Tunisia: Upgrading Tunisia's Sovereign Rating May Take Some Time (IACE)

Tunis/Tunisia — The upgrading of Tunisia's sovereign rating by Moody's may take some time, as the countries that had fallen to class B3 and managed to avoid the short-term descent to class C are rather few, the Arab Institute of Business Leaders (IACE) said Wednesday.

In a note entitled "Impact of the downgrading of Tunisia's sovereign rating from B2 to B3," the IACE added that "the countries that managed to climb the ladder did so after a minimum of three years, following the implementation of reform and development plans."

According to the same source, the implementation of such reforms should not be justified solely by the improvement of Tunisia's rating or compliance with the requirements of the International Monetary Fund, but rather to give the State a budget margin and thus boost public investment in education and health and unleash the potential of private initiative.

The IACE considers that sovereign ratings mainly affect the amounts, maturity and interest rates when a country issues new securities, adding that beyond its direct effects, this downgrade will have impacts on the financial sector, companies and investors.

/// "Long-term public debt sustainability at risk" ///

Thus, foreign investors are exposed to the risk of impairment of their assets as a result of the depreciation of the local currency.

Physical investments may face the sovereign risk associated with foreign direct investment, the Institute points out, explaining this by the fact that a depreciation of the local currency will be recorded, along with an increase in the inflation rate.

This could lead to a devaluation of fixed assets when consolidating their financial statements.

In order to improve the investment rate, attract and reassure future investors, IACE recommends the government to encourage public and private professional (industrial or service) real estate, to be offered for rent to foreign investors (a rental investment is the acquisition of real estate in order to put it for rent for an indefinite period of time. If this activity is also appreciated, it is because of the various advantages it represents).

As regards the impact of the downgrading of the sovereign rating on financing, the IACE estimated that failing to conclude an agreement with the IMF, and to obtain the total renewal of the American guarantee or an additional guarantee, Tunisia will only be able in the current conditions to raise half of its external financing needs at a short maturity.

Even in the case of the renewal of the American guarantee, the gap would be 2600 million dinars, specifies the same source, pointing out that securing this renewal will not alleviate the pressure on foreign exchange reserves at the time of repayment which will imperatively precede the issue of new securities under guarantee.

According to the IACE, the interest rate applied, in case of borrowing from the external market, would be 11%, with a 7-year maturity, which "will threaten the sustainability of public debt in the long term."

Regarding the repercussions on banks, the Institute said that the downgrading of the sovereign rating will increase the country risk of Tunisian banks in their next evaluations by rating agencies.

/// "The BCT must resist political pressure that could engulf it in the trap of direct budget funding" ///

This future probable downgrading of the rating of Tunisian banks may increase the financing cost in the event of recourse to foreign banks or other funding sources (very limited in Tunisia).

The recourse to third party banks for confirmations and guarantees entails additional costs which are ultimately borne by the companies, IACE warns again.

According to the note, the impact on businesses in a country classified B3 and worsened by the repercussions of the health crisis is basically financial, explaining that the lack of liquidity will inevitably reduce the margin of manoeuvre and worsen their situation, in the absence of measures.

As for public enterprises importing strategic products, whose trade finance is mainly provided by public banks, their suppliers may deem their risks to be high.

They would thus impose new, more restrictive conditions because of the high risk of public enterprises and their banks, notes the IACE, adding that the stock-out of strategic products due to supply concerns is a high and likely risk.

The IACE underlined that, during this period, the Central Bank will have an important role to play in preserving the financial soundness of the banking system, ensuring the availability of the resources needed to finance the economy, securing international trade operations to avoid potential disruptions, reassuring foreign currency accounts' holders in order to avoid a possible flight of capital and, above all, resisting political pressure that may "engulf it in the trap of direct financing of the budget."

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