OREANDA-NEWS. Fitch Ratings has revised the Outlook on Tunisia's Long-term foreign and local currency Issuer Default Ratings (IDR) to Negative from Stable and affirmed the IDRs at 'BB-' and 'BB', respectively. The issue ratings on Tunisia's senior unsecured foreign currency bonds have also been affirmed at 'BB-'. Fitch has affirmed the Short-term foreign currency IDR at 'B' and the Country Ceiling at 'BB'.

KEY RATING DRIVERS
The revision of the Outlook to Negative from Stable reflects the following key rating drivers:

MEDIUM
The collapse of tourism in the context of heightened security risks contributed to a slowdown in GDP growth to just 0.8% in 2015, its lowest level since the 2011 revolution, from 2.3% in 2014. The agency has also revised down its growth forecasts to 1.2% for 2016 from 2% in the previous review, and to 2% for 2017 from over 3% previously. Unemployment, already high at over 15% of the labour force relative to a peer median of 9%, is unlikely to come down significantly, raising the risk of further social instability.

Geopolitical and domestic political risks have increased. The terrorist attacks of March, June, and November 2015 illustrate the deterioration in the security environment, despite government and international coalition efforts to crack down on terrorism. The growing footprint of Islamic State in Libya risks further spill-overs into Tunisia, adding to threats from local terrorists.

In January, a new wave of protests, triggered by unemployment in the interior poverty-stricken regions, has once again raised the risk of social instability and may complicate the government's implementation of structural reforms.

The trajectory for public finances has weakened. Fitch estimates the budget deficit at 5.3% of GDP in 2015, with wage increases, bank recapitalisation costs and a drop in corporate revenues offsetting savings from low energy subsidy costs. The 2016 Budget falls short of improving the budget composition, with the wage bill consuming almost 60% of revenues. Capital spending declined to 5.3% of GDP in 2015 from a long-term average of 7.5%. Public debt neared 53% of GDP in 2015, compared with a peer median of around 43%, and is projected by Fitch to reach 58.4% by 2017. Around 65% of government debt is denominated in foreign currency.

The affirmation of Tunisia's IDRs also reflects the following key rating drivers:

The country ranks well within the 'BB' rating category on structural features such as development and governance indicators. GNI per capita (PPP basis), depth of financial markets, trade openness, and ease of doing business indicators compare favourably with the median.

Tunisia is increasingly reliant on the commitment of official external creditors to plug its foreign financing gap. In 2015, around half of the government's financing needs were met through external multilateral or bilateral support, and Fitch expects this support to remain. A new IMF programme is currently being negotiated, in addition to renewed bilateral and multilateral commitments including US government debt guarantees, French bilateral loans, and new funding from the World Bank, African Development Bank and EU. Authorities also plan to tap the bond markets following a standalone issuance last year.

Nevertheless, there are risks to the implementation of a future IMF programme and to its success in restoring economic growth, narrowing the twin budget and current account deficits and stemming the increase in public and external indebtedness.

The recapitalisation of the state banks (costing the government 0.7% of GDP in 2015) placed them just under the solvency limit, albeit with no buffers for downside risks. Given the non-performing loan ratio for the public bank sector is 24% and rising due to the sector's exposure to tourism, the banks will likely need more capital. Shortfalls could partly be met with asset disposals, although more state support cannot be ruled out. The cancellation of plans to create a problem loan management company slows the restructuring process.

External finances remain a key rating weakness. Low oil prices contributed to an improvement in the trade balance in 2015, but the current account remained in deficit at 8.7% of GDP, reflecting the fall in tourism receipts (down 35% yoy in 2015 and down 50% yoy in January 2016), a consumption-led rise in imports, and lower manufacturing, energy, and phosphate exports. Net external debt reached almost 46% of GDP, from 35% a year earlier. Tunisia's external liquidity ratio is low at 102% in 2016 and foreign exchange reserves cover 3.3 months of current external payments, lower than the peer median coverage of 4.2 months. Fitch projects the current account to remain in deficit at around 7.5% of GDP in 2016 and 2017, and for net external debt to rise to over 50% of GDP by 2017.

RATING SENSITIVITIES
The main factors that could, individually or collectively, lead to negative rating action are:
- Failure to increase the growth rate.
- Political destabilisation of the country stemming from terrorist risk or social unrest.
- Failure to stabilise government debt-to-GDP.
- Failure to reduce the current account deficit.

The main factors that could, individually or collectively, lead to positive rating action are:
- Increased growth prospects, for example related to structural improvements in the business environment and/or the security situation.
- Reduction in budget deficits consistent with stabilising the debt-to-GDP ratio in the medium term.
- A structural improvement in Tunisia's current account deficit, leading to reduced external financing needs and stronger international liquidity buffers.

KEY ASSUMPTIONS
Fitch assumes that official lenders will remain supportive of the country in the coming years.

Fitch assumes that Brent crude will average USD35/b in 2016 and USD 45/b in 2017.