Absence of agreement with IMF could cost Tunisian banking system USD 4.1 billion to USD 7.6 billion (S&P)

February 22, 2023

(TAP) - The absence of a funding agreement between Tunisia and the International Monetary Fund (IMF) and external financing put the country in a situation of 'sovereign default' and could cost between $4.1 billion and $7.6 billion to the Tunisian banking system, i.e. between 8% and 14.8% of nominal GDP late in 2023, according to the most extreme scenario of the rating agency Standard & Poor's (S&P).

In a report released on Monday, the US rating agency presented three hypothetical scenarios ranging from 'low stress' to 'severe stress' and based on surveys of investors, the agency reviewed the potential financial and economic impacts on the banking sector, which faces an “ambiguous” environment.

The Agency also stated in its report the impacts of the COVID-19 pandemic on the country and ways Tunisia could use to finance its twin deficits and address the risks threatening the banking system.

In 'severe stress' scenario, S&P estimates that the country risks defaulting on its financial obligations if it fails to sign an agreement with the IMF and obtain other bilateral support, particularly from Gulf countries, which would worsen the balance of payments and public finances. This situation would also result in a “heavy” depreciation of the Tunisian dinar and a “substantial rise” in inflation and would push banks to suffer “serious losses” and increase their need to be recapitalised.

The Tunisian economy should recover in case of an agreement signed with the IMF

In the case of the most optimistic 'low stress' scenario, the American rating agency estimates that an agreement with the IMF will be signed by the end of the first quarter of 2023 and the implementation of reforms would 'gradually' restore confidence in Tunisia and boost private sector investments.

Public and external finances should get back to a “sustainable” trajectory. Local banks would be able to start implementing the reforms run by the Central Bank of Tunisia (BCT) even if the cost of banking risk should remain high but, on a downward trend compared to 2020/2021, the Agency said.

However, two main sources, external and internal, remain valid for this scenario. These are a greater external risk of a slowdown in Europe and higher commodity prices and internal risks of political instability or major opposition to reforms.

Concerning the third 'moderate stress' scenario, Standard & Poor's assumes that lack of implementation of reforms would prevent the country from mobilising the resources necessary to fund its budget, which will have impacts on bilateral and multilateral support.

Without external support, the government would be compelled to rely on the local market in a bid to mobilise resources from banks or other public sector companies which have sufficient liquidity. This could exacerbate pressure on banks and erode profitability, the agency said.

As of February 9, the total refinancing volume of the banking system with the BCT reached 14.5 billion dinars.

According to the finance law of 2023, Tunisia must mobilise 14.8 billion dinars in external loans.

Director of the International Monetary Fund (IMF) Kristalina Georgieva told Arab media on February 13, on the sidelines of the government summit in Dubai, that the finalisation of the agreement signed in October 2022 between Tunisia and the Fund will be carried out 'very soon.' This agreement depends on the mobilisation of other funds from the Gulf region so as to help introduce the reforms promised by the Tunisian government.

Tunisia's sovereign rating by the S&P agency was withdrawn in 2013 by the BCT.


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