Fitch Affirms Tunisia at 'BB-'/'BB'; Outlook Negative

The issue ratings on Tunisia's senior unsecured foreign currency bonds have also been affirmed at 'BB-'. The Outlooks on the Long-term IDRs are Negative. The Country Ceiling has been affirmed at 'BB' and the Short-term foreign currency IDR at 'B'. KEY RATING DRIVERS Tunisia's IDRs and Outlook reflect the following key rating drivers:- - Political risk remains high but has receded following the adoption of the new constitution and the nomination of a technocratic government early 2014, which Fitch considers as an important step in reducing political instability. In Fitch's view, the political transition remains long, however, and uncertainty remains over the timing of the presidential and legislative elections and over whether these elections can bring about political stability and economic revival. - The budget deficit widened to 6.5% of GDP in 2013 from 4.5% in 2012, pushing public debt to 45.4% of GDP from 44.3%. This is a higher level than BB-rated peers and Fitch expects it to exceed 50% of GDP by end-2015. The agency also expects moderate fiscal consolidation in the coming years, but likely bank recapitalisation will weigh on public finances in 2014 and 2015. - Tunisia benefits from strong support from international financial institutions and bilateral creditors. After a pause in disbursements by official creditors at end-2013, international support has resumed since the adoption of the new constitution. Fitch expects large disbursements by IMF and World Bank in 2014, as well as bilateral support from the US and Japan to finance budget and external borrowing requirements during the year and, to a lower extent, in 2015. Debt has long maturities but a significant share (57%) is in foreign currency. - Fitch considers external finances as a rating weakness. Due to subdued exports to the EU and slowing tourism receipts, Tunisia's current account deficit has widened steadily in recent years to 8.4% of GDP in 2013. Moderate FDI inflows (2.8% of GDP on average over the past three years) have contributed to an increase in external debt, and international reserves, at 3.2 months of current account payment cover at end-2013, are weak. Net external debt, at 61% of current account receipts at end-2013, will remain above the BB median (32.9%) in the coming years. - Real GDP growth has recently been slower than 'BB' rated peers, decelerating to 2.6% in 2013 after a rebound in 2012 (3.7%). Fitch expects a gradual recovery in 2014 and 2015, supported by political normalisation and EU recovery. Despite economic turbulences following the Jasmine revolution, economic volatility remains lower than 'BB' peers, and Fitch expects inflationary pressures to gradually recede in 2014-2015 after a spike in 2013 to 6.1% on average. - Development indicators, including GDP per capita, governance indicators, human development index as well as savings and investment rates, are broadly in line with 'BB' rated peers. Tunisia has a clean track record of debt repayment. - The weak banking sector weighs on the ratings. Given public banks' NPL ratio of 21% at end-June 2013, fragile capital buffers and large exposures to vulnerable state-owned companies, Fitch expects the government will provide public banks with support for their recapitalisation and restructuring. Fitch expects a 2%-3% of GDP recapitalisation cost for 2014-2015. RATING SENSITIVITIES The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the rating: - Renewed political tensions in the run-up to or after the presidential and legislative elections, or failure to form a coherent government - Failure to narrow the budget and current account deficits over the medium term or rising uncertainty over deficit financing options - Material recapitalisation needs of the banking sector above our forecasts or materialising contingent liabilities from state-owned enterprises The current Outlook is Negative. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to an upgrade. However, future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include: - An easing of political and social tensions and improved confidence in the transition process, for example, related to the peaceful organisation of elections and formation of a legitimate government - A demonstrated gradual unwinding of economic imbalances, illustrated by a narrowing of budget and current account deficits, and improved growth prospects KEY ASSUMPTIONS The ratings are sensitive to a number of assumptions: Fitch assumes that progress towards political transition will continue until and beyond the next elections without a breakdown in the process or widespread violence. Fitch assumes that multilateral and bilateral creditors will remain supportive of Tunisia in coming years. In particular, Fitch assumes that IMF and World Bank loan disbursements will cover a large part of Tunisia's public and external financing needs in 2014 and, to a lower extent, in 2015.

Fitch assumes a gradual economic recovery in the euro zone, to 1.1% in 2014 and 1.4% in 2015 from -0.4% in 2013. Fitch also assumes that the current authorities or the future government will not repudiate external public debt contracted under the former regime on grounds of illegitimacy. Contact: Primary Analyst Amelie Roux Director +33 144 299 282 Fitch France SAS 60 rue de Monceau - 75008 Paris - France Secondary Analyst Arnaud Louis Director +44 20 3530 1539 Committee Chairperson Edward Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685737 Country Ceilings http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715618 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827720 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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