Tunisia may sidestep default this year with IMF aid in limbo
Bondholders are confident Tunisia can meet its debt-repayment obligations over the next year, even as the fate of a bailout from the International Monetary Fund hangs in the balance, potentially exacerbating a deepening sense of malaise across the country.
The country’s euro-denominated bonds due next month are trading close to par, following a 46% plunge in April after President Kais Saied’s rejection of a set of IMF-mandated spending cuts and reforms in return for $1.9 billion in funding. Dollar notes due in January next year have climbed 4.8 cents on the dollar this year to 87.03, near their August 2021 high.
Tunisia has enough foreign reserves to meet its debt obligations without triggering a balance-of-payments crisis, according to Patrick Curran, a senior economist at Tellimer. Foreign-currency buffers have helped cover around fourth months of rationed import needs, while a recovery in tourism and remittances from Tunisian expatriates bolstered inflows.
But to stave off debt distress in the long run, Tunisia will need to commit to “difficult fiscal and structural reforms that the government has so far resisted,” Curran added.
The IMF reached a staff-level agreement with Tunisia in 2022 for funding, but President Saied subsequently slammed its recommended reforms as “foreign diktats” that would impoverish Tunisians. In October, he fired his economy and planning minister, one of most vocal advocates of the rescue program.
Still, in Davos this week, Prime Minister Ahmed Hachani met with Kristalina Georgieva, the IMF’s director-general, indicating his country is not quitting the bailout option. Tunisia met all foreign-debt repayments in 2023 and won’t face any delays doing so this year, Hachani told Georgieva, according to a statement on his official Facebook page, days after the Washington-based lender added Tunisia to its list of least cooperative members.
“There was a general expectation there will be no IMF program until after the 2024 election if even then,” said Mark Bohlund, a senior credit research analyst at Redd Intelligence. Fear of default remains, but investors are showing less concern about it happening in the next 18 months or so, he said. “It seems like most investors now assume that they will not announce debt restructuring post the election and that the January 2025 eurobond maturity will be met,” Bohlund said.
Economic Malaise
While Tunisia ranks sixth-highest on Bloomberg’s Sovereign Debt Vulnerability Scorecard, support from Qatar’s development fund could help it dodge default this year, according to Ziad Daoud, chief emerging markets economist for Bloomberg Economics.
But Saied faces pressure to scale down Tunisia’s bloated public sector while revamping the subsidy and tax systems to make its debt burden more sustainable.
Local opponents and human right defenders have accused Saied of ushering an authoritarian backslide and undermining democratic norms. He has also picked fights with international organizations including the European Union, which he accused of failing to provide financial support to help curb migration across the Mediterranean Sea.
Next year’s budget expects debt-servicing costs to jump to 14.1% of gross domestic product from 13.1% in 2023 and 10% in 2022. Economic growth is seen rising to 2.1% versus 1% this year.
