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Investing.com -- Moody’s Ratings has upgraded the Government of Tunisia’s long-term issuer ratings to Caa1 from Caa2, maintaining a stable outlook. The Central Bank of Tunisia’s senior unsecured debt ratings also improved to Caa1 from Caa2, with the outlook remaining stable. The Central Bank is legally responsible for all government bond payments.
The upgrade is due to an easing of Tunisia’s private-sector external debt and the Central Bank’s ability to maintain stable foreign exchange reserves over the past two years, backed by historically low current account deficits. As a result, Tunisia’s external financing requirements are now lower and better covered by foreign exchange buffers. The ongoing reduction in fiscal deficits also helps to lessen repayment risk despite some financing constraints.
The stable outlook reflects the expectation that Tunisia’s external financing needs will remain contained. However, the ability to respond to shocks will continue to be limited due to high debt levels, and government funding is still reliant on the Central Bank. Risks are balanced. Positive developments could come from improvements in external financing availability and if fiscal consolidation is faster than expected. However, the socio-economic environment will continue to present downside risks to reform momentum and fiscal adjustment efforts.
Tunisia’s country risk ceilings have been raised to B1 from B2 for the local-currency ceiling and B3 from Caa1 for the foreign-currency ceiling. The three-notch gap between the local currency ceiling and the sovereign rating reflects relatively predictable, albeit weakened, institutions; balanced against a broad public sector footprint and a challenging political and social environment which hampers the business environment. The two-notch gap of the foreign-currency ceiling to the local-currency ceiling reflects elevated external debt and a relatively closed capital account, which increase firms’ exposure to potential transfer and convertibility risks.
The upgrade reflects the decrease in the risk of a credit event, mainly driven by lower external financing requirements that are now better covered by foreign exchange buffers. Tunisia’s private-sector external debt has fallen to 6% of the overall government debt stock as of December 2024, from 25% in 2019. Tunisia has a further €700 million eurobond maturing in July 2026, after which only modest private-sector external debt payments fall due.
The Central Bank’s foreign-exchange reserve buffer, which has been utilized for the repayment of recent eurobonds, is likely to remain an important and reliable backstop for forthcoming external debt amortisations. At $7.3 billion following the repayment of the January 2025 eurobond, foreign exchange reserves remain equivalent to around 3.4 months of import cover and fully cover the whole economy’s external financing needs for this year. At the same time, exchange rate stability has been preserved against the dollar and euro, in part reflecting Tunisia’s strict capital controls.
Tunisia’s current account deficits have reached historically low levels of around 2% of GDP in 2023 and 2024, much lower than the average of around 8% of GDP recorded between 2011 and 2022. Moderate but continued growth in tourism exports and remittances, as well as improved terms of trade, have supported the current account. While a moderate widening of the current account deficit to 3-4% of GDP this year and next is forecasted as imports pick up alongside a modest recovery in economic growth, external financing needs will remain lower than in the past.
Gradual fiscal deficit reduction will also contain the sovereign’s funding requirements over time, from around 16% of GDP in 2025 and the similar level recorded annually since 2020. The budget deficit, excluding grants, has narrowed to 6% of GDP in 2024, from 8% of GDP in 2022. The deficit is forecasted to continue narrowing further to 5.5% of GDP this year - in line with the budget target – driven by a continued focus in increasing tax revenue and spending restraint, notwithstanding the elevated public sector wage bill nominal growth target of 9.5% budgeted for this year.
The stable outlook balances the positive developments noted above against continued credit challenges resulting from residual financing constraints, limited fiscal space, and subdued growth prospects. Under the baseline scenario, Tunisia’s external profile is expected to remain stable, although fiscal space to respond to shocks will remain limited by elevated debt.
We expect constraints on the government’s access to external funding to remain, leaving the government reliant on domestic sources. This includes recurrent recourse to direct Central Bank financing in 2024 and 2025 – for TND7 billion (around 4% of GDP) in each year – that increases the risks to the effectiveness of monetary policy and budgetary discipline. Without an IMF programme in place, external financing has consistently underperformed the government’s budget projections in recent years and represented just 2.1% of GDP in 2024. Notwithstanding last year’s more limited performance, a residual level of support from Western and Gulf partners is factored in. Overall external financing averaged close to 5% of GDP annually between 2021 and 2023.
Central government debt remains elevated at an estimated 81% of GDP in 2024, limiting the government’s shock-absorption capacity. A rigid spending structure, including a large public-sector wage bill (albeit gradually decreasing) as well as regressive energy subsidies, constitutes a key structural weakness that weighs on the public finances. The large state-owned enterprise sector exposes the government to contingent liability risks. While Tunisia’s public sector wage bill has declined from 16% of GDP in 2020 to around 13.4% of GDP in 2024, this year’s more elevated spending allocation and the scheduled end of a 2022 triennial salary agreement with social partners risk limiting future reduction.
Although a modest acceleration in economic growth is expected this year, the outlook remains subdued and insufficient to significantly expand employment prospects for Tunisians, particularly young graduates, increasing the risk of social discontent. Growth was modest at 1.4% in 2024, and heavily driven by the agricultural sector. Going forward, average growth of 2.4% in 2025 and 2026 is forecasted. Constraints arise from tight financing conditions, the weakness of public investment, and weak domestic and external demand.
Tunisia’s credit profile is highly exposed to environmental risks, reflected in its E-4 issuer profile score and driven by its exposure to physical climate risks and water stress. Coastal regions - which account for 80% of Tunisia’s total output - are exposed to rising sea levels, while water and desertification risks are increasing in internal regions. Climate variability, erratic precipitation patterns, and severe droughts pose threats to Tunisia’s agricultural sector, which accounts for around 15% of total employment.
Exposure to social risks is very high (S-5), driven by risks related to labor and income. Rigid labor 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. Resilient remittances are a supportive factor and partially compensate for weak income prospects, but the issuer’s shock resilience is constrained by the deterioration in fiscal and debt metrics over the past decade. More generally, progress on reforms, and as a result, fiscal strength, liquidity risks and to some extent external vulnerability risks, are shaped by social considerations and the capacity of the government and civil society stakeholders to align behind credible policy plans or not.
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. Recurring social tensions inhibit policy effectiveness by reducing political consensus for reform, including from the part of civil society institutions. Moreover, the quality of executive and legislative institutions has weakened through successive governments failing to adopt and deliver a coherent policy agenda.
Tunisia’s rating would likely be upgraded if sustained progress on structural reforms and fiscal consolidation were to strengthen growth prospects and improve Tunisia’s fiscal space, indicative of improved policy effectiveness. Improved access to external financing at manageable costs that would obviate the current reliance on monetary financing and demonstrate a further reduction in government liquidity risk, would also be credit positive.
Tunisia’s rating could be downgraded if increased pressures on foreign exchange reserves or a marked tightening in domestic liquidity conditions were to weigh on the government’s ability to meet its debt payment obligations. A renewed material widening of Tunisia’s fiscal and external imbalances would be credit negative.
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