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Fitch lowers Tunisia's outlook to negative on pressure on finances

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Fitch lowers Tunisia's outlook to negative on pressure on finances

Fitch Ratings revised the outlook on Tunisia's long-term foreign- and local-currency issuer default ratings to negative from stable, citing rising pressure on external finances and uncertainty in the government's capacity to implement economic policies.

Tunisia's external and public finances will be weighed by rebounding oil prices and tightening U.S. dollar financing conditions on international markets, Fitch said. The rating agency expects the country's current account deficit to remain wide at an average of 9.5% in 2018-2019, down from 10.4% in 2017, and external debt to rise to 75.6% of GDP in 2019.

Fitch also flagged increased liquidity risk stemming from Tunisia's weak performance under its IMF arrangement in 2016 and 2017 that have led to loan disbursement delays, but the country will likely meet the quantitative performance criteria for the upcoming first-quarter review in June.

Fitch expects inflation, which soared to a 26-year high of 7.7% in April, to remain well above its long-term average of 4% for the foreseeable future. "The upsurge in inflation and the rise in unit labor costs are aggravating the overvaluation of the dinar," the rating agency said.

Fitch said Tunisia's GDP growth is gradually accelerating and will average 2.7% in 2018-2019, up from 1.5% in 2016-2017, on the back of a tourism recovery, strong agricultural output, and robust manufacturing demand. However, it expects domestic demand to slow in the medium term.

Party positioning ahead of 2019 legislative and presidential elections may also trigger renewed government instability, Fitch warned, noting that a looming new coalition pact and a likely cabinet reshuffle will determine whether the government can push through its reform agenda in the next 18 months.

The rating agency affirmed the long-term issuer default ratings at B+, highlighting that while the country is saddled by high and growing debt as well as muted economic growth, it is supported by high GDP per capita and a good debt service record. Tunisia's short-term ratings were affirmed at B.