May 26, 2017 / 8:16 PM / 7 months ago

Fitch Affirms Tunisia at 'B+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 26 (Fitch) Fitch Ratings has affirmed Tunisia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'B+'. The Outlook is Stable. The issue ratings on Tunisia's senior unsecured bonds have also been affirmed at 'B+'. Fitch has affirmed the Short-Term Foreign- and Local-Currency IDRs at 'B' and the Country Ceiling at 'BB-'. KEY RATING DRIVERS Tunisia's 'B+' IDRs with Stable Outlook reflect the following key rating drivers: Tunisia has a high and growing government debt burden and external sector imbalances, relatively high contingent liabilities stemming from weak state-owned enterprises and banks, and limited reform momentum in the context of a fragile social and political context. These factors are balanced with international support that provides external financing and foreign currency liquidity, strong structural features relative to 'B' peers including human development and governance, and a clean debt service record. Episodes of social unrest have intensified, as the combination of high unemployment (at 15.3% in 1Q17), rising inflation, and a weakening currency is putting increasing pressure on household purchasing power, despite the government's attempt to channel more investment to under-developed areas. On 10 May, Tunisia's president ordered a deployment of the army to protect oil and phosphate production sites, where in some cases protest activity has interrupted production. The move should allow production from these sites to resume. However, there is a risk, and some early evidence, that the government's firm response may exacerbate tensions. On the other hand, the government's strengthened security apparatus has so far proven effective at preventing further incidents since the series of terrorist attacks in 2015 and early 2016 near the Libyan border. While security risks remain elevated, maintaining stability would contribute to a normalisation in economic conditions. After GDP growth of 1.1% in 2016, Fitch projects growth of 2.3% in 2017 and 2.5% in 2018, to be driven by private consumption (supported by wage growth), a pickup in tourist inflows, and investment (aided by the passing of an investment law in April). Estimates for 1Q17 growth (of 2.1% versus 0.7% a year earlier) are in line with Fitch's full year forecast. External imbalances have worsened, with a wider current account deficit in 1Q17 leading to exchange rate pressures. The current account deficit reached 3.1% of GDP in 1Q17 compared with 1.9% in 1Q16. The deterioration was due to a 57.3% increase in the trade deficit compared with the same period in 2016, as the 20.3% growth in imports, caused primarily by the rise in oil prices, outpaced that of exports (7.4%). Borrowing, remittances and FDI inflows were not sufficient to cover the ensuing gap (of around USD130 million for 1Q17). Against this backdrop, depreciation of the TND accelerated in April, triggered by an exchange rate policy miscommunication. In reaction, the central bank adopted a number of measures including raising the key interest rate by 50bp to 4.75% in April and again to 5% in May, and a one-time USD100 million market injection to ease liquidity strains. This weaker external finance position has been reflected in reserves, which have declined by around USD600 million since the end of 2016, and by over USD1 billion since early 2015. Fitch expects reserves to be partly replenished by scheduled foreign funding disbursements in 2H17, but the lower external buffer limits the capacity of authorities to deal with external shocks. Fitch expects balance of payments pressures to ease in 2H17, in line with the 19% narrowing of the trade deficit in April relative to April 2016. Government proposals to introduce higher tariffs on some non-essential products, as well as the passing of Ramadan (after June), will contribute to the slowdown in import growth from the 1Q17 level. Fitch expects exports growth to be aided by higher GDP growth in Europe, and the projected recovery in tourism, as suggested by a doubling of confirmed bookings this year compared with 2016. Nonetheless, we expect that a structural current account deficit will remain a weakness of Tunisia's sovereign credit profile for the foreseeable future, with the deficit forecast at 10.5% of GDP in 2017 (from 9.0% in 2016) and 9.7% of GDP in 2018. Inflation accelerated to 5.0% yoy in April from 3.7% in 2016, partly due to the exchange rate depreciation, but also reflecting higher food demand in the run up to Ramadan, higher public sector wages, and the energy price increase in 1Q17. Fitch expects inflation to decelerate slightly starting in 2H17, aided by the rate rises, to 5.2% for the year 2017 and 4.9% for 2018. Without fiscal consolidation to reduce foreign financing needs, Fitch expects strains on external balances to continue. The agency estimates Tunisia's fiscal external funding needs to be equivalent to 7% of GDP in 2017. In addition to the EUR850 million Eurobond issued in February and the USD1 billion Qatari guaranteed bond issued in April, Tunisia is relying on multilateral funding to cover the remaining gap. While concessional financing from multilateral and bilateral lenders, representing around 53% of funding sources for this year, remains a key supporting factor for the rating, financing risks related to future disbursement delays cannot be ruled out, in Fitch's opinion. Such delays would leave Tunisia reliant on less predictable or more expensive market financing. The lack of progress in containing wage growth was among the reasons for a postponed IMF disbursement (of about USD320 million) following the first review of the programme agreed in May 2016. A subsequent review was completed in 1Q17 (and disbursement is now expected in June), but the implementation of unpopular reform measures is complicated by the delicate social context and ahead of municipal elections. The agency is projecting a general government deficit of around 6.5% of GDP in 2017 (incorporating a 5.6% of GDP central government deficit and projected social security and local government balances) and 6.2% in 2018. With 67.5% of gross general government debt (GGGD) denominated in foreign currency as of March 2017, increased reliance on foreign funding has rendered public debt vulnerable to exchange-rate fluctuations. Applying the depreciation of the dinar to date from the beginning of 2017 (of about 12% versus the euro and 5% versus the dollar) adds over USD1 billion to Fitch's 2017 foreign debt stock projection. At the same time, the agency's higher GDP deflator forecast has partially offset the rise in terms of GGGD-to-GDP, with Fitch forecasting GGGD-to-GDP to reach 68.5% this year, and to top 70% by 2018. The rapid rise in net external debt, from 20.8% of GDP in 2010 to 46% in 2016, at more than double the 'B' median and forecast by Fitch to surpass 55% by 2018, further increases Tunisia's vulnerability to external shocks. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Tunisia a score equivalent to a rating of 'BB-' on the Long-Term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: - Structural factors: -1 notch, to reflect high security, social, and political risks, which continue to impact growth, external and public finances, including by making reform implementation more difficult. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Outlook is Stable, which means Fitch does not expect developments with a high likelihood of leading to a rating change. However, the main factors that could lead to negative rating action are: - Political destabilisation of the country, for example from social unrest or major terrorist attacks, with adverse impact on the nascent economic recovery. - Continued weakening in external finances, such as a widening of the current account deficit and renewed pressure on international reserves leading to a marked increase in net external debt-to-GDP. - Worsening of the fiscal deficit or a materialisation of contingent liabilities, for example from the weak state-owned banks, leading to an increase in government debt/GDP. The main factors that may individual or collectively lead to positive rating action are: - Improved growth prospects, for example related to structural improvements in the business environment and/or the security situation. - Reduction in budget deficits consistent with lowering the debt-to-GDP ratio in the medium term. - A structural improvement in Tunisia's current account deficit, leading to reduced external financing needs and stronger international liquidity buffers. KEY ASSUMPTIONS Fitch assumes that Brent crude will average USD52.5/b in 2017 and USD55/b in 2018. Fitch assumes that concessional lending from multilateral and bilateral lenders, which constituted 62.5% of external government debt as of March 2017, will remain in place over the medium term. Contact: Primary Analyst Maria Malas-Mroueh Director +44 20 3530 1081 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Amelie Roux Director +33 144 299 282 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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