Moody’s downgrades Tunisia’s ratings to Caa2 with a negative outlook

Moody’s Investors Service (“Moody’s”) has today downgraded the Government of Tunisia’s long-term foreign-currency and local-currency issuer ratings to Caa2 from Caa1 and changed the outlook to negative.

Moody’s has likewise downgraded the Central Bank of Tunisia’s senior unsecured debt ratings and senior unsecured shelf rating to Caa2 and (P)Caa2 from Caa1 and (P)Caa1 respectively and changed the outlook to negative. These ratings were also previously on review for downgrade. The Central Bank of Tunisia is legally responsible for the payments on all of the government’s bonds. These debt instruments are issued on behalf of the government.

The downgrade is driven by Moody’s assessment that the absence of comprehensive financing to date to meet the government’s large funding needs raises default risks to a point no longer commensurate with a Caa1 rating. A new IMF programme has yet to be secured, despite reaching staff-level agreement in October 2022, aggravating an already challenging funding position and compounding the pressures on Tunisia’s foreign exchange reserve adequacy. Very tight domestic and external funding conditions and the Tunisian government’s challenging debt-service profile elevate refinancing risks. Moody’s assesses that weak governance and significant social risks in part account for Tunisia reaching such a critical juncture. Residual credit support stems from the Central Bank of Tunisia’s remaining foreign exchange reserve buffer, alongside the government’s continuing commitment to seeking a new IMF arrangement and a longstanding track record of support from a broad range of international partners.

Concurrent to today’s action, Tunisia’s country risk ceilings have been lowered to B2 from B1 for the local-currency ceiling and to Caa1 from B3 for the foreign-currency ceiling. The three-notch gap between the local currency ceiling and the sovereign rating reflects relatively predictable, albeit weakened, institutions; balanced against a broad public sector footprint, external imbalances and a challenging political and social environment which hampers the business environment. The two-notch gap of the foreign-currency ceiling to the local-currency ceiling reflects persistent external imbalances and reliance on foreign inflows which increase firms’ exposure to potential transfer and convertibility risks.