Tunisia in trouble after S&P cuts credit rating

What's Down: Tunisia's struggle to rebound from revolutionary turmoil could get even tougher.

Tunisia's struggle to rebound from revolutionary turmoil last year is likely to become even tougher after Standard & Poor's cut the country's sovereign credit rating to junk.

The action risks hampering the country's ability to borrow internationally to help turn around its weak economy.

S&P on Wednesday lowered Tunisia's rating by two notches to BB, citing weaker-than-forecast economic, fiscal and external debt indicators. The ratings outlook for Tunisia was now stable, it said.

"In general when the rating goes down, it tends to make it more expensive or difficult for a country to raise funds, particularly in this case when the rating has gone into non-investment grade," said Kai Stukenbrock, the senior director of international public finance ratings at S&P in Dubai. "Certain institutional investors tend to have investment guidelines or rules which tell institutional investors they can only invest in investment grade, for example, and this could have repercussions."

Debt issued by a "junk rated" country usually offers interest rates at least three to four percentage points higher than safer government issues.

Tunisia has already outlined plans to borrow this year after a revolution last year that hurt economic activity and raised public spending. The country raises about a third of its financing through international markets.

In order to help minimise the impact of its weak credit rating, the government is looking at different ways to borrow at lower rates than its risk profile would usually enable.

Tunisia planned to issue US$300 million to $350m in debt guaranteed by the United States government in July, Chaker Soltani, the director general at the finance ministry, was quoted by Reuters as saying on Wednesday.

It follows Tunisia's securing a $500m loan from Qatar last month. The loan carried an interest rate of 2.5 per cent, the central bank said at the time.

Tunisia needs the cash to help plug a forecast budget deficit of 6.6 per cent this year. It also needs to pay for higher spending on development and generating jobs.

In a statement, S&P said it did "not believe that Tunisia's transitional government will be able to take proactive corrective measures against a weakening economic and financial backdrop that would be consistent with an investment-grade rating".