MARCH 15, 2018 – Moody’s Investors Service downgraded Tunisia’s credit rating on its deteriorating fiscal situation, complicating the government’s plans to raise capital on international markets.
The ratings company lowered Tunisia’s long-term issuer credit rating by one notch to B2 — five levels below investment grade and on a par with Argentina, Nigeria, Cameroon and Kenya. Moody’s, which had last downgraded Tunisia seven months ago, assigned it a ‘‘stable’’ outlook.
The ratings drop is liable to hobble the government’s efforts to raise money abroad to help defuse the unrest that’s mounted over rising prices and high unemployment. It comes days after Tunisia’s new central bank governor said the nation cannot defend its currency “even if it wanted to” as foreign reserves dwindle.
“The key drivers for the downgrade are Moody’s expectations that the further erosion in fiscal strength and foreign exchange reserve buffers will not reverse significantly in the next few years,” Moody’s said in a statement.
Creditor Willingness
Tunisia’s rising debt burden, from already high levels, makes the country “vulnerable to shifts in foreign creditors’ willingness to finance its borrowing needs,” the ratings company added. The nation’s ability to afford to borrow is dwindling, with its debt burden expected to peak at 73 percent next year from an estimated 70 percent in 2017, Moody’s said.
The yield on the central bank’s $1 billion of euro bonds due in January 2025 has risen 120 basis points this year to 7.013 percent.
Reserve Drain
Tunisia’s central bank drained its reserves defending the dinar, which is loosely pegged to a basket of currencies, before eventually allowing it to weaken 19 percent against the euro in the past 12 months. Reserves now cover 78 days of imports, according to central bank data.
Plans to sell $1 billion in euro bonds last month to boost reserves were delayed after Prime Minister Youssef Chahed replaced the previous central banker in a move seen by some as an attempt to shift the blame for Tunisia’s poor economic performance.
The weaker currency, along with subsidy cuts and tax increases, helped to propel annual inflation to 7.1 percent, it highest level in two decades. That, in turn, led policy makers to raise the benchmark interest rate 75 basis points last week.
Violent Protests
Tunisia is attempting to implement an International Monetary Fund-backed economic plan designed to bring down its budget deficit and kick-start growth. Austerity measures have fueled violent protests that hobbled implementation of the program and delayed the disbursal of an IMF loan installment.
Last week, central bank Governor Marouane El Abassi said talks with the IMF are progressing well and that he expected the board to approve the release of the $320 million third installment when it meets on March 23. Al Maghreb newspaper on Thursday cited Tawfik Rajhi, the cabinet minister in charge of major reforms, as saying the money would be released on March 24.
