and painful, particularly if the establishment of an asset management company to acquire bad loans to clean up banks' balance sheets is postponed or cancelled. The banking sector's risks to public finances remain significant over the medium term and public banks' ability to finance the economy is structurally impaired.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's view that upside and downside risks to the ratings are currently balanced.

The main factors that could, individually or collectively, lead to a negative rating action are:

-A reversal in fiscal consolidation trend, e.g. related to relaxed budget deficit targets or higher than currently expected bank recapitalisation needs

-A material surge in political, social or security instability in the country

The main factors that could, individually or collectively, lead to a positive rating action are:

-A structural improvement in Tunisia's CAD, leading to reduced external financing needs and stronger international liquidity buffers

-A material strengthening of the banking sector's financial health and supervision, driven by a recapitalisation and a deep restructuring of major public banks

-Improved economic performance related to the effects of reforms on structural indicators, such as the business environment, the investment rate or governance indicators.

KEY ASSUMPTIONS

Fitch assumes that Brent crude will average USD65 and USD75 per barrel in 2015 and 2016 respectively, compared with an average USD101 in 2014, therefore alleviating pressures on the CAD and budget spending

Fitch assumes that economic recovery in the eurozone will gradually strengthen, with real GDP growth averaging 1.4% in 2015 and 1.7% in 2016 (against 0.8% in 2014), therefore improving export prospects for Tunisia.

Fitch assumes that the new government will remain committed to continuity in Tunisia's relationship and commitments to official lenders, including the IMF, which in turn will continue to remain supportive of the country in coming years.