Standard & Poor's on Wednesday cut its sovereign credit rating on Tunisia to junk with a two-notch downgrade to BB, citing weaker-than-expected economic, fiscal and external debt indicators despite overall political stability.



The rating outlook for Tunisia is now considered stable, S&P said in a statement.



The Arab Spring protests that erupted in Tunisia in January 2011 and led to the overthrow of Zine al-Abidine Ben Ali have resulted in a stable political environment, the S&P said.



S&P said, however, it does "not believe that Tunisia's transitional government - in office since December 2011 - will be able to take proactive corrective measures against a weakening economic and financial backdrop that would be consistent with an investment-grade rating."



The firm said it expects that once a draft constitution is approved and parliamentary elections take place, the political and economic indicators will be consistent with the new rating.



Tunisia's Parliament speaker, Mustafa Ben Jaafar, said last week the new constitution would be ready by Oct. 23. Parliamentary elections have been promised to take place between March and June 2013.



Tunisia still holds the lowest investment-grade credit ratings from both Moody's Investors Service, at Baa3 with a negative outlook, and Fitch Ratings, BBB-minus with a negative outlook.



"Our stable outlook on the long-term ratings indicates that we believe the political transition should be smooth and the country should withstand potentially considerable external shocks emanating from Europe," S&P said.



WEAKER INDICATORS



S&P highlighted Tunisia's falling tourism receipts and widening trade deficit.



The European Union's weak economic environment presents a significant challenge for Tunisia because the region is by far Tunisia's largest export market and a source of foreign direct investment for the North African nation.



Increases in government spending to support the domestic economy eroded Tunisia's public finances, but did prevent a recession from deepening, S&P said.



Access to external financing is expected to remain as long as an elected government articulates a clear medium-term economic plan, S&P said, adding that the rating continues to be constrained by Tunisia's fragile banking system.

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