The downgrading of Tunisia’s sovereign rating to “Caa2” means that the Tunisian government and the Central Bank of Tunisia are exposed to too high risks and the inability to honor their financial commitments. Tunisia is facing a decisive situation before reaching the phase of no return and it is currently in the obligation to begin serious reforms immediately…
According to the independent New York financial research and rating agency “Moody’s”, which assesses the financial health of companies, banks or States, and the risk that they will not be able to repay their debts, the deterioration of the sovereign rating of Tunisia to “Caa2” means that the Tunisian government and the Central Bank of Tunisia are exposed to too high risks and the inability to honor their financial commitments. This downgrading of Tunisia’s sovereign rating is explained by the uncertainty as to the government’s ability to put in place measures that can meet the high financing needs.
But what is the meaning of the note “Caa”? According to experts, debt securities that are rated “Caa” are considered to have poor credit quality and are exposed to very high credit risk. Thus, the “Caa1” rating is interpreted as high risk, while the “Caa2” reflects the transition to an ultra-speculative stage. And from the “Caa3” rating, the country is categorized as a country in default with some hopes of recovery. You should also know that the Moody’s scale is made up of twenty ratings and Tunisia is today at the level of 18e. This agency rates 111 countries in the world and Tunisia is at the 100e place, or to a place of bankruptcy.
According to Moody’s, “further delays in implementing a new International Monetary Fund program would erode foreign exchange reserves through debt service payments, thus exacerbating balance of payments and the likelihood of debt restructuring that would result in losses for private sector creditors.
Moez Hadidane, expert in economics and financial markets, explains that “Tunisia is facing a decisive situation before reaching the phase of non-reimbursement of some of its financial commitments, it is currently in the obligation to begin immediate reforms.
The risk of recourse toux «Clubs»
For him, this deterioration of the sovereign rating could push Tunisia to resort to the “Paris Club” for a rescheduling of its debts and to the “London Club” which brings together private creditors. “Tunisia’s negative rating outlook reflects a probable inability to honor its debts except in the event of the opening of new prospects for external financing”.
According to Hadidane, “foreign investment flows to Tunisia will be affected by Tunisia’s sovereign rating, in addition to the possibility of a drop in the dinar’s exchange rate against other currencies.”
It should be recalled that “Moody’s” has also lowered the rating of the BCT, which is legally responsible for payments on all Tunisian government bonds from Caa1 to Caa2 with a negative outlook.
Bassem Neifer, financial analyst, explained that the lowering of Tunisia’s sovereign rating with negative outlook by the rating agency “Moody’s” was not so surprising. “The agency intends to put Tunisia’s rating under review for downgrading,” said the analyst. And to continue: “the weakness of the Tunisian economy, the bad governance and the fall in the rate of growth were at the origin of this deterioration”. He also said that other rating agencies will rely on Moody’s report and will also lower their ratings or outlook for Tunisia. “In addition to disrupting the obtaining of foreign financing, all this will have a bad influence on the import operations made by the State or private companies”, mentioned Neifer.
For the economist and former Minister of Commerce, Mohsen Hassen, the downgrading of Tunisia’s sovereign rating by the American rating agency “Moody’s” was foreseeable due to the ongoing difficulties encountered by Tunisian public finances. “The low turnout in the second round of legislative elections on Sunday 29 January is damaging Tunisia’s brand image abroad. It should be noted that one of the reasons that led the IMF to deprogram the examination of the loan file presented by Tunisia is the tense climate which marks the Tunisian context, in addition to the delay in the adoption of certain texts of laws, the absence of a national consensus and the position of the Ugtt concerning the government’s reform programme. The international financial community is following the political situation in Tunisia very closely and has surely taken into account the low turnout in the polls, which reflects a certain political instability in Tunisia”, developed Hassen.
Calm political life, an absolute priority
The economic expert, Ezzeddine Saidane, also shared this opinion and declared that “if the country is not in a stable political situation with a strong government which can undertake the necessary reforms, it affects the rating”. For him, this new rating is the tenth downward revision of Tunisia’s rating since 2011. “In 2010, Tunisia had a BBB+ rating with a positive outlook. We were one step away from the A rating,” said Saidane.
According to him, the main reason for this deterioration is the absence of a definitive agreement with the IMF. “Tunisia was unable to mobilize the external resources necessary to finance the 2023 budget and the reform program on the basis of which the government managed to obtain the technical agreement with the technical staff of the IMF on October 15, 2022. Added to this is the non-publication, last November, of the 2023 budget, signed by the President of the Republic. The letter of intent has not been signed by the president either.
Ezzedine Saidane once again indicated that the State is at great risk following this situation. “We are not going to find the resources to cover its current expenses for 2023”. He also explained that the “Caa2” rating will not allow Tunisia to access the international financial market and the chances of reaching an agreement with the IMF become even weaker.
On the eve of the announcement of Tunisia’s sovereign rating by “Moody’s”, the Head of Government, Najla Bouden, met with the Director General of the French Treasury, who is also the President of the “Club de Paris” .
Saidane wondered whether Tunisia is not preparing for entry into the Paris Club and the rescheduling of its debt? For him, the only glimmer of hope can come from a peaceful start to try to calm political life and evolve towards a more stable situation, with the current government or another. “The important thing is to go towards a major rescue operation and not a recovery of the economy, public finances and public companies… But all the signs do not show us that we are going towards this logic”, deduced Sayane.
Draw inspiration from similar experiences
For his part, Youssef Cherif, director of the “Columbia Global Centers” in Tunis and doctoral student in international relations at the University of Leiden in the Netherlands, specializing in international relations in the Maghreb, assured that in Tunisia, “the he worsening economic crisis fueled the disillusionment of citizens who hoped that democracy would be synonymous with prosperity. But this period of democratic transition can be rich in lessons, especially if it is mirrored with the Latin American transition experience.
He said that there are, of course, significant differences between Tunisia and Latin America, which is hardly a homogeneous region.
“Certain national particularities have made democratic transition in Tunisia more problematic than for Latin American countries. Despite these differences, there are important similarities between Tunisia and Latin America regarding the essential characteristics of democratic transitions. We can cite exacerbated socio-economic expectations, too often disappointed by the deterioration of economic conditions, deep institutional weaknesses, including the fragmentation of political parties, the issue of corruption —often perceived as incapacitating—, as well as tensions between political parties. politics and emerging civil society, not to mention the dangerous prevalence of misinformation and conspiracy theories,” explained Cherif.
According to him, the transitional governments must try to meet popular expectations with quick results. There is no one-size-fits-all solution, but it is essential that governments focus their attention and resources on a few high-productivity, high-visibility programs. But in Tunisia, it is above all to the creation of political institutions—certainly very important transition measures—that the political elites have dedicated their efforts, while relatively neglecting economic innovation and job creation. “Each country must find its own balance between executive and legislative powers. But Tunisia’s inability to find a viable one has led to chronic instability and inaction,” he noted.
Youssef Cherif insisted on strengthening the role and autonomy of central banks and ministries of finance. “It remains of the utmost importance. For experience has shown that in many Latin American countries which have succeeded in establishing strong and independent central banks, as well as complementary ministries of finance with competent staff, the latter have served as a bulwark against financial excesses, and ensure at least the transparency of public revenue and expenditure. In Tunisia, the Central Bank has certainly gained in autonomy, but the ministries of finance continue to suffer from political instability”, explained the director of the “Columbia Global Centers” in Tunis.