INTERNATIONAL. Standard & Poor's Ratings Services today revised the ratings outlook on the Republic of Tunisia to negative from stable.
At the same time we affirmed our 'BBB-/A-3' foreign currency and 'BBB/A-3' local currency credit ratings on the sovereign and the Central Bank of Tunisia. Our transfer and convertibility assessment for Tunisia remains at 'BBB'.
The rating action reflects our view that risks to Tunisia's credit standing will persist during the next year, at least until the elections for the constitutional assembly take place and the economic recovery firms up.
The ratings are supported by our view of Tunisia's track record of modest fiscal and current account deficits and past policies that have engendered sustained economic growth.
We also believe that a more inclusive and legitimate political system than that which existed previously could strengthen the social contract, improve the business climate, and promote more inclusive growth.
Six months after the fall of President Ben Ali, our ability to clearly assess Tunisia's economic outlook is clouded by uncertainties. This is in part because the caretaker government does not have the mandate to articulate or implement medium-term policies.
Our baseline scenario envisages growth of 1% of GDP in 2011, gradually returning to trend growth of around 5% by 2014. We expect that the current account deficit will worsen to more than 6% of GDP this year, particularly as tourism revenues have halved.
We see tourism and FDI improving gradually, as confidence in Tunisia returns, to get back to 2010 levels by 2013.
We anticipate a fiscal deficit of about 5% of GDP in 2011, and 4% in 2012. We understand that the government plans to finance its deficit on the domestic market, and from official lenders.
We believe, however, that the extended political transition brings some downside risks over the next year, at least until the elections for the constitutional assembly take place and the economic recovers.
Elections for the constitutional assembly have been postponed to end-October 2011, from end-July, and there is still uncertainty about the structure and powers of the government after the elections.
We also remain unclear as to which medium-term policy objectives and structural reform priorities will eventually be adopted. Although episodes of public protests may continue, we expect these to remain largely peaceful through the elections.
The economic recovery depends largely on how quickly tourism and FDI inflows recover. We do not expect that the drop in these inflows will endanger Tunisia's external position, provided that additional foreign borrowing is sufficient.
Delays in official disbursements, or reduced availability of interbank funding lines to financial institutions, could require a tighter fiscal policy stance at a time when the government is under pressure to deliver quickly on the population's high expectations after the Jasmine Revolution.
The current economic slowdown, with its rising unemployment, only exacerbates sociopolitical tensions and spending pressures. On the upside, the government could benefit from higher-than-anticipated (one-off) revenue, depending on how it disposes of the former presidential family's shares in various businesses.
We also believe that banking sector weaknesses--particularly in the state-owned banking sector--could hold back the recovery. Even before the revolution, Tunisia public banking sector was weakly capitalized and plagued by high levels of nonperforming loans and low provisioning.
We project that the growth slowdown, especially in the tourism sector, will worsen asset quality. In turn, we believe that this will raise financing costs and hamper investment as a sound financial system is essential to sustain growth, create jobs, and absorb economic shocks. In our view, recapitalization requirements of public sector banks could reach 5% of GDP.
The negative outlook on the ratings on Tunisia reflects our view that downside risks to the rating will persist, at least until the constitutional assembly elections are held and the economy recovers. The outlook implies at least a one-in-three chance that the ratings could be lowered within the next 24 months if one or a combination of these risks materializes.
In our view, these downside risks would primarily stem from: uncertainties around medium-term policy formulation and implementation; weaker fiscal policies; and/or the weakened banking system's negative impact on growth.
Conversely, ratings could stabilize at the current level if we view the transition to a new democratic government as smooth, and we see that a legitimate government is able to quickly define and implement policies that improve Tunisia's economic and external profile in the medium term.