Tunisia Foreign And Local Currency Ratings Lowered To 'BB/B' On Weaker Economic Indicators; Outlook Stable
Publication date: 23-May-2012 00:01:19 EST
- For the Republic of Tunisia, economic, fiscal, and external indicators--both in reported data and in our revised forecasts--are now weaker than we previously anticipated.
- Despite overall stability and consensus since the removal of President Ben Ali in early 2011, we believe pronounced medium-term policy uncertainties will persist, at least until Tunisia adopts a new constitution and elects a government. We do not expect this before mid-2013.
- We are therefore lowering our long- and short-term foreign currency sovereign credit ratings on Tunisia to 'BB/B' from 'BBB-/A-3'. We are lowering the long- and short-term local currency ratings to 'BB/B' from 'BBB/A-3'. We are equalizing our long-term local currency rating with the long-term foreign currency rating.
- We assign a recovery rating of '3' to the Central Bank of Tunisia, indicating a "meaningful" (50%-70%) recovery range in case of default.
- The stable outlook reflects our expectation that, despite uncertainties, the ongoing transition to the 2013 elections will occur without major political conflict. The outlook also reflects our expectation that Tunisia's fiscal and external balances will gradually recover over the next few years.
FRANKFURT (Standard & Poor's) May 23, 2012--Standard & Poor's Ratings Services today lowered its long- and short-term foreign currency sovereign credit ratings on the Republic of Tunisia to 'BB/B' from 'BBB-/A-3'. We lowered the long- and short-term local currency ratings to 'BB/B' from 'BBB/A-3'. The
outlook is stable.
At the same time we lowered our long- and short-term foreign currency issuer credit ratings on the Central Bank of Tunisia to 'BB/B from 'BBB-/A-3' and lowered the long- and short-term local currency ratings to 'BB/B from 'BBB/A-3'. The outlook is stable.
The recovery rating on the Central Bank of Tunisia is '3', indicating a "meaningful" recovery in case of default in the range of 50%-70%.
The transfer and convertibility (T&C) assessment is revised to 'BB+'.
Although overall political stability since the removal of President Ben Ali in early 2011 has stayed within our expectations, we do not believe that Tunisia's transitional government--in office since December 2011--will be able to take proactive corrective measures against a weakening economic and financial backdrop that would be consistent with an investment grade rating.
However, once a draft constitution is approved by referendum and parliamentary elections take place (planned for no later than June 2013), we anticipate the new government will find its feet and that Tunisia's political and economic indicators will be more consistent with the 'BB' ratings category. Our stable outlook on the long-term ratings indicates that we believe the political transition should be smooth and the country should withstand potentially considerable external shocks emanating from Europe.
At the same time we lowered our long- and short-term foreign currency issuer credit ratings on the Central Bank of Tunisia to 'BB/B from 'BBB-/A-3' and lowered the long- and short-term local currency ratings to 'BB/B from 'BBB/A-3'. The outlook is stable.
The recovery rating on the Central Bank of Tunisia is '3', indicating a "meaningful" recovery in case of default in the range of 50%-70%.
The transfer and convertibility (T&C) assessment is revised to 'BB+'.
Although overall political stability since the removal of President Ben Ali in early 2011 has stayed within our expectations, we do not believe that Tunisia's transitional government--in office since December 2011--will be able to take proactive corrective measures against a weakening economic and financial backdrop that would be consistent with an investment grade rating.
However, once a draft constitution is approved by referendum and parliamentary elections take place (planned for no later than June 2013), we anticipate the new government will find its feet and that Tunisia's political and economic indicators will be more consistent with the 'BB' ratings category. Our stable outlook on the long-term ratings indicates that we believe the political transition should be smooth and the country should withstand potentially considerable external shocks emanating from Europe.
Tunisia's GDP contracted by 1.8% in real terms in 2011 (our previous projection was for zero growth; see "Sovereign Risk Indicators" published Dec. 28, 2011). Lower tourism receipts and a widening trade deficit led to a weaker external liquidity position combined with a rising short-term external debt stock. We anticipate that recovery will be slow, particularly given the weak economic environment in the European Union--by far Tunisia's largest export market and source of foreign direct investment (FDI) and tourists. Unemployment has also risen sharply to be now estimated at more than 18%, since the January 2011 revolution.
Increased government spending to support domestic demand and livelihoods helped prevent Tunisia's 2011 recession from deepening, but it led to a sharp deterioration in the public finances. We now anticipate a general government deficit of close to 7.0% of GDP in 2012, higher than our previous forecast of 3.9%. We expect fiscal consolidation to be gradual as economic and social conditions make a more rapid adjustment difficult, with the deficit still above 3.0% of GDP in 2015.
To fund this deficit, we believe general government debt will rise substantially to peak at 49% in 2013, from around 40% in 2010, before stabilizing and gradually declining thereafter. We believe that the government's access to official financing will remain strong as long as an elected government articulates a clear medium-term economic plan.
External liquidity has also suffered. Amid a collapse in tourism receipts in 2011, the current account deficit widened sharply to around 7.5% of GDP (two percentage points higher than our previous forecast) and we anticipate that it will remain above 5.0% through to 2015. Both narrow net external debt and gross external financing needs have risen sharply relative to current account receipts (CARs) and official useable reserves. We project Tunisia's 2012 gross external financing needs as a proportion of CARs and useable reserves at around 109%, which we anticipate will be financed by public sector borrowing from official creditors, FDI, and an increase in private sector debt. We believe about $5.2 billion of short-term external debt, comprised mostly of non-resident deposits and trade-related credit, will be fully rolled over.
Increased government spending to support domestic demand and livelihoods helped prevent Tunisia's 2011 recession from deepening, but it led to a sharp deterioration in the public finances. We now anticipate a general government deficit of close to 7.0% of GDP in 2012, higher than our previous forecast of 3.9%. We expect fiscal consolidation to be gradual as economic and social conditions make a more rapid adjustment difficult, with the deficit still above 3.0% of GDP in 2015.
To fund this deficit, we believe general government debt will rise substantially to peak at 49% in 2013, from around 40% in 2010, before stabilizing and gradually declining thereafter. We believe that the government's access to official financing will remain strong as long as an elected government articulates a clear medium-term economic plan.
External liquidity has also suffered. Amid a collapse in tourism receipts in 2011, the current account deficit widened sharply to around 7.5% of GDP (two percentage points higher than our previous forecast) and we anticipate that it will remain above 5.0% through to 2015. Both narrow net external debt and gross external financing needs have risen sharply relative to current account receipts (CARs) and official useable reserves. We project Tunisia's 2012 gross external financing needs as a proportion of CARs and useable reserves at around 109%, which we anticipate will be financed by public sector borrowing from official creditors, FDI, and an increase in private sector debt. We believe about $5.2 billion of short-term external debt, comprised mostly of non-resident deposits and trade-related credit, will be fully rolled over.
The ratings continue to be constrained by the country's fragile banking system, which we believe has weak asset quality (see "BICRA On Tunisia Maintained At Group '8'," Nov. 9, 2011). Domestic claims on the private sector grew by 13% in 2011 and we anticipate this to grow by a further 11% in 2012, in part due to widespread restructurings of principal and interest of loans.
With per capita GDP currently less than $5,000, Tunisia is a middle-income country with development needs that will stay high in the medium-to-long term, constraining fiscal expenditure flexibility.
Supporting the ratings are a relatively well-diversified economy and well-educated labor force, a broadly supportive business environment, increasing media freedoms, and improving accountability of state institutions.
The long-term local currency rating has been equalized with the foreign currency rating at 'BB', as we now do not expect significant progress in moving to a floating exchange rate regime from the current soft peg to a basket of currencies. Under our criteria, greater monetary policy independence is a condition for such a rating distinction.
The T&C assessment of 'BB+' reflects our opinion that the likelihood of the sovereign restricting access to foreign exchange needed by Tunisia-based nonsovereign issuers for debt service is slightly lower than the likelihood of the sovereign defaulting on its foreign-currency obligations. While the government has current account repatriation and foreign exchange surrender requirements in addition to other controls, they are being reduced. However, this process may cease or reverse in a severe downside scenario.
The '3' recovery rating on the Central Bank of Tunisia indicates a "meaningful" recovery in case of default in the range of 50%-70%. We assign recovery ratings to all rated speculative grade sovereigns that have a substantial amount of commercial debt outstanding. The recovery analysis assumes that Tunisia might default if high current account imbalances persist and the country's net external liability position rises significantly above its 2003 peak of nearly 240% of CARs, which we do not currently project. External funding could come under pressure if FDI remains constrained by political uncertainties, and the banks, which have significant short-term external debt, experience roll-over problems. Such developments might quickly lead to higher fiscal pressures.
With per capita GDP currently less than $5,000, Tunisia is a middle-income country with development needs that will stay high in the medium-to-long term, constraining fiscal expenditure flexibility.
Supporting the ratings are a relatively well-diversified economy and well-educated labor force, a broadly supportive business environment, increasing media freedoms, and improving accountability of state institutions.
The long-term local currency rating has been equalized with the foreign currency rating at 'BB', as we now do not expect significant progress in moving to a floating exchange rate regime from the current soft peg to a basket of currencies. Under our criteria, greater monetary policy independence is a condition for such a rating distinction.
The T&C assessment of 'BB+' reflects our opinion that the likelihood of the sovereign restricting access to foreign exchange needed by Tunisia-based nonsovereign issuers for debt service is slightly lower than the likelihood of the sovereign defaulting on its foreign-currency obligations. While the government has current account repatriation and foreign exchange surrender requirements in addition to other controls, they are being reduced. However, this process may cease or reverse in a severe downside scenario.
The '3' recovery rating on the Central Bank of Tunisia indicates a "meaningful" recovery in case of default in the range of 50%-70%. We assign recovery ratings to all rated speculative grade sovereigns that have a substantial amount of commercial debt outstanding. The recovery analysis assumes that Tunisia might default if high current account imbalances persist and the country's net external liability position rises significantly above its 2003 peak of nearly 240% of CARs, which we do not currently project. External funding could come under pressure if FDI remains constrained by political uncertainties, and the banks, which have significant short-term external debt, experience roll-over problems. Such developments might quickly lead to higher fiscal pressures.
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.
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