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Rating Action:

Moody's affirms Tajikistan's B3 rating; outlook remains negative

26 May 2020

Singapore, May 26, 2020 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Tajikistan's long-term local and foreign currency issuer and the foreign currency senior unsecured B3 ratings and maintained the negative outlook.

The negative outlook reflects Moody's assessment that the coronavirus shock increases Tajikistan's external liquidity risks as remittances fall sharply and the government's spending needs rise. While in the near term, significant financial support from the international community will likely cover Tajikistan's external financing needs, beyond 2020, the government will be challenged to sustain its fiscal consolidation objective in order to preserve macroeconomic stability. Very weak governance points to the policy challenge for the government in responding to and mitigating the impact of the shock.

The coronavirus outbreak and the deteriorating global economic outlook, falling oil prices, and asset price volatility are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. For Tajikistan, the main channels of exposure are lower remittance inflows and consequently wider fiscal and external funding gaps and slower growth.

The affirmation of the B3 rating reflects progress made by Tajikistan in stabilizing its external payments position over the past year, alleviating some of the pressures on its foreign exchange reserves that led to the initial change in the rating outlook to negative in December 2018.

Tajikistan's long-term foreign currency bond ceiling remains unchanged at B3. The foreign currency deposit ceiling remains at Caa1, while the local currency bond and deposit ceilings remain at B1. In addition, the short-term foreign currency bond and deposit ceilings are unchanged at "Not Prime."

RATINGS RATIONALE

RATIONALE FOR MAINTAINING THE NEGATIVE OUTLOOK

CORONAVIRUS SHOCK RENEWS RISE IN EXTERNAL AND LIQUIDITY RISKS

The coronavirus shock has interrupted some signs of stabilization in Tajikistan's external liquidity position and raises renewed risks to the sovereign's credit profile. Lower oil prices leading to substantially weaker economic growth in Russia (Baa3 stable)—the most important destination for Tajikistan's overseas workers— are likely to weigh significantly on remittances in Tajikistan, a major source of foreign currency and income. Combined with higher spending for the government, Tajikistan's external financing needs have increased markedly. Weak institutions and governance point to risks to the government's capacity to manage the shock in a way that preserves macroeconomic stability.

Moody's expects that the current account deficit will widen to around $600 million in 2020 (6.8% of GDP) from less than $200 million in 2019 (2.3% of GDP) as a result of the coronavirus shock. Imminent liquidity pressures appear contained as Tajikistan's external financing gap is likely to be in large part covered by financing from International Financial Institutions, including the IMF's rapid credit facility (RCF) line that was approved in early May.

Moody's does not currently expect Tajikistan to participate in any debt relief initiative that would require the participation of private sector creditors. A decision to do so could carry negative implications for the country's rating.

Moody's estimates that some of the current account shortfall will be met by a drawdown on Tajikistan's international reserves, pushing the External Vulnerability Indicator, the ratio of external debt payments due in the course of the year to foreign exchange reserves (excluding gold) to over 500% in 2021 from around 300% this year. The negative outlook captures the risks related to a possible more significant and longer shock to foreign currency receipts in the economy at a time when the government's spending needs increase.

Beside the negative effect of lower remittances on household incomes, disruptions to trade and cross-border travel, as well as the imposition of containment measures weigh on domestic activity. Slower economic growth, around 3% this year from an average of almost 7% in the preceding five years, will weigh on government revenue. Moreover, in response to the coronavirus outbreak, the government will also increase spending to bolster public health initiatives and help to contain the economic fallout on households and businesses, contributing to substantially wider fiscal deficits.

Financing of the wider fiscal shortfall, estimated by Moody's at around 7% of GDP in 2020, mirrors the financing of the external funding gap. Moody's baseline scenario projects Tajikistan's government debt will be contained to less than 50% of GDP in 2020 from around 45% of GDP in 2019. While the associated borrowing needs for the government are not particularly large compared to other B3-rated sovereigns, Tajikistan has not previously demonstrated strong access to funding at moderate costs in times of urgent needs, pointing to some liquidity risks.

Moody's baseline projections assume traction on Tajikistan's non-binding commitments to international development partners regarding fiscal consolidation and the avoidance of non-concessional borrowing until the debt position has stabilised. However, given the government's limited track record of fiscal discipline, the negative outlook also reflects the potential for a deviation from the fiscal consolidation path, which could in turn threaten Tajikistan's access to external sources of financing.

RATIONALE FOR THE B3 RATING AFFIRMATION

RECENT, PRE-SHOCK, PROGRESS TOWARDS EXTERNAL STABILIZATION

While Tajikistan's credit metrics at the onset of the coronavirus shock are weak, signs of macroeconomic stabilization in the recent years support the B3 rating.

In 2019, Tajikistan's current account deficit more than halved as compared to 2018, reflecting a recovery in remittance inflows and better export performance given improved bilateral relations with Uzbekistan (B1 stable) and the completion of the second of six planned turbines in the Rogun Hydropower Project (HPP). Relatedly, foreign currency reserves climbed through much of 2019 and reached a near-record high of almost $640 million in January 2020. Once the global impact of the coronavirus epidemic eases, Tajikistan's improved export potential should support foreign currency revenue. Over the medium term, strengthened exports and revenue will be essential to meet the repayments of debt related to the Rogun HPP project.

In 2019, Tajikistan also recorded a third consecutive year of narrower fiscal deficits, largely driven by expenditure restraint. As a result, its government debt burden has consolidated to around 45% of GDP in 2019 from over 50% in 2017. Although susceptibility to exchange rate depreciation remains given the ongoing reliance on external funding, the largely concessional nature of much of Tajikistan's foreign-currency government debt also continues to support debt affordability. However, Tajikistan's fiscal strength is undermined by material contingent liabilities related to state-owned enterprises (SOEs) and banks.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental considerations are material to Tajikistan's credit profile. The country lies within the collision zone between the Indian Plate and the Eurasian Plate, making it especially vulnerable to earthquakes. Furthermore, as the economy is heavily dependent on agriculture, it is vulnerable to climate change risks, the potential impacts of which are compounded by the economy's small size and low incomes. Given the government's already high debt burden, an earthquake or climate-change related shock that caused widespread damage could materially impact Tajikistan's rating.

Social considerations are material to Tajikistan's economic strength given interrelated issues concerning poverty and low human capital. Despite robust economic growth and significant progress on poverty reduction over the past decade, Tajikistan continues to have one of the lowest per capita incomes among rated sovereigns. Limited economic and employment opportunities have also led to significant emigration, although remittances from overseas Tajik workers have generally been supportive of the external payments position. Comparatively weak levels of human capital development also constrain diversification of the economy. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the potential implications for public health and safety. For Tajikistan, the shock mainly translates into rising external liquidity risks given a significant fall in remittances and higher financing needs.

Governance considerations are material to Tajikistan's credit profile, and are reflected in a "caa1" assessment of its institutions and governance strength. Tajikistan scores poorly on governance assessments as measured by the Worldwide Governance Indicators, reflecting weak regulatory quality, rule of law and control of corruption.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

WHAT COULD CHANGE THE RATING UP

The negative outlook indicates that an upgrade is unlikely in the near term.

Moody's would consider changing the outlook to stable upon evidence that increasing non-debt creating inflows are contributing to a durable build-up in foreign exchange reserves. Effective implementation of reforms in the banking sector and SOEs, which significantly reduce contingent liability risks to the government, would also support a stable outlook at B3.

WHAT COULD CHANGE THE RATING DOWN

Moody's would likely downgrade the rating if risks to macroeconomic stability increased materially through a more marked and longer erosion of foreign exchange reserves than Moody's currently expects. This could result from only partial coverage of the country's external financing needs by concessional lines of external financing, which in turn may depend on a sustained commitment to policy reform and medium-term fiscal consolidation.

A materialisation of significant contingent liabilities posed by banks or SOEs with large fiscal costs would weigh on fiscal strength and likely prompt Moody's to downgrade the rating.

While not Moody's current expectation, indications that the government was likely to participate in debt relief initiatives which Moody's concluded were likely to entail losses for private sector creditors would be negative for the rating.

GDP per capita (PPP basis, US$): 3,427 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 7.3% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 5.4% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -2.8% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -5% (2018 Actual) (also known as External Balance)

External debt/GDP: 79.44% (2018 Actual, includes private and public sector)

Economic resiliency: b2

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 20 May 2020, a rating committee was called to discuss the rating of the Tajikistan, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become increasingly susceptible to event risks.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christian de Guzman
Senior Vice President
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Marie Diron
MD - Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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