A hypothetical default of Tunisia’s government on its loans could cost the country’s banks between $4.3 billion to $7.9 billion, a report published last week by Standard & Poor’s rating agency found.
Tunisia’s banks are significantly exposed to government debt, a situation that has continued to exacerbate over the past decade. COVID-19 put further strain on the country’s indebted sovereign, with the economy hit hard by the pandemic.
“Understanding the cost of a hypothetical sovereign default for Tunisia's banks is therefore becoming increasingly relevant, especially in light of the damage that the COVID-19 pandemic has wreaked on the Tunisian economy and the ongoing political divide between the country's three branches of power,” the S&P report said.
Should a default occur, although S&P notes this is unlikely, it would be equivalent to 55 to 102 percent of the entire country’s banking sector equity. Tunisia’s banks have expanded their exposure to government debt in the last 10 years.
In addition to the purchase of government bonds, the banks have also been directly lending to the central government.
The ratings agency noted that for the country to achieve future economic growth it would need to resolve its political issues and implement government reform.
The country’s debt has soared over the past decade. At year-end 2010, Tunisia’s gross debt sat at 39.2 percent of gross domestic product (GDP), but by year-end 2020 this number had jumped to 87.6 percent of GDP.
With reforms lacking, and debt sky-high, the country has become dependent on financing from multilateral institutions, such as the International Monetary Fund (IMF), S&P explained.
“We think multilateral support should be forthcoming, assuming the country is able to implement the necessary reforms, which would ultimately require a resolution of the political divide. As long as Tunisia receives that support, we do not expect it to default over the next 12 months,” the S&P report said.