INTERNATIONAL. Standard & Poor's Ratings Services said today it placed its 'BBB/A-3' long- and short-term foreign currency sovereign credit ratings on the Republic of Tunisia and the Central Bank of Tunisia on CreditWatch with negative implications
At the same time, Standard & Poor's lowered its long-term local currency sovereign credit ratings on Tunisia and on the Central Bank of Tunisia to 'BBB+' from 'A-'. The ratings were subsequently placed, along with the 'A-2' short-term local currency sovereign credit ratings, on CreditWatch negative.
After several weeks of street protests, Tunisia's president, Ben Ali, left the country late last week. We believe that the interim government may call general elections during the next few months.
"We expect the current political instability and violent conflict to affect Tunisia's economic growth in 2011 and, in particular, its tourism industry," said Standard & Poor's credit analyst Christian Esters. "GDP growth has been at 3%-4% over the past two years."
The conflict may also weigh on Tunisia's balance of payments if foreign direct investment (FDI) or remittances were to decrease. We understand from the Central Bank of Tunisia that, so far, reserves remain at about $9 billion. FDI has exceeded Tunisia's current account deficits over the past few years, leading to a stronger external position relative to the median for peers rated 'BBB'. Furthermore, we see a risk that Tunisia's public finances could weaken. We currently have no information on the country's future political orientation or its stance toward fiscal and economic policy under a new government. We consider that a new government might be under pressure to increase subsidies to the domestic economy to limit price increases.
In 2010, we estimate Tunisia's general government deficit to have been at about 2% of GDP, and we understand from the authorities that Tunisia's general government debt burden had decreased to 39.7% of GDP as of year-end 2010, in line with the 'BBB' median of 39.2%.
The ratings on Tunisia have so far been supported by our view of its strong track record of prudent macroeconomic policies that have allowed regular growth and moderate fiscal deficits for more than a decade. The ratings are also supported by our view of Tunisia's resilient external position, despite the more challenging external environment of the past two to three years.
Standard & Poor's aims to resolve the CreditWatch within the next three months.
"We may lower both the foreign currency ratings and the local currency ratings, potentially by more than one notch, if we conclude that the political uncertainty in Tunisia could continue for an extended period and result in lower economic growth or materially weaker external liquidity," said Mr. Esters. "We may also lower the ratings if a new government were to adopt what we view as a more populist approach to policymaking or embrace more expansionary fiscal policies."
We could extend the CreditWatch beyond three months or assign a negative outlook to the ratings if the political crisis were to remain unresolved and the extent of the downward pressure on the ratings were to remain unclear to us.
We could remove the CreditWatch and affirm the ratings if the political instability turns out to be temporary and we believe that it has not significantly affected Tunisia's medium-term economic and external profile, and if a new government appears committed to containing fiscal deficits at moderate levels of 3%-4% of GDP.