Fitch downgrades Tunisia further into junk territory as IMF deal remains elusive

The country's long-term foreign currency issuer default rating was revised to 'CCC-', which is seven levels below investment grade

Rising consumer prices have fuelled public discontent across Tunisia, resulting in mass protests and countrywide labour strikes. AP

Fitch Ratings has downgraded Tunisia's rating farther into junk territory on concerns that it is struggling to meet International Monetary Fund (IMF) requirements to clinch a financing deal.

The country's long-term foreign currency issuer default rating was revised to 'CCC-' from 'CCC+', which is seven levels below investment grade, the New York-based ratings agency said on Friday.

Junk status makes it more difficult for a country to access capital markets and raise funding that it needs when it wants to borrow.

Fitch considers financing risk in Tunisia, whose economy has been battered by a war, high debt and deteriorating finances, as “high”. The downgrade “reflects uncertainty around Tunisia's ability to mobilise sufficient funding to meet its large financing requirement”, Fitch said.

“We forecast that government financing needs will be high at around 16 per cent of GDP in 2023 [about $7.7 billion] and 14 per cent of GDP in 2024 [$7.4 billion], well above the 2015-2019 average of 9 per cent,” it said.

“This is the result of high fiscal deficits and large debt maturities, both domestically – as the government has increasingly relied on shorter-term domestic financing to compensate for scarce external financing – and externally, including Eurobond repayments [€500 million in 2023 and €850 million in 2024].”

There are also “increased signs that a default is probable, because of the inability to obtain funding from the IMF and unlock associated official creditor financing”, Fitch said.

The IMF funding could help Tunisia out of its worst economic and financial crisis that has been made worse by the rise in energy and commodity prices globally and the effects of Ukraine war that have widened its current account deficit.

Tunisia had sought $4 billion in funding from the IMF almost a year ago, and reached a staff-level agreement with the fund in October for a new 48-month Extended Fund Facility worth about $1.9 billion to support the government’s economic reform programme.

The country's fiscal and external deficits will be likely to total a cumulative 13 per cent of its GDP this year, the IMF had previously said.

The IMF board, however, did not approve the facility, which was planned for December 2022, as prior government actions were not met. The fund specifically pointed out the opposition of Tunisian President Kais Saied to an agreed reform of fuel subsidies as one of the reasons for its failure.

Securing funding from the IMF requires unpopular decisions that include the freezing of wages, and cutting energy and food subsidies at a time when rising inflation has slashed spending power.

Rising consumer prices have fuelled public discontent, resulting in protests and labour strikes. Political turmoil also impeded reform efforts.

In Fitch's Sovereign Rating Model, Tunisia has a medium WBGI ranking, “reflecting low political stability”.

“We believe that the majority of the plan is contingent on an IMF programme, and will likely not be fully mobilised this year, even if an IMF agreement is reached in the second half of 2023,” Fitch said.

Commitments to the IMF programme are also essential to unlock the associated bilateral funding that underpinned Tunisia's financing plan, Fitch said.

We believe that the majority of the plan is contingent on an IMF programme, and will likely not be fully mobilised this year, even if an IMF agreement is reached in the second half of 2023

Fitch Ratings

“In the absence of an IMF agreement, we believe about $2.5 billion of external financing could be attainable in 2023 – mainly from Algeria, African Export-Import Bank, project loans from multilateral partners and increased grants from bilateral partners - intensifying the financing challenges. Alternative financing sources for 2024 are not clear,” it said.

This month, Tunisia announced that it will receive $500 million from African Export-Import Bank to fund its 2023 budget, after passing a law related to the loan.

“Our central scenario assumes an agreement between Tunisia and the IMF by year-end, but this is much later than our previous expectation and risks remain elevated,” it said.

Fitch did note, however, that has been progress on other reforms endorsed by the IMF that led to the October staff level agreement, including the commitment to control the wage bill, which remains central to budget consolidation, and tax measures that have been passed to improve revenue mobilisation.

In January, Moody's Investors Service also downgraded Tunisia’s credit ratings, also on the country's struggles to find financing to meet the government’s large funding requirements.