Tunis/Tunisia — The Moody's Investors Service (Moody's) has placed on Friday the Government of Tunisia's B2 issuer ratings on review for downgrade.
The review period, which may extend beyond the usual three-month horizon, will focus on assessing the authorities' capacity to manage such a significant shock in the context of existing economic, financial and social pressures, and evaluating the options to address the resulting fiscal and external funding gap, Moody's said in a press release issued Friday.
According to Moody's, the decision to place the ratings on review for downgrade reflects the acute tightening in global financing conditions that risks precipitating a sustained period of high financing risk, exacerbated further by Tunisia's weakened near-term economic growth prospects, deteriorating fiscal position, and fragile external position.
"For Tunisia, the shock transmits mainly through wider risk premia, a drop in tourism revenue and a sharp slowdown in GDP growth that weaken the sovereign's liquidity and external position and raise its debt burden. The shock increases the risks to Tunisia's credit profile significantly compared to increasing confidence that macroeconomic stability would be sustained at the time of Moody's change in the outlook on Tunisia's ratings to stable from negative last February," the press release reads.
Moody's has also placed the Central Bank of Tunisia's B2 senior unsecured rating and the (P)B2 senior unsecured MTN program and senior unsecured shelf ratings on review for downgrade. The Central Bank of Tunisia is legally responsible for the payments on all of the government's bonds. These debt instruments are issued on behalf of the government.
The government relies to a large degree on external official funding sources to meet its gross financing needs at about 10-15% of GDP. While negotiations for a follow-up IMF program are underway after the cancellation of the remainder of the previous four-year Extended Fund Facility that started in May 2016, the government has secured a $745 million disbursement under the IMF's Rapid Financing Instrument (RFI) and a $280 million loan from the Islamic Development Bank (Aaa stable) to address the additional fiscal costs of its coronavirus response programme.
However, Woody's pointed out that wider fiscal and current account deficits than previously expected due to marked shortfalls in government revenue risks raising Tunisia's financing needs beyond what has been secured so far at a time when financing options are constrained.
According to Moody's, the rating would likely be confirmed at the current B2 level if the review concluded with sufficient confidence that the coronavirus shock will not materially alter Tunisia's debt trajectory and/or erode the recently restored foreign exchange reserve buffer. Similarly, high confidence in Tunisia's ability to secure funding to meet its upcoming debt service payments in the next few years at affordable costs could also support confirmation of the rating at the current level.
Conversely, a downgrade would be likely if there were delays in the availability of or marked increase in the cost of external funding, or a significantly more severe deterioration in Tunisia's fiscal and debt metrics that would weaken Tunisia's fiscal strength and foreign exchange reserves adequacy, the statement reads.