Standard & Poor's (S&P) Global warned on Tuesday that a sovereign debt default in Tunisia could cost the country's banks up to $7.9 billion, accounting for 102% of total equity.
The economic blow from the pandemic and the ongoing political instability in the country, which exacerbated its financial outlook, also led the agency to downgrade the credit ratings of three Tunisian banks.
Mohamed Damak, an analyst at Standard & Poor's, said that Tunisian banks' exposure to their sovereignty has more than doubled over the past decade with a sharp increase in government indebtedness.
Tunisia's economy has already been hit by the pandemic, with GDP contracting by 8.8% last year, the largest economic downturn since 1956, according to the International Monetary Fund (IMF). The IMF's latest report showed that the country's youth unemployment rose to 36.5% in Q4 of 2020, and lower tax revenues led to the growth of its fiscal deficit to 10.6%.
IMF said the government has turned to local lenders to finance the spending, as borrowing from local banks covers more than 50% of the total financing needs.
Tunisia's debt-to-GDP is forecast to grow to 91.2 per cent this year, from 87.6 per cent in 2020, according to the Washington-based lender. The country's debt-to-GDP ratio is expected to grow to 91.2% this year, from 87.6% in 2020, according to the S&P.
S&P said that sovereign debt default of the next 12 months "remains highly unlikely," but if that happens it will cost banks between $4.3 billion and $7.9 billion, or 55% to 102% of Its equity.
S&P lowered the long-term source ratings of Arab Tunisian Bank, BH Bank, Banque de Tunisie et des Emirats to to CCC+ from B- previously.
According to IMF, The Tunisian economy will likely take some time to return to pre-pandemic levels, with average GDP growth of only 2.4% over the next five years.
Also, data from the Tunisian Central Bank last week showed that tourism revenues for the first four months of 2021 fell by 55%.
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