28 May 2018

Tunisia: Fitch Affirms Tunisia's Long-Term Foreign-Currency Idr At 'B+', Revises Outlook to Negative

Tunis/Tunisia — Fitch Ratings, on Sunday, said it has revised the Outlook on Tunisia's Long-Term Foreign-Currency Issuer Default Rating (IDR) to negative from stable and affirmed the IDR at 'B+'.

Fitch ratings said "Tunisia's rating is weighed down by high and growing public and external debt, reflecting wide twin deficits, subdued economic growth and sluggish reform momentum against a background of social and political tensions."

The revision of the Outlook to Negative reflects increased pressures on external finances and the high uncertainty surrounding the government's capacity to advance the required policies to reduce macroeconomic imbalances," the rating agency specified.

"Slow progress on largely unpopular fiscal reforms and continued upward pressures on wages will lead to a persistently wide saving-investment gap.

Thin external and fiscal buffers exacerbate the economy's susceptibility to exogenous shocks.

The rebound in oil prices and tightening US dollar financing conditions on international markets raise downside risks for Tunisia's external and public finances," it also pointed out.

Moreover, Fitch expects that inflation will remain well above its long-term average of 4% for the foreseeable future. GDP growth is gradually picking up momentum and will average 2.7% in 2018-2019, up from 1.5% in 2016-2017.

Tourism is rebounding from the slump that followed the 2015 terrorist attacks, aided by an improved security environment. Agricultural output is expected to achieve strong growth and the revival of external demand is supporting manufacturing activity.

Over the medium term, the tightening of the policy mix, pressures on purchasing power and rising costs of inputs will increasingly constrain domestic demand."

"The public payroll is a key constraint for consolidation efforts as it absorbed 68% of tax revenues, equivalent to 15% of GDP in 2017. The government's plans to reduce the headcount in the civil service through a restrictive hiring policy will only bear fruit over the medium term. Participation in the negotiated redundancy scheme targeting 10,000 departures in 2018 has been weak, according to preliminary results," the agency also said in its statement.

Fitch projected "the central government (CG) deficit narrow from 6% of GDP in 2017 to 5.6% in 2018, against a budget projection of 4.5% (4.9% excluding grants), and further to 5% in 2019.

This will result in an improvement in the general government (GG) deficit (including social security and local government balances) to 5.4% from 6.3% in 2017. GG debt will continue rising albeit at a slower pace than in previous years, reaching 75% of GDP in 2019, up from 70% in 2017.

With 70% of CG debt denominated in foreign currencies, the debt trajectory is highly vulnerable to shocks on the exchange rate."

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