Analyst
Shen Yuefeng
shenyuefeng@dagongcredit.com

Sovereign Credit Rating
 
Local currency/outlook BBB+/stable
Foreign currency/outlook BBB+/stable
Rating time October,2010

Rationale

Dagong assigns “BBB+” to the local currency and foreign currency credit ratings for the Republic of Tunisia (“Tunisia”), which are based on Tunisia's stable political situation, strong fiscal consolidation willingness and sufficient external financing support, but still underdeveloped economic and financial strength.

In recent years, Tunisian government debt keeps increasing. As of the end of 2009, the debt amounted to 25.06 billion dinars. However, due to the rapid economic growth over the same period, the government’s debt-to-GDP ratio declined from 59.4% in 2004 to 46.9% in 2009. Since the government would still maintain the expansionary fiscal policy in 2010, the fiscal deficit is expected to expand to 2 billion dinars, or about 3% of GDP. Coupled with about 2.5 to 2.8 billion dinars of principal reimbursement of the same year, Dagong expects that the government’s debt financing requirement will maintain in the range of 4.5~4.8 billion dinars, which is about 8% of GDP. Hence, the debt level is expected to expand continuously, but can be controlled below 50% of GDP. The government will restore prudent fiscal policy from 2011, therefore, both fiscal deficit and government debt financing requirement are expected to decline gradually.

On the whole, the capacity of Tunisian government's foreign and local currency debt repayment can be guaranteed, and the main reasons are as follows:

The stable political situation, high credibility of the government, clear national development strategies, as well as favorable international relations provide a beneficial internal and external environment for economic development;
As a low-medium revenue economy, Tunisian economy is small and develops steadily. The over-dependence on European market and capital, as well as serious unemployment constitute the main uncertainties for economic development;

Financial stability of Tunisia improves continuously in recent years, but the fact of high level non-performing loans, as well as low rate of provisions are noteworthy;
The government debt lies in the medium to high level among peer countries, but the interest burden is moderate. In addition, the government has shown strong willingness on fiscal consolidation. Hence, it is likely for the government to control fiscal deficit and cut debt in the future;

Tunisia’s foreign exchange reserves are sufficient and the government has good external financing support, so government’s solvency on its external debt can be guaranteed.

Outlook

Tunisia’s political situation is stable, and the economy is undergoing the recovery phase. Therefore, Dagong expects the country will steadily develop in accordance with its set vision. Fiscally, the expansionary policy implemented in this year will lead to the expansion of debt deficit, but a prudent policy starting from the next year will help the government control the deficit and cut debt gradually. In the next few years, with the steady liberalization of capital account, the overseas expansion pace of the financial sector will be accelerated. In this process, Tunisia’s real economy will benefit from the financial integration; meanwhile the possibility of potential external shocks will also increase as well. However, sufficient reserves and good external financing support will help Tunisia withstand relevant risks. Therefore, Dagong keeps a stable outlook to both local and foreign currency credit ratings of Tunisia in the next 1~2 years.