"Tunisia's economy and public finances have demonstrated impressive stability despite a series of external shocks in recent years," said Charles Seville, Associate Director in Fitch's Sovereign Group. Most recently, the government has had to contend with a sharp rise in food and fuel prices, although prices have fallen back in the second half of 2008. Higher prices caused spending on subsidies to rise but the government raised fuel prices and, with the help of buoyant tax revenues, has kept the budget deficit within its 3%-of-GDP target.

General government debt has also continued to decline, though at 50.9% of GDP in 2007, it is the fifth-highest in the 'BBB' rating category. Debt dynamics remain positive and the government is actively reducing reliance on external debt to reduce exposure to currency risk. Depending on how revenues perform, lower world food and fuel prices, combined with a gradual lifting of subsidies on domestic prices, may give the government the flexibility needed to lower the budget deficit more quickly and bring debt ratios closer to its rated peers.

Tunisia now faces a sharp slowdown in the EU, the main market for its goods and services and history suggests growth will moderate in these circumstances. However, a pipeline of foreign investments in energy, infrastructure and industry will underpin growth of at least 5% over the forecast period, and foreign direct investments are substantially higher year-on-year so far in 2008. In aggregate, manufacturing has adapted well to free trade (in non-agricultural goods) with the EU, and higher value- added sectors are growing briskly.

Tunisia has grown in line with the average of 'BBB'-rated countries and has avoided current account imbalances or excessive credit growth. On the contrary, bank credit growth has been relatively subdued. Although the financial sector has weaker prudential indicators than most peers, a high stock of non-performing loans is a legacy issue that is being gradually addressed. Banks are increasing both provisions and capital.

The current account deficit has been contained and funded largely by foreign direct investments in recent years. Overall balance of payments surpluses have led international reserves to increase, strengthening the country's external balance sheet. Ample external liquidity, along with a well-capitalised financial system, will be a pre-requisite for continuing the opening of the capital account.

Triggers for positive rating action would centre on continued progress in reducing government indebtedness and strengthening the banking system in a context of sustained rapid growth.

 - Ends -

About Fitch
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.

For more information, please contact:
Charles Seville
London
Tel: +44 (0) 20 7417 425

Eric Paget-Blanc
Tel: +33 1 44 29 91 33.

Media Relations
Francoise Alos
Paris
Tel: +33 1 44 29 91 22

Peter Fitzpatrick
London
Tel: + 44 (0)20 7417 4364

© Press Release 2008

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