S&P revises Tunisia's outlook to negative on increasing uncertanies


Standard & Poor's Ratings Services revised the ratings outlook on Tunisia to negative from stable in a new report.

The rating reflects S&P's 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 S&P's view of Tunisia's track record of modest fiscal and current account deficits and past policies that have engendered sustained economic growth. 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 materialises.

S&P does "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, S&P says that its 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 per cent of GDP in 2011, gradually returning to trend growth of around 5 per cent by 2014.

S&P expects that the current account deficit will worsen to more than 6 per cent of GDP this year, particularly as tourism revenues have halved. Tourism and FDI is expected to recover gradually, as confidence in Tunisia returns, to get back to 2010 levels by 2013. We anticipate a fiscal deficit of about 5 per cent of GDP in 2011, and 4 per cent in 2012. S&P is under the impression that the government plans to finance its deficit on the domestic market, and from official lenders.

S&P does believe 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, they are expected to remain largely peaceful through the elections.

According to S&P, the economic recovery depends largely on how quickly tourism and FDI inflows recover. S&P does 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.

Alain Charles Publishing, University House, 11-13 Lower Grosvenor Place, London, SW1W 0EX, UK
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