The shocks of the Covid-19 pandemic will continue to weigh down the Tunisian banking system, undermining its asset quality and profitability, according to a report by Moody's.
The North African country's economy, which contracted 8.8 per cent in 2020, is expected to see growth of 4 per cent in 2021. The ratings agency, however, expects pre-Covid-19 economic output to recover in absolute terms only by 2023.
The agency rates Tunisia's sovereign component at ba3 with the outlook for the country's banking sector set at "weak to very weak".
A subdued economic recovery and tepid credit growth will continue to hurt the banking sector's performance, Moody's said.
"The sector faces risks from lower tourism and weak external demand amid the pandemic, as well as higher oil prices," Badis Shubailat, an analyst at Moody’s Investors Service, said.
"Return on assets will inch lower on subdued lending growth, competition for deposits and high provisioning needs."
Tunisian banks' problem loans ratio is expected to remain high this year, even as they ease their reliance on central bank funding.
A slump in tourism, which accounts for 13.9 per cent of gross domestic product and is an important source of employment for the country, is also set to weigh down the wider economy.
"Delays in the reform agenda, exacerbated by a highly fragmented political landscape, could reignite social discontent," the ratings agency warned.
The North African country had 341,952 cases of Covid-19 with 12,513 deaths as of Friday, according to Worldometer, which tracks the pandemic.
The coronavirus pandemic has hit the global economy, which slid into a deep recession last year. It forced governments to close borders, introduce movement restrictions and shut all but essential businesses, impacting tourism-dependent countries like Tunisia.
The Tunisian banking system also took a hit to profitability due to the shocks of the pandemic, with net income on tangible assets declining to 0.5 per cent in the first half of 2020 from 1.6 per cent in 2019.
The sector's problem loans also remain elevated at 13 per cent of all loans as of September. The proportion remained unchanged since 2017, Moody's said.