Tunisia teeters on the edge over mounting debt

Reuters

• $2bn debt matures in 2023
• Deficit is 8.6% of GDP
• Downgraded by Fitch to CCC-

Saddled with mounting levels of debt and dwindling foreign reserves, Tunisia is intensifying concerns over its deteriorating public finances.

Bailout talks with the International Monetary Fund have stalled since last October when a preliminary agreement for a 48-month loan worth close to $2 billion was reached.

Tunisian president Kais Saied’s government refused to accept the terms of the proposed deal which is leading some experts to predict that it is now only a matter of time before the country defaults on its debt. 

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“We think that Tunisia is heading toward a sovereign default,” James Swanston, Middle East and North Africa economist at Capital Economics, told AGBI. 

“We have long forecast that Tunisia would run into trouble in 2023-24 as there are large foreign currency debt principal repayments due in the final quarter of this year and first quarter of 2024.”  

Tunisia’s external debt maturities comprise $2 billion in 2023, including a €500 million ($535 million) Eurobond in October, and $2.6 billion in 2024 which includes an €850 million Eurobond in February. 

A low level of foreign exchange reserves and lack of an IMF deal mean Tunisian authorities have little ammunition with which to service repayments and also continue to prop up their domestic currency, Swanston said.

“Tunisia is not in a position to try and roll over its debts,” he added, noting how sovereign dollar bond yields are still trading above 20 percent.

Other experts are more optimistic about Tunisia’s near-term outlook.

“The overall debt profile implies sustainability over the rest of 2023,” François Conradie, lead political economist at Oxford Economics Africa, said in a research paper published last month. 

However, he cautioned that the punishing interest rate environment and persistence of a wide fiscal deficit will make restructuring a greater threat going into next year.

Borrowing concerns

According to the latest available figures, Tunisia’s current account deficit stood at 8.6 percent of GDP at the end of 2022. 

Conradie said the Tunisian sovereign’s ability to borrow abroad is a concern as commercial foreign lenders have become hesitant to take up the country’s bonds.

Ratings agency Fitch in June downgraded Tunisia’s rating further into junk territory, citing concerns over its refusal to commit to the reforms of its subsidies, state-owned enterprises and the civil service that the IMF loan is conditioned on. 

It revised the country’s long-term foreign currency issuer default rating from CCC+ to CCC-, which is seven levels below investment grade.

Junk status makes it more difficult for a country to gain access to capital markets and raise funding, and indicates that default is possible. 

Conradie said that the risk of Tunisia defaulting on its debt is “not unavoidable,” and pointed to the fact that the country’s reserves, which stood at almost $8 billion at the end of June, are ample to meet its obligations. 

Yet drawing on its reserves would apply pressure on Tunisia’s external position.

“For this reason, and because Tunisia is locked out of capital markets, there is an urgent need to obtain more loans from abroad on a bilateral basis – and the sooner the better,” he said. 

“Even if this is only a stopgap measure, Tunisia needs to narrow its current account deficit.” 

Saudi Arabia in July announced it would provide Tunisia with $400 million as a soft loan – one with no interest or a below-market rate of interest – and $100 million as a grant. 

Riyadh has pledged more financial support in the near future but this has yet to materialise. 

“The Tunisians have also been very busy talking to the Emiratis and I think that they are willing to help,” Conradie said. 

“They just want some pledges in return that Saied will start normalising relations with Israel, which he is being obstreperous about. 

“There is now a very big push for that, and I think that if he starts moving in that direction, then he will receive Emirati money too.”