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Investment Bank Morgan Stanley has warned that Tunisia is likely to default on its debt if its finances continue to worsen.
A default could be avoided if Tunisia can soon secure an IMF assistance and continue to slash public spending, the US bank said in a report. “Assuming that Tunisia muddles along in 2022 and without substantial reforms, this raises the probability of default in 2023 on account of the high financing needs,” the report noted.
Meanwhile, an IMF delegation is expected to arrive in Tunisia on Friday for talks with the government as fears rise over its risk of default, Bloomberg reported.
Tunisia’s external debt has reached $41billion and the current account deficit stands at 8.5 percent of the GDP.
The Tunisian government has been negotiating a $4 billion loan with the IMF. Such a loan requires the government to embark on an economic restructuring program and introduce major cuts to government expenses.
In the meantime, the report expects strong resistance from Tunisia's labor unions to further austerity measures, such as scaling down of subsidies, in case an agreement is reached with the IMF.
The Russia-Ukraine war is expected to exacerbate the country’s ordeal as the rise in global food and energy prices is set to unleash more social anger.
The North African country was marked with slow growth and rising debt levels when the pandemic started. Its GDP growth contracted by 8.8 percent in 2020 and the unemployment rated reached nearly 18 percent in first quarter of 2021, according to the World Bank.
“The lacklustre growth numbers have resulted in revenue generation failing to keep pace with expenditure, ultimately leading to debt/GDP moving from 45 percent in 2010 to 90 percent in 2021,” the report noted.
Morgan Stanley’s warning came on the heels of Fitch’s recent downgrade of Tunisia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'CCC' from 'B’.
The credit rating agency cited heightened fiscal and liquidity risks as reasons for the downgrade.
(Reporting by Noha El Hennawy; editing by Seban Scaria)
