As Tunisia Seeks Financing, Its Banks Face Uncertain Prospects, Says Report

DUBAI (S&P Global Ratings) Feb. 20, 2023–As Tunisia seeks to secure an IMF program to alleviate its twin deficits, the country’s banks are navigating major uncertainty and significant macroeconomic pressure, according to a new S&P Global Ratings scenario analysis report published today.

“With a potential IMF deal looming, we have analyzed the current situation and considered the potential financial and economic implications for the banking sector under three hypothetical scenarios, from low stress to severe stress. Under the latter, we stress tested the resilience of the banking system to a potential sovereign default,” said S&P Global Ratings credit analyst Mohamed Damak.

The COVID-19 pandemic and prevailing political uncertainty have weighed on Tunisia’s economic activity in recent years. According to the IMF, the country’s economic growth is expected to reach 1.6% in 2023, while its fiscal and external deficits will likely total a cumulative 13% of GDP. The country faces major hurdles to raise external funding and internal divides have reportedly caused delays in mobilizing the necessary resources. The Tunisian authorities and the IMF are in talks to agree a program that entails important reforms.

In this context, banks’ exposure to the state remains significant at 83% of total equity on Aug. 31, 2022 (including direct lending to the public administration exposures), up from 5.1% at year-end 2010. Although this is lower than that seen in some peer banking systems, it represents a major source of risk given the lack of visibility on how the country will finance its twin deficit.

“Overall, our calculations show that a Tunisian sovereign default might cost the banking system $4.1 billion-$7.6 billion, or 8.0%-14.8% of forecast nominal GDP at year-end 2023. Our calculations exclude the potential effects of a sharp depreciation of the Tunisian dinar, which might add to these costs,” Mr. Damak concluded.

The full report: “As Tunisia Seeks Financing, Its Banks Face Uncertain Prospects,” is available on RatingsDirect.

This report does not constitute a rating action.