Tunisia Is Tapping International Bond Markets, but Investors Are Worried About Default 2

Tunisia Eurobond

Tunisia had tapped international bond markets in February in continued efforts to procure financing to rebuild its economy. The 850 million euro seven-year Eurobond saw a yield of 5.75%. Prior to this, the country had tapped international markets in 2015 via a $1 billion dollar-bond which had drawn a lot of investor interest.

Reports indicated that global coordinator Natixis and joint lead managers to the issue, Commerzbank and JP Morgan, had been unable to find better pricing, though there were views that tighter pricing could not be obtained because of the euro denomination of the bond vis-à-vis a dollar denomination.

Another reason investors were not completely sold on the bond was because they did not find the reform initiatives convincing. For instance, the graph below shows how the government’s indebtedness has increased over the past few years. According to the IMF, Tunisia’s public debt was over 60% of GDP in 2016.

Investors’ fears are not completely unfounded.

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Rating downgrade

Just before the global coordinator and lead managers were to set out for roadshows for the bond, rating agency Fitch downgraded the country’s long-term foreign and local currency ratings, and senior unsecured bonds, to ‘B+’ from ‘BB-.’ It kept its outlook ‘stable.’

Fitch noted that “The collapse of tourism in the context of elevated security risks, slowdown in investment amid frequent government changes and episodes of strikes and social unrest have weakened economic growth performance and prospects.” These, the agency held, will have negative impact on external and public finances and can be seen in the country’s increasing budget and current account deficits.

Bloomberg’s assessment

Bloomberg counts Tunisia as among four countries most likely to default on their payments in Africa. According to its sovereign credit risk model, which incorporates “budget deficits, foreign reserves, non-performing bank loans and political instability,” Tunisia’s probability of default is 3.5% – the third highest in Africa.

Tunisia to issue more bonds

Even in face of default risk and delayed financial assistance from the International Monetary Fund (IMF) citing the lag in reforms, the country intends to approach international bond markets again in 2017.

Reuters reported Finance Minister Lamia Zribi saying that the country plans to issue $500 million Sukuk Islamic bond. She was quoted as saying “If we don’t manage to fulfill our external financing needs of 6.5 billion dinars ($2.85 billion) then without a doubt we’ll go to capital markets again this year.”

At this juncture, it is extremely essential for the country to go full throttle on the economic reform process so that the IMF disburses its delayed and upcoming loan tranches. This would infuse confidence in the minds of international investors and would provide more desirable yields to the government if and when it goes to international markets again this year.

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