Tunisia: Risk of default on external debt has increased (Crédit Agricole Group)
24/07/2021 19:32, TUNIS/Tunisia
(TAP) - The prospect of a default on the external debt of Tunisia has increased in recent weeks, in the face of the continuing political crisis and the lack of agreement on the urgent reforms to be implemented, said a report published by the Credit Agricole Group (France) entitled "Tunisia - New downgrade: without a salutary shock, a default on the external debt is quite likely.

The document recalls that Fitch Ratings has again downgraded Tunisia's rating to B- and maintains a negative outlook. It joins Moody's in its assessment of the quality of Tunisian risk (including negative outlook). The two agencies have lowered the rating of the sovereign by 7 notches since 2011, due to political and social instability and economic drift for 10 years (debt, growth, monetary policy, banking sector).

//Political crisis and macroeconomic drift

The report states that the fragmented and antagonistic political system prevents any reform - or even any decision - and social tensions, particularly with the UGTT, lead to macroeconomic drifts that are increasingly worrying and that frighten foreign investors.

In addition, the country has suffered greatly from the crisis of 2020: a recession of 8.8%, a budget deficit of 11.4% of GDP and a current account deficit of 6.7% of GDP, increasing the double public debt (89% of GDP) and external debt (2.7 times exports) to very alarming levels. The collapse of savings will keep the current account deficit above 6% of GDP this year.

The resurgence of the coronavirus pandemic in June 2021 is exponential. "This situation totally compromises the tourist season of this summer and the shortfall will be very high for the second year in a row, while the country needs 4 billion dollars of foreign currency resources to serve its external debt by the end of the year. Tunisia has already been the subject of an IMF support plan since 2015, but the Fund is impatient with the lack of reforms."

"The governor of the Central Bank has just launched a cry of alarm against the government to ask it to act on the level of subsidies and salaries of civil servants. Indeed, the most urgent reform to achieve is that of the state, but successive governments seem to give up.

"For its part, the BCT is trying to defend the exchange rate of the dinar to avoid imported inflation that would further accentuate social instability. Foreign exchange reserves have declined by 8% between the end of 2020 and the end of March 2021 to 8.4 billion dollars. This is a very worrying signal, especially since 49% of these reserves are made up of the four IMF loans still active.

//Default on external debt is quite likely

"The prospect of a default on the external debt has thus become more acute, in the absence of political agreement on the urgent reforms to be implemented and opening the door to new IMF aid. Although current aid already represents 11% of the country's GDP, an extension seems essential to resolve external liquidity pressures. For now, the government refuses to consider such a debt restructuring. Indeed, of the country's $40 billion external debt (105% of GDP), only $17 billion is carried directly by the sovereign.

"A liquidity crisis could then take on a very severe intensity and lead to a contagion to actors indebted in foreign currency. A restructuring would affect, above all, corporate and bank creditors and would force the country to enter into painful negotiations with private-sector creditors. If the country were to fall into the CCC categories, this would mean a total closure of international refinancing markets.

The report concludes that the responses to the crisis are not going in the right direction: inflation-wage spiral under pressure from the social partners, the drift of the cost of debt to 25% of budgetary expenditure, monetisation of public deficits by the BCT under government pressure. This feeds both government instability and the mistrust of external creditors.

Like Lebanon, the usual external creditors (IMF, multilaterals, European countries and Gulf countries) are increasingly reluctant to help emerging countries where political blockages are leading them into a spiral of difficulties. Moreover, and as in the case of Beirut, only a prior agreement with the IMF will be able to unlock the funds of friendly countries willing to support Tunis financially.

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