Standard & Poor (S&P)'s Ratings Services has affirmed its BBB/A-3 foreign currency and A/A-1 local currency sovereign credit ratings on the Republic of Tunisia, reflecting the government's prudent macroeconomic policies. The outlook is stable, according to a press release.
"The government continues to pursue fiscal consolidation, and the current account deficit remains at a low three percent of gross domestic product (GDP) despite the economic slowdown in Europe, Tunisia's main exports market," said S&P's credit analyst Luc Marchand.
"The general government deficit is expected to be moderate in 2004, at 2.3 percent of GDP, and to continue to trend downward thereafter. As a result, general government debt, which is estimated at 60.6 percent of GDP in 2003, should decrease steadily in the next few years," he added.
Growth will recover to 6.2 percent in 2003, mainly due to a sharp rebound in agricultural output, to 26 percent this year, and a pick-up in tourism receipts since the summer. Growth is expected to remain healthy, at about 5.6 percent in 2004, on the back of a rebound in external demand from the EU. It will continue to benefit from a low inflation and interest rate environment, and an increasingly flexible exchange rate policy, helping to maintain the country's competitiveness.
"The ratings on Tunisia are constrained, however, by its highly centralized political system, the need for further structural reforms, and relatively weak external liquidity," said Marchand.
Further reforms are needed to curtail the public sector's large economic role and reduce the debt of nonfinancial public enterprises, estimated at 16-20 percent of GDP in 2003. Net public sector debt is projected to reach a total of about 72 percent of GDP in 2004, compared with a BBB median of 43 percent.
The economy also remains dependent on agriculture, tourism, and merchandise exports to the EU. Tunisia has made great progress in upgrading the competitiveness of its industries through the "mise à niveau" program. Nevertheless, further privatization and liberalization are needed to meet increased competition as the country's Association Agreement with the EU is implemented.
Increasing external liquidity is important in the context of the further liberalization of the capital account, and the more flexible exchange rate policy already engaged. The stable outlook balances Tunisia's track record of prudent fiscal and monetary policies against the risk of slippage in structural reforms, which are essential to meet the challenges of increased competition and high unemployment.
"The ratings on Tunisia could be raised if structural reforms are accelerated, or if political and institutional liberalization is significantly advanced in the direction of more democracy, a better functioning legal system, and better governance," said Marchand. "A significant increase in external liquidity would also be a positive for the ratings, as it would underpin the authorities' more flexible exchange rate policy and facilitate capital account liberalization." — (menareport.com)
© 2003 Mena Report (www.menareport.com)
