Moody's lowers outlook on Tunisia's debt but keeps rating stable

Ratings agency cites economic, financial, social and political challenges faced by the country's new government

A mask-clad customer speaks with a fruit seller at the central market in Tunisia's capital Tunis. Moody's expects the country's economy to contract 6.5 per cent in the wake the Covid-19 crisis. AFP

Moody's Investors Service maintained its B2 issuer rating on Tunisia, citing the strength of the North African country’s foreign exchange buffers, but changed its outlook to negative.

The ratings agency cited the economic, financial, social and political challenges faced by the country's new technocratic government in implementing its reform agenda as the reason for its more cautious assessment. The country's sovereign debt rating has been under review since April.

The confirmation of its B2 rating reflects the “resilience of the foreign exchange reserve buffer observed since the opening of the review, as a backstop for maturing external liabilities over the next year”, Moody’s said in a statement on Wednesday.

"The instalment of a new technocratic government in September supports Moody's assessment that Tunisia's institutions and governance will contribute to policy continuity.”

The government is likely to maintain medium-term fiscal and economic reform implementation under a new International Monetary Fund programme. Moody’s expects monetary and fiscal policy to continue to be aimed at “containing Tunisia's external and fiscal imbalances”, which will support its access to “official and market financing”.

Tunisia's economy, which is largely reliant on tourism, has taken a hit in the wake of the Covid-19 crisis. Moody's expects its gross domestic product to contract 6.5 per cent this year, followed by 4 per cent growth as it recovers from the pandemic shock in 2021. The ratings agency expects growth to average 2-3 per cent per year thereafter. The IMF in April approved a $745 million emergency loan for Tunisia to help the country mitigate the impact of the Covid-19 crisis on its economy.

“The pandemic exacerbates a decline in trend growth over the past decade,” Moody’s said. The government's high debt ratio constrains scope for a rapid increase in public investment as a means to boost growth potential.”

Taking weaker revenue into account on the back of the pandemic shock, Moody's expects the fiscal deficit to widen to 7 per cent of GDP in 2020, followed by 4.5 per cent in 2021. Tunisia recorded a deficit of 3.6 per cent in 2019.

The ratings agency also expects Tunisia’s debt burden to increase to over 80 per cent of GDP this year and to stabilise within the 80-85 per cent range around 2024.

“A number of structural weaknesses weigh on public finances, including a large public-sector wage bill amounting to over 15 per cent of GDP, which remains to be addressed over the long term,” Moody’s said.