Moody’s downgrades Tunisia’s credit ratings amid funding crunch

The North African country is seeking $4 billion from the IMF to shore up its finances

Tunisia is seeking $4 billion in funding from the International Monetary Fund to shore up its finances. EPA

Moody's Investors Service downgraded Tunisia’s credit ratings as the North African country struggles to secure financing to meet the government’s large funding requirements amid the economic turmoil caused by the coronavirus pandemic and the fallout of the Ukraine crisis.

Moody’s cut Tunisia’s long-term foreign-currency and local-currency issuer ratings to Caa2 from Caa1 and changed the outlook to negative, the New York-based ratings agency said in a statement on Saturday.

Caa ratings are judged to be of poor standing and are subject to very high credit risk.

“The downgrade is driven by Moody's assessment that the absence of comprehensive financing to date to meet the government's large funding needs raises default risks to a point no longer commensurate with a Caa1 rating,” the ratings agency said.

“A new IMF (International Monetary Fund) programme has yet to be secured, despite reaching staff-level agreement in October 2022, aggravating an already challenging funding position and compounding the pressures on Tunisia's foreign exchange reserve adequacy.”

Tunisia’s economy was severely affected by the war in Ukraine, which widened its current account deficit, as well as the coronavirus-induced slowdown, high debt and deteriorating finances, all of which required that it introduce several reforms to secure funding from the IMF.

The North African country had sought $4 billion in funding from the IMF, which could help it to steer the nation out of its worst economic and financial crisis that has been exacerbated by the rise in energy and commodity prices globally.

In October, Tunisia reached a staff-level agreement with the IMF for a new 48-month Extended Fund Facility (EFF) worth about $1.9 billion to support the government’s economic reform programme. However, it is yet to secure funding from the Washington based lender.

“Further protracted delays in securing a new IMF programme would erode foreign exchange reserves through drawdowns for debt service payments, thereby exacerbating balance of payment risks and the probability of a debt restructuring that would entail losses for private sector creditors,” Moody’s said.

Even after the IMF agreement, Tunisia’s credit profile will remain skewed to the downside as financing projects depend "on timely and sustained reform implementation that will invariably prove challenging in the face of governance weaknesses and acute exposure to social risks,” Moody's said.

Tunisia is introducing economic reforms to shore up its finances. Last month, the Tunisian government raised the price of drinking water by as much as 23 per cent as the country seeks to reduce subsidies to qualify for IMF assistance.

Tunisia expects to reduce its fiscal deficit to 5.5 per cent in 2023, from 7.7 per cent last year, as the North African country continues to carry out austerity measures to boost growth.

Spending on subsidies and on financial operations next year is projected to drop 26.4 per cent and 56.5 per cent respectively, while tax revenue will rise by 12.5 per cent, state-owned news agency Tunis Afrique Presse reported last month.

Moody's has also downgraded the Central Bank of Tunisia's senior unsecured debt ratings and senior unsecured shelf rating to Caa2 and (P)Caa2 from Caa1 and (P)Caa1 respectively, and changed the outlook to negative.