Standard & Poor'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.
The government has continued to pursue fiscal consolidation despite the economic slowdown in 2002. The general government deficit is expected to be moderate in 2003, at 2.3 percent of gross domestic product (GDP), and to remain broadly unchanged thereafter.
As a result, general government debt--which, at an estimated 62.1 percent of GDP in 2002, is still higher than in most BBB peers--should decrease if corrective measures are applied to social security finances in the next couple of years.
Inflationary pressures are relatively modest, with consumer prices increasing by about three percent annually. Moreover, an increasingly flexible exchange rate policy has helped to maintain the country's competitiveness.
Growth slowed to 1.9 percent in 2002, mainly due to slowing growth in EU countries--Tunisia's main trading partners--and the sharp decrease in tourism receipts related to a terrorist attack. Growth is expected to recover to about 5.5 percent in 2003 on the back of a rebound in external demand from the EU.
The ratings on Tunisia are constrained, however, by its highly centralized political system and the need for further reforms, especially in the banking sector. There is a need for further reforms to curtail the public sector's large economic role and reduce the debt of non-financial public enterprises, which is estimated at 15-20 percent of GDP in 2002. Net public sector debt is projected to reach a total of 74 percent of GDP in 2003, compared with a BBB median of 47 percent.
"Due to the decrease in tourism receipts and the economic slowdown, non-performing loans in the banking system have increased to about 18 percent of GDP in 2002," said Standard & Poor's credit analyst Luc Marchand. The Tunisian authorities have recognized the problem and started addressing it by improving prudential practices, as well as privatizing some banks in the public sector. Despite efforts to address this problem, however, both public and private sector banks still represent a significant contingent liability for the sovereign.
Tunisia has made great progress in upgrading the competitiveness of its industries through the partly publicly financed catching-up program. However, further privatization and liberalization are needed to meet increased competition as the country's Association Agreement with the EU is implemented. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
