Fitch Ratings has downgraded Arab Tunisian Bank's (BVMT:ATB) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to 'B' from 'B+'. The Outlook is Negative.

A full list of rating actions is at the end of this commentary.

The ratings action follows the downgrade of Tunisia sovereign rating on 8 July 2021, and downward revision of the Country Ceiling to 'B' from 'B+'. The downgrade reflects heightened fiscal and external liquidity risks leaving Tunisia exposed to the risk of a deterioration of external buffers (see "Fitch Downgrades Tunisia to 'B-'; Outlook Negative" available on www.fitchratings.com).

Fitch has also revised the outlook on Tunisian banks' 'b-' operating environment to Negative from Stable, primarily to reflect heightened risks to the banks' credit profiles resulting from a weakened sovereign, given banks' high exposures to the state, which we estimate at 15% of total sector assets at end-November 2020.

In addition, banks are significantly exposed to highly indebted state-owned enterprises (SOEs), most of which are in a poor financial position. Under Fitch's base case, the Tunisian economy is projected to grow 3.4% in 2021 after a contraction of 8.8% in 2020. However, the recent surge in Covid-19 infections and associated containment measures increase downside risks to the 2021 growth forecast. We expect banks' financial profiles to remain under pressure from the increased challenges in the operating environment, and their key credit metrics are likely to be weaker, notwithstanding state-support relief.