Fitch upgrades Tunisia's IDR to "CCC+"

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Tunisia - Ftich Ratings upgraded on Monday Tunisia's Long-Term Foreign-Currency Issuer Default Rating (IDR) from "CCC-" to to "CCC+".

The agency said “the rating upgrade reflects its increased confidence in the government's ability to meet its large fiscal financing needs. This stems from Tunisia's stronger external position that enables it to maintain its international reserves at a sufficient level to meet current external payments and debt obligations.

This is balanced by still-elevated financing needs, limited access to external financing, uncertainty over the ability and willingness of the banking sector to take on large volumes of domestic debt and a budget that remains vulnerable to external shocks”

Fitch Ratings highlighted that Tunisia's ability to meet 2024-2025 external debt obligations has improved, with a lower current account deficit (CAD), strengthening international reserves beyond previous expectations.

“We forecast reserves will remain above three months of current external payments through 2026. This should enable Tunisia to continue to service its external debt obligations, supported by ongoing inflows of external financing, despite the absence of an IMF financing programme.”

The rating agency pointed out that "limited and persistent" external financial sources, combined falling external amortisations, should allow Tunisia to balance its net external financing by 2026.”

The rating agency also believes that the domestic banking sector could help meet the sovereign’s financing needs, as deposit growth and weak credit demand support the sector's liquidity, and expects state-owned banks to take on a greater share of the financing burden due to the caution of some private banks.

Fitch also expects a lower wage bill, capital expenditure and subsidies to reduce the fiscal deficit to 6.4% of GDP in 2024, 5.3% in 2025 and 4.7% in 2026, from 7.1% in 2023.

“We do not expect subsidy system reform, due to political opposition to raising regulated food and energy product prices. However, falling international prices should reduce subsidy costs by 1.7pp of GDP by 2026 under our baseline scenario for commodity prices. We also expect the wage bill to decline to 12.9% of GDP by 2026, from 14.3% in 2023, on below inflation wage increases.”

Fitch forecasts that public debt to remain above 80%, at 83.4% in 2024, 82.2% in 2025 and 80.8% in 2026 (2023: 83.9%). The debt trajectory is highly sensitive to currency depreciation and fiscal shocks amid high vulnerability to international commodity price volatility. Tight foreign-exchange market management and regulation and resilient international reserves kept the exchange rate steady in 2022-2024.

“This stability should continue, but risks may arise from lower external financing and monetary financing of the deficit. Sharper depreciation would lift debt/GDP, given the high share of foreign-currency debt, but a high share of official sector debt has favourable financing terms,” it pointed out.