Standard & Poor’s Ratings Services has affirmed its BBB/A-3 foreign currency and A/A-1 local currency sovereign credit ratings on the
The government has continued to pursue fiscal consolidation despite the economic slowdown in 2002. The general government deficit is expected to be moderate in 2003, at 2.3% of GDP, and to remain broadly unchanged thereafter. As a result, general government debt which, at an estimated 62.1% of GDP in 2002, is still higher than in most BBB peers should decrease if corrective measures are applied to social security finances in the next couple of years.
Inflationary pressures are relatively modest, with consumer prices increasing by about 3% annually. Moreover, an increasingly flexible exchange rate policy has helped to maintain the country’s competitiveness. Growth slowed to 1.9% in 2002, mainly due to slowing growth in EU countries Tunisia’s main trading partners and the sharp decrease in tourism receipts related to a terrorist attack. Growth is expected to recover to about 5.5% in 2003 on the back of a rebound in external demand from the EU.
The ratings on Tunisia are constrained, however, by its highly centralised political system and the need for further reforms, especially in the banking sector.
There is a need for further reforms to curtail the public sector’s large economic role and reduce the debt of non-financial public enterprises, which is estimated at 15-20% of GDP in 2002. Net public sector debt is projected to reach a total of 74% of GDP in 2003, compared with a BBB median of 47%.
“Due to the decrease in tourism receipts and the economic slowdown, non-performing loans in the banking system have increased to about 18% of GDP in 2002,” says Standard & Poor’s credit analyst Luc Marchand. The Tunisian authorities have recognised the problem and started addressing it by improving prudential practices, as well as privatising some banks in the public sector. Despite efforts to address this problem, however, both public and private sector banks still represent a significant contingent liability for the sovereign.
Tunisia has made great progress in upgrading the competitiveness of its industries through the partly publicly financed mise a niveau (catching-up) programme. However, further privatisation and liberalisation are needed to meet increased competition as the country’s association agreement with the EU is implemented.