Tunisia’s credit-rating actions seem unconvincing

Justifying its rating action towards the end of May, Moody’s noted a significant decline in domestic political risk resulting from the democratic transition, reduced external funding challenges and diminishing fiscal and external imbalances.

International creditors remain engaged, with the IMF and World Bank prepared to stump up more financing to support development and reforms.

Tunisia’s risk score has nevertheless failed to produce a convincing recovery in Euromoney’s survey:

Its score slipped 0.7 to 43.9 points out of 100 during the first quarter, and preliminary data for the second quarter – to be finalized and distributed to subscribers early next month – show a further slide.

The longer-term trend decline has seen Tunisia shed more than five points since 2010 and 14 in total since 2007, before the global financial crisis struck.

Morocco, by contrast, has fallen by nine points since 2007, a smaller drop aided by the fact its score has been consistently recovering since Q3 2014.

However, confidence among the rating agencies in Tunisia seems premature.

Why the uncertainty?

Economists taking part in the ECR survey have been downgrading their scores for the economic-GNP outlook and government finances this year, and it is not hard to see why.

The IMF and other forecasters had been expecting GDP growth of 3% in real terms for 2015, in line with the government’s official forecast, but its economy expanded by just 1.7% year-on-year during the first quarter, which was below both the previous quarter and year-earlier outturns.

Not all areas of the economy were weak, but export growth of textiles, and finished clothing and footwear, slowed down in Q1, alongside services.

Slower-than-expected growth will complicate the fiscal improvement, which foresees a narrowing of the deficit from 6.2% of GDP in 2014 to around 5% this year, but which could be thwarted not least because of the difficulties of cutting spending with such a large public-sector wage bill.

Slower economic growth will also frustrate attempts to narrow the current-account deficit, which remained above 8% of GDP last year for a third successive year.

The IMF predicts a deficit of 6.4% of GDP for 2015 based on its 3% growth forecast, but many factors remain uncertain, including tourism earnings, the strength of the recovery among European trading partners and the direction of the currency affecting a large proportion of foreign debt.

A recent report from head of research Marwan Barakat and his team at Bank Audi states: “Tunisia needs reform of its banking systems, as its ratio of non-performing loans stays stubbornly high.”

The report goes on to note declines in industrial investment, notably in construction and services, during the first quarter, and the sharp fall of inward foreign direct investment.

Moody’s assertion that political risk has improved, meanwhile, refers to events in 2014 when the new constitution prepared the way for presidential and parliamentary elections to be staged producing a democratic transition.

However, ECR scores for corruption, the regulatory and policy environment, and government stability have fallen back – symbolizing increased risk – this year, highlighting the difficulties involved in reaching agreement on key decisions with such a broad and fragile coalition.

Social problems

There are social problems to factor in, too. Unemployment is high (around 15%), but notably worse in the phosphate-producing city of Gafsa.

Nassib Ghobril, chief economist at Byblos Bank, notes: “Four towns in the main phosphate-producing region began a general strike to protest against the lack of employment opportunities.”

Labour protests also caused the Kerkennah gas field to shut down in April.

Therefore, while there are reasons to be optimistic on Tunisia’s longer-term outlook, presently risk experts remain cautious… and for good reason.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.