Moody's cuts Tunisia's ratings on weak governance and maintains negative outlook

North African country at risk of a default if significant funding is not secured

Prime Minister Najla Bouden takes the oath during the country's new government swearing-in ceremony, in Tunis, Tunisia October 11, 2021. Tunisian Presidency/Handout via REUTERS ATTENTION EDITORS - THShow more

Moody's Investors Service downgraded Tunisia's long-term foreign currency and local currency issuer ratings to Caa1 from B3.

The downgrade takes the North African country to seven levels below investment grade and is based on weakening governance and heightened uncertainty regarding the government's capacity to implement measures that ensure renewed access to funding to meet its high financing requirements over the next few years, the ratings agency said. The country's negative outlook was maintained.

The New York-based ratings agency says that the North African country is at risk of a default stemming from high liquidity pressure if significant funding is not secured, with the country's large external imbalances and reliance on continued inflows limiting the degree to which reserves can be drawn down further without jeopardising its currency and price stability.

"The negative outlook captures downside risks related to possible protracted delays in reforms and reform-dependent funding which would erode FX reserves through drawdowns for debt service payments, thereby exacerbating balance of payment risks. In this scenario, the probability of a public sector debt restructuring that would entail losses for private sector creditors would rise," Moody's said.

The downgrade reflects the economic challenges facing Tunisia, which is battling a bloated public wage bill, high unemployment and loans coming due from foreign lenders, exacerbated by the central bank's worries about an acute shortage of external financial resources and foreign currency.

The country needs to raise at least $3.5 billion in 2021 to roll over foreign debts and pay the wages of hundreds of thousands of public-sector employees.

This week, a new government was sworn in, with President Kais Saied on Wednesday appointing Najla Bouden Romdhane as the new prime minister in an effort to steer the country out of economic and political crises. Ms Bouden – the first woman to hold the position in Tunisia and the Arab World's first female prime minister – has made fixing public finances and implementing economic reforms as her priorities.

Moody's said Tunisia's external and domestic liquidity conditions have tightened significantly in the wake of the constitutional crisis, which erupted on July 25 after Mr Saied's suspension of the former government and parliament, leading to uncertainty regarding the government's capacity to meet its upcoming funding needs.

The agency's fiscal deficit estimate of 7.7 per cent of GDP in 2021 and 5.9 per cent in 2022 implies gross borrowing requirements of about 18 per cent of GDP this year and 16 per cent in 2022.

Moody's says that the government may seek alternative sources of funding, such as bilateral loans and a drawdown of the International Monetary Fund's recently allocated Special Drawing Rights amounting to $740 million. On the domestic side, a renewed increase in commercial banks' refinancing needs at the central bank indicates increasing absorption constraints.

For 2022, renewed access to multilateral and bilateral loans will most likely rely on the successful negotiation of an IMF programme that has remained elusive since the previous four-year programme was cancelled in April last year.

Moody's expects Tunisia's debt-to-GDP ratio to rise to almost 90 per cent of GDP this year from 84.7 per cent in 2020, stabilising below 95 per cent over the next few years, taking into account a weaker than previously expected economic expansion by 3.5 per cent this year, followed by 2.5 per cent thereafter.

"Continued uncertainty regarding the institutional framework reduces the prospect for structural fiscal and economic reform upon which hinges renewed access to official and commercial funding sources to meet the government's upcoming funding needs," Moody's said.