Moody’s Investors Service, on Thursday, downgraded the Government of Tunisia’s long-term foreign-currency and local-currency issuer ratings to Caa1 from B3 and maintained the negative outlook, it said in a statement.
The rating agency has also downgraded the Central Bank of Tunisia’s senior unsecured ratings to Caa1 from B3 and the senior unsecured shelf rating to (P)Caa1 from (P)B3 and maintained the negative outlook. The Central Bank of Tunisia is legally responsible for the payments on all of the government’s bonds.
“The downgrade to Caa1 reflects weakening governance and heightened uncertainty regarding the government’s capacity to implement measures that would ensure renewed access to funding to meet high financing requirements over the next few years,” Moody’s pointed out, adding “there is a risk that, if significant funding is not secured, high liquidity pressure may lead to default. This risk is partly mitigated by the past build-up of the foreign exchange reserve buffer that provides some backstop to upcoming external debt service payments in the short term.”
The negative outlook captures downside risks related to possible protracted delays in reforms and reform-dependent funding which would erode FX reserves through drawdowns for debt service payments, thereby exacerbating balance of payment risks.
In this scenario, the probability of a public sector debt restructuring that would entail losses for private sector creditors would rise, Moody’s said.
“Tunisia’s country ceilings have been lowered by one notch. Namely, Tunisia’s local-currency country ceiling was lowered to B1 from Ba3. The three-notch gap to the sovereign rating reflects weakening institutions, a broadening public sector footprint, external competitiveness constraints and a challenging political and social environment which hamper the business environment”, Moody’s indicated.
The foreign-currency ceiling was lowered to B3 from B2. The two-notch gap to the local currency ceiling reflects persistent external imbalances and reliance on foreign inflows which increase firms’ exposure to potential transfer and convertibility risks.
Weakening governance increases uncertainty regarding the government’s capacity to implement fiscal and economic reforms
The downgrade is underpinned by weakening governance, in particular lower quality of Tunisia’s institutions, significantly raising liquidity risks which could lead to default over time.
The constitutional crisis that erupted on July 25 following President Kais Saied’s suspension of the former government and parliament based on temporary emergency powers is being exacerbated by the absence of a constitutional court with authority to settle disputes between executive and legislative powers. Continued uncertainty regarding the institutional framework reduces the prospect for structural fiscal and economic reform upon which hinges renewed access to official and commercial funding sources to meet the government’s upcoming funding needs.
While the recent formation of a new government led by Prime Minister Najla Bouden Romdhane sets the stage for renewed negotiations with official and bilateral lenders, a consensus on long-standing reforms, including the public sector wage bill, energy subsidy reform and reform of state-owned enterprises, will be challenging to secure among all stakeholders, including civil society institutions. Such reforms are critical to rebalance Tunisia’s fiscal accounts and ensure debt sustainability in the future amid a subdued growth outlook.
Loss of international capital market access exacerbates government liquidity risk
External and domestic liquidity conditions have tightened significantly in the wake of the constitutional crisis, leading to uncertainty regarding the government’s capacity to meet its upcoming funding needs. Moody’s fiscal deficit estimate of 7.7% of GDP in 2021 and 5.9% in 2022 implies gross borrowing requirements of about 18% of GDP this year and 16% in 2022.
Budget execution data to July 2021 show an execution rate of 30% for external borrowings, reflecting prohibitive financial market access (spreads have widened to over 1,000 basis points), with a budgeted $2.3 billion (5.2% of GDP) outstanding through this channel. The government may seek alternative sources of funding such as bilateral loans and a drawdown of the IMF’s recently allocated Special Drawing Rights amounting to $740 million. On the domestic side, a renewed increase in commercial banks’ refinancing needs at the central bank indicates increasing absorption constraints.
For 2022, renewed access to multilateral and bilateral loans will most likely rely on the successful negotiation of an IMF program that has remained elusive since the previous four-year program was cancelled in April 2020.
In the short term, the Caa1 rating remains supported by the $7.8 billion foreign exchange reserve buffer as of September 2021 that offers a backstop for the government’s remaining funding needs this year and estimated external refinancing needs at about $1.5 billion in 2022 before increasing thereafter.
Source: Tap News Agency