Moody’s places Tunisia’s debt ratings on review for downgrade

The country faces the risk of default in the absence of an IMF bailout agreement, ratings agency says

Tunisia is struggling to revive its public finances as discontent grows over inflation running at nearly 9 per cent and a shortage of food in shops. Reuters

Moody’s Investors Service placed Tunisia’s long-term foreign currency and local currency issuer ratings on review for downgrade.

Prior to this action, Tunisia’s rating was Caa1 with a negative outlook, the New York-based ratings agency said in a statement on Saturday.

“The decision to place the ratings on review for downgrade reflects our assessment that in the absence of timely agreement on a new International Monetary Fund programme, Tunisia’s increasingly elevated government liquidity risks and fragile external position raise the risk of default,” Moody’s said.

“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.”

The North African country was seeking to reach a deal with the IMF last month on a loan of between $2 billion and $4bn over three years, the central bank governor said.

Tunisia, which is suffering its worst financial crisis yet, is seeking an IMF loan to save public finances from collapse.

The country is struggling to revive its public finances as discontent grows over inflation running at nearly 9 per cent and a shortage of food in shops because the country cannot afford to pay for some imports.

The government and the Tunisian General Labour Union (UGTT) signed a deal last month to boost public sector wages by 5 per cent. But they did not announce any further agreement on reforms needed for an IMF bailout.

The IMF has signalled it will not move forward with a bailout sought by Tunis unless the government brings on board the UGTT, which says it has more than a million members and has previously shut down the economy with strikes.

Moody’s also placed the Central Bank of Tunisia’s Caa1 senior unsecured rating and Caa1 senior unsecured shelf rating on review for downgrade.

“The Central Bank of Tunisia is legally responsible for payments on the government’s bonds. These debt instruments are issued on behalf of the government,” the ratings agency said.

“Prior to this rating action, the Central Bank of Tunisia’s rating was Caa1 with a negative outlook.”

The review period will focus on evaluating the authorities’ progress in winning executive board approval for a new IMF programme, which is key to alleviating financing and external vulnerability risks, and ultimately social risks, before the end of the year, according to Moody’s.

It will also focus on the likelihood of the Tunisia government maintaining sufficient official financing sources in the coming years to avert a balance of payments or fiscal crisis with negative social implications, Moody’s added.

The agency estimated the government’s gross financing needs for this year at around 17 per cent of gross domestic product (GDP) and remaining above 15 per cent of GDP in 2023 as a result of rising debt amortisation payments and a still-high fiscal deficit.

Moody’s also expects Tunisia’s current account deficit to reach close to 10 per cent of GDP this year and remain around 8 per cent of GDP in 2023, from 5.9 per cent of GDP in 2021.

“In the absence of international market access at affordable costs and in view of domestic financing constraints, meeting these levels is achievable only through the concessional financing that would be unlocked by a new IMF programme,” Moody’s said.

“Beyond the financing provided by the IMF itself, further funds would likely be catalysed through a broad base of multilateral and bilateral partners.”

The IMF is likely to seek further reform commitments, including the restructuring of loss-making state-owned enterprises and the gradual phasing out of consumption subsidies in favour of more targeted financial transfers, the agency said.

“A downgrade of the rating would be likely if the sovereign were unable to secure in a timely manner multilateral financing, through the conclusion of an IMF agreement that is sustained and large enough to materially and durably ease liquidity pressures,” it added.

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