Tunisia Debt Hangovers Darken Growth Outlook
Debt overwhelmed the North Africa nation, Tunisia, which hasn’t been finding it easy managing large foreign currency borrowings exposures but it may get by with funding support from the International Monetary Fund.
Like others, Tunisia is battling weak fiscal performance while macroeconomic indices point to a bleak future for its local currency, growth and employment conditions. In a rating note, Fitch said Tunisia’s progress on policies required under the Staff Level Agreement (SLA) for an IMF support package has increased the likelihood of funding disbursement.
However, the country’s external financing risk is noted to remain high while recent delays to the SLA’s approval have highlighted risks to the implementation of the programme. Fitch however upgraded Tunisia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC+’, from ‘CCC’ in December 2022.
It said the upgrade was based on an assessment that the SLA reached with the IMF in October for a new 48-month USD1.9 billion Extended Fund Facility (EFF) that would unlock substantial official creditor funding and support fiscal consolidation. The IMF Executive Board was originally due to approve Tunisia’s EFF in December 2022, but the scheduled meeting was delayed without public explanation.
“.. We believe the amendment of the law on public-sector enterprises, passed by the council of ministers on 9 February, and the authorities’ progress in finalising an updated financing plan have improved the prospects for board approval”.
IMF Managing Director Kristalina Georgieva stated in mid-February that the authorities had made very good progress on prior actions required under the EFF and that she expected conclusion of the remaining actions within weeks, not months.
Even assuming procedural delays, Fitch said it consequently expects board approval and the release of the first tranche of IMF funding before the end of Q2-2023. It said under the updated financing plan, Tunisia would receive over USD5 billion of external funding, mostly from official creditors in Europe and the Gulf.
This would be equivalent to around 65% of 2023 government financing needs, which Fitch estimates will total around 16.9% of GDP.
“The remaining financing could be provided mostly by local banks without putting significant pressure on their liquidity, in our view. We believe that official creditor support included in the plan remains conditional on IMF approval for the EFF”, according to the Ratings.
Fitch’s estimate of the government’s financing needs assumes that the fiscal deficit is reduced to 5.7% of GDP in 2023, from 7.3% in 2022, through measures such as control of the wage bill and subsidy spending. It incorporates debt maturities of around 11.2% of GDP.
“Under our base case, Tunisia would avoid debt restructuring, securing sufficient funding to cover its external debt maturities of USD2 billion in 2023 – including a EUR500 million Eurobond maturing in October- and USD2.6 billion in 2024 (including a EUR850 million Eurobond maturing in February).”
However, the rating of ‘CCC+’ indicates that default is a real possibility, Fitch said emphatically, saying the country’s external liquidity position will remain tight. Recall that USD900 million financing package secured at the end of 2022, mostly from Afreximbank and Algeria, provided some relief and stabilised official reserves at around three months of import cover.
Nevertheless, Fitch stated that prolonged delays in external funding disbursement or a significant increase in Tunisia’s import bill would add significantly to external pressures, given large current-account deficits, estimated at USD 3.4 billion in both 2023 and 2024.
“A decline in foreign-exchange reserves available for debt repayment could put downward pressure on the rating”, Fitch said.
The global rating agency said that even if the EFF is approved, external financing strains could quickly reappear if Tunisia deviates from the IMF programme objectives and further disbursements under it are suspended.
This would likely also impede bilateral financing disbursements, as official creditor financing is largely contingent on reform prospects. Historically, Tunisia’s adherence to IMF programmes has been weak.
Fitch said the government’s ability to implement reform commitments under the EFF could be challenged if social instability increases, and some reforms, such as those for state-owned enterprises and subsidies, may generate strong opposition from the influential Tunisian General Labour Union.