Moody’s Investors Service (“Moody’s”) on September 30 placed the Government of Tunisia’s Caa1 long-term foreign-currency and local-currency issuer ratings on review for downgrade. Prior to this rating action, Tunisia’s rating was Caa1 with a negative outlook.
Moody’s has also placed the Central Bank of Tunisia’s Caa1 senior unsecured rating and (P)Caa1 senior unsecured shelf rating 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. Prior to this rating action, the Central Bank of Tunisia’s rating was Caa1 with a negative outlook.
“The decision to place the ratings on review for downgrade reflects Moody’s assessment that in the absence of timely agreement on a new International Monetary Fund (IMF) programme, Tunisia’s increasingly elevated government liquidity risks and fragile external position raise the risk of default.”
“Tunisia’s large fiscal and external imbalances and elevated refinancing risks represent significant credit weaknesses, which alongside social tensions have been exacerbated by the global implications of the Russia-Ukraine military conflict.”
Moody’s review period will focus on evaluating the authorities’ progress in securing Executive Board approval of a new IMF programme – key to alleviating financing and external vulnerability risks, and ultimately social risks – before the end of the year; and the likelihood of maintaining sufficient official financing sources in the coming years to avert a balance of payments or fiscal crisis with negative social implications.
Tunisia’s ceilings remain unchanged at B1 for the local-currency ceiling and B3 for the foreign-currency ceiling, said the agency, adding that the three-notch gap between the local currency ceiling and the sovereign rating reflects a broad public sector footprint, external imbalances and a challenging political and social environment which hampers the business environment; balanced against relatively predictable, albeit weakened, institutions. The two-notch gap of the foreign currency ceiling to the local currency ceiling reflects persistent external imbalances and reliance on foreign inflows which increase firms’ exposure to potential transfer and convertibility risks.
The successful signing of an IMF programme has remained elusive since the previous four-year arrangement was terminated in April 2020. However, Moody’s pointed out that “the publication of a reform programme by the government in June, and the conclusion on 15 September of a salary agreement with social partners implying some containment of the public sector wage bill in real terms over the next three years, represent important signs of progress in that direction.”
Moody’s expects risks to Tunisia’s credit profile to remain skewed to the downside even under an eventual IMF agreement. Access to international capital markets is likely to remain closed over 2023, and official sector financing prospects would remain dependent on timely implementation of the reforms targeted under a programme.
Tunisia’s ESG Credit Impact Score is very highly negative (CIS-5), reflecting very high exposure to social risks and a weak governance profile. While remittances partially compensate for weak income prospects, the sovereign’s capacity to respond to social risks is increasingly threatened by the government’s balance-sheet constraints.
Tunisia’s credit profile is moderately exposed to environmental risks, reflected in its E-3 issuer profile score and driven by its exposure to rising sea levels in coastal areas and to increasing water and desertification risks in internal regions.
Exposure to social risks is very high (S-5), driven by risks related to labour and income. Rigid labour markets and weak employment generation result in high unemployment rates, including among young graduates. These constraints make it difficult to absorb the well-educated workforce, contributing to negative net migration flows every year and to brain drain.
Tunisia’s governance is weak (G-4 issuer profile). Although the country’s consensus-building orientation has been instrumental in securing the successful democratic transition with all stakeholders involved, in recent years the policy decision making process has been significantly impaired.
