S&P downgrade Tunisia over fears of continued political instability
Risks to Tunisia's transition to democracy have increased markedly in recent weeks
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Standard & Poor's Ratings Services has lowered its long-term foreign and local currency sovereign credit ratings on the Republic of Tunisia to 'BB-' from 'BB'. The outlook is negative. At the same time, S&P affirmed the 'B' short-term foreign and local currency ratings on Tunisia.
S&P said, “Although overall institutional stability since the removal of President Ben Ali in early 2011 has so far broadly stayed within our expectations, we believe that risks to Tunisia's transition to democracy have increased markedly in recent weeks, and particularly since the assassination of opposition leader Chokri Belaid in early February.
“We think the prime minister's recent proposal to dissolve the transitional government has highlighted deep divisions within the coalition, which have hampered its ability to take proactive corrective measures against a weakening economic and financial backdrop.
“Moreover, we think any new transitional administration that emerges from ongoing negotiations may lack popular legitimacy and could be beset by instability, which would further jeopardize effective policymaking.
“Nonetheless, we still consider it more likely than not that a new constitution will be passed and fresh elections held in 2013, although probably months later than our previous expectation of March 2013.
“The recent performance and our medium-term outlook for Tunisia's economic growth, as well as the fiscal and external deficits, which remain high, constrain the ratings. We think that the banking sector remains fragile and that the current political turmoil and the lack of a government with a sufficient mandate hamper medium-term planning. Tunisia's open and fairly well-diversified economy, relatively well-educated work force, and broadly supportive business conditions support the ratings.
“Tunisia's GDP contracted by 1.8 per cent in real terms in 2011, while the World Bank estimates sluggish 2.4 per cent growth in 2012. The outlook for growth in 2013 is clouded by political uncertainty, which could deter investment and lead to a repeat of the paralyzing strikes in 2011. Although tourism receipts proved fairly resilient in 2012, we expect the recent turmoil to depress this sector in 2013.
“Thus, we expect lower tourism receipts, combined with a widening trade deficit, to result in current account deficits that will remain in excess of five per cent of GDP through 2016. The current account deficit reached an estimated eight per cent of GDP in 2012. Although we expect donors and official creditors to support the government's external financing requirement, private-sector needs may be accommodated in part through a decline in reserves, which we project to fall to half of Tunisia's gross external financing requirement by the end of 2013. That said, our calculations assume that about $5 billion of short-term external debt, consisting mostly of non-resident deposits and trade-related credit, will be fully rolled over.
“We anticipate that Tunisia's economic recovery will be slow, particularly given the weak economic conditions in the EU--by far Tunisia's largest export market and source of foreign direct investment and tourists. Unemployment has remained high since the January 2011 revolution, and we think it will remain a major source of social instability in the medium term.
“We estimate that the general government deficit (including grants) rose to close to five per cent of GDP in 2012. We expect still-high government stimulus spending will keep the deficit near this level in 2013. Even assuming that the transition to democracy happens this year, we expect fiscal consolidation to be gradual because economic and social conditions make a more rapid adjustment difficult, with the deficit still greater than three per cent of GDP in 2016.
“To fund this deficit, we believe general government debt will rise and peak at nearly 50 per cent of GDP in 2013, from about 40 per cent in 2010. 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. We understand that the International Monetary Fund will soon confirm a precautionary standby agreement worth $1.8 billion, and we expect bilateral donors to support Tunisia through its transitional phase. Also, we understand the authorities plan to raise some EUR 500 million in Sukuk funding in 2013.
“The ratings remain constrained by the country's fragile banking system, which we believe has weak asset quality. We believe that nonperforming loans may be significantly higher than reported levels of 12-15 per cent of total loans because of forbearance.
“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 is the country's relatively well-diversified economy, which produces a variety of goods and services. In 2011, agriculture accounted for nearly 10 per cent of GDP, industry for 27 per cent, and services for the remainder. Exports are also varied, with garments, electronic goods, minerals, and agricultural products the leading categories.
“The labour force is relatively well-educated. Primary education enrolment is approaching 100 per cent for both sexes, women outnumber men in tertiary education, and the overall adult literacy rate is 78 per cent.
“We have also lowered our ratings on the Central Bank of Tunisia to the same as those on the sovereign.
“The negative outlook reflects our judgment that the chance of political and social stability further deteriorating to an extent that is inconsistent with the current rating is at least one-in-three. We could also consider lowering the rating if economic, fiscal, or external metrics are weaker than we now forecast.
“On the other hand, the rating could stabilise at the current level if the transition to democracy occurs without further major delays, bouts of unrest, or policy paralysis, and if the government formulates a policy framework that is conducive to growth and fiscal consolidation.”
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