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Fitch Downgrades Tunisia to 'BB+', Outlook Negative Ratings Endorsement Policy
12 Dec 2012 12:27 PM (EST)
Fitch Ratings-London-12 December 2012: Fitch Ratings has downgraded Tunisia's Long-term foreign currency Issuer Default Rating (IDR) to 'BB+' from 'BBB-' and Long-term local currency IDR to 'BBB-' from 'BBB'. The Outlooks on the IDRs are Negative. The agency has also downgraded Tunisia's Country Ceiling to 'BBB-' from 'BBB' and Short-term foreign currency IDR to 'B' from 'F3'.
RATING RATIONALE
The downgrade of Tunisia's sovereign ratings by one notch reflects the agency's view that the country's economic and political transition is proving longer and more difficult than anticipated and downside risks around the process have therefore increased. In addition large twin budget and current account deficits are leading to deteriorating public and external debt ratios.
Social unrest and political tensions are persisting, adding uncertainty to the political transition in the country. Legislative and presidential elections have been postponed to June 2013 and could be further deferred to end-2013 and the risks around Fitch's base case of a successful transition have increased. Longer transition periods and election campaigns are not conducive for macroeconomic reforms and could fuel social unrest.
Loose economic policies, combined with high oil prices have fuelled twin deficits, with the budget and current account deficits expected to widen to 7.2% and 7.5% of GDP respectively in 2012. Credit growth is rapid, weakening bank liquidity and driving inflation up to an expected 5.5% by year-end. Although monetary policy is tightening, the twin deficits are expected to remain at 6.6% and 6.8% respectively in 2013, putting strain on official foreign currency reserves, which currently only cover three months of current external payments.
Additionally, asset quality is weak in the banking sector due to a legacy of mismanagement, transparency is poor and it is suffering from a prolonged strain on liquidity. It requires urgent recapitalisation and restructuring which will affect public finances and delay economic recovery.
These macroeconomic imbalances will result in higher public and external debt in 2012 and 2013. Financing and refinancing risks are, however, mitigated by a favourable repayment schedule and by the strong support of official bilateral and multilateral creditors, which will finance most of Tunisia's large borrowing needs in coming years.
After a recession in 2011, real GDP growth is expected to rebound to 2.8% in 2012 and 3.5% in 2013, thanks to rapid consumption, fuelled by accommodating monetary and fiscal policies. This has helped the country to partly offset the recession in the eurozone and crisis in Libya, its main trading partners, but growth remains below historical trends.
RATING OUTLOOK - NEGATIVE
The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the ratings:
- A generalisation and intensification of social violence generating political destabilisation and jeopardising the political transition or preventing an appreciable economic recovery.
- A significant further erosion of international reserves, e.g. resulting from widening current account deficit.
- A failure to correct large budget and current account deficits and to stabilise public and external debt ratios.
- Significantly larger than currently anticipated recapitalisation needs in the banking sector (which the IMF estimate at 3% - 7% of GDP) or material delays in its recapitalisation and restructuring.
Future developments that may, individually or collectively, lead to a stabilisation of the Outlook include the following elements:
- The smooth election of a legitimate and stable government which would implement key economic and structural reforms.
- An alleviation of macroeconomic imbalances, illustrated by a decline in the current account deficit, a progressive reduction in budget deficit and a strengthening of international reserves.
KEY ASSUMPTIONS AND SENSITIVITIES The ratings are sensitive to a number of assumptions.
- Fitch assumes that the eurozone remains intact and that there will be no materialisation of severe tail risks to global financial stability that would severely affect Tunisia's external position. Such a scenario could trigger a downgrade.
- Fitch also assumes that the current authorities or the future government will not repudiate external public debt contracted under the former regime on grounds of illegitimacy. If the likelihood of such a repudiation increased, a sovereign downgrade would follow.
- Fitch's ratings are also based on the assumption that the country will benefit from continuing international support by multilateral and bilateral creditors, including the IMF if required. It this support were to falter, this would change the agency's assessment of the rating.
12 Dec 2012 12:27 PM (EST)
Fitch Ratings-London-12 December 2012: Fitch Ratings has downgraded Tunisia's Long-term foreign currency Issuer Default Rating (IDR) to 'BB+' from 'BBB-' and Long-term local currency IDR to 'BBB-' from 'BBB'. The Outlooks on the IDRs are Negative. The agency has also downgraded Tunisia's Country Ceiling to 'BBB-' from 'BBB' and Short-term foreign currency IDR to 'B' from 'F3'.
RATING RATIONALE
The downgrade of Tunisia's sovereign ratings by one notch reflects the agency's view that the country's economic and political transition is proving longer and more difficult than anticipated and downside risks around the process have therefore increased. In addition large twin budget and current account deficits are leading to deteriorating public and external debt ratios.
Social unrest and political tensions are persisting, adding uncertainty to the political transition in the country. Legislative and presidential elections have been postponed to June 2013 and could be further deferred to end-2013 and the risks around Fitch's base case of a successful transition have increased. Longer transition periods and election campaigns are not conducive for macroeconomic reforms and could fuel social unrest.
Loose economic policies, combined with high oil prices have fuelled twin deficits, with the budget and current account deficits expected to widen to 7.2% and 7.5% of GDP respectively in 2012. Credit growth is rapid, weakening bank liquidity and driving inflation up to an expected 5.5% by year-end. Although monetary policy is tightening, the twin deficits are expected to remain at 6.6% and 6.8% respectively in 2013, putting strain on official foreign currency reserves, which currently only cover three months of current external payments.
Additionally, asset quality is weak in the banking sector due to a legacy of mismanagement, transparency is poor and it is suffering from a prolonged strain on liquidity. It requires urgent recapitalisation and restructuring which will affect public finances and delay economic recovery.
These macroeconomic imbalances will result in higher public and external debt in 2012 and 2013. Financing and refinancing risks are, however, mitigated by a favourable repayment schedule and by the strong support of official bilateral and multilateral creditors, which will finance most of Tunisia's large borrowing needs in coming years.
After a recession in 2011, real GDP growth is expected to rebound to 2.8% in 2012 and 3.5% in 2013, thanks to rapid consumption, fuelled by accommodating monetary and fiscal policies. This has helped the country to partly offset the recession in the eurozone and crisis in Libya, its main trading partners, but growth remains below historical trends.
RATING OUTLOOK - NEGATIVE
The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the ratings:
- A generalisation and intensification of social violence generating political destabilisation and jeopardising the political transition or preventing an appreciable economic recovery.
- A significant further erosion of international reserves, e.g. resulting from widening current account deficit.
- A failure to correct large budget and current account deficits and to stabilise public and external debt ratios.
- Significantly larger than currently anticipated recapitalisation needs in the banking sector (which the IMF estimate at 3% - 7% of GDP) or material delays in its recapitalisation and restructuring.
Future developments that may, individually or collectively, lead to a stabilisation of the Outlook include the following elements:
- The smooth election of a legitimate and stable government which would implement key economic and structural reforms.
- An alleviation of macroeconomic imbalances, illustrated by a decline in the current account deficit, a progressive reduction in budget deficit and a strengthening of international reserves.
KEY ASSUMPTIONS AND SENSITIVITIES The ratings are sensitive to a number of assumptions.
- Fitch assumes that the eurozone remains intact and that there will be no materialisation of severe tail risks to global financial stability that would severely affect Tunisia's external position. Such a scenario could trigger a downgrade.
- Fitch also assumes that the current authorities or the future government will not repudiate external public debt contracted under the former regime on grounds of illegitimacy. If the likelihood of such a repudiation increased, a sovereign downgrade would follow.
- Fitch's ratings are also based on the assumption that the country will benefit from continuing international support by multilateral and bilateral creditors, including the IMF if required. It this support were to falter, this would change the agency's assessment of the rating.
Posted in: اخبار السياسة
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