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Rating Action:

Moody's affirms Tanzania's B1 ratings; maintains negative outlook

23 Aug 2019

London, 23 August 2019 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Tanzania's B1 local- and foreign-currency long-term issuer ratings and maintained the negative outlook.

The affirmation of the B1 rating balances Tanzania's weak institutional framework, low fiscal strength, particularly weak revenue mobilisation capacity, with credit supports such as a low cost of debt and the economy's diversification which helps mitigate the impact of shocks and supports robust growth.

The decision to maintain the negative outlook reflects Moody's assessment that the risks remain that unpredictable policy negatively affects Tanzania's growth, investment environment and/or access to financing durably.

The foreign-currency and the local-currency bond and deposit ceilings remain unchanged, at Ba2 for local-currency bonds and deposits, Ba3 for foreign-currency bonds and B2 for foreign-currency deposits.

RATINGS RATIONALE

RATIONALE FOR AFFIRMING THE B1 RATING

WEAK INSTITUTIONS, LOW FISCAL STRENGTH DESPITE LARGELY CONCESSIONAL DEBT

Tanzania's weak governance and policy effectiveness are a constraint on the rating.

The Worldwide Governance Indicators (WGI) rank Tanzania in the bottom 18th percentile of sovereigns rated by Moody's for government effectiveness and in the 34th percentile for control of corruption and in the 28th percentile for rule of law. Notwithstanding the government's efforts in fighting corruption, Tanzania's institutional framework has been weakening relative to other sovereigns in recent years.

Weak governance and government effectiveness are shown in the persistent significant underperformance of government revenue and expenditure compared to budgets, previous accumulation of domestic arrears that is not reversed (estimated at 5.7% of GDP as of June 2018), and weak policy implementation, as highlighted by the weak budget execution.

The sovereign's institutional weaknesses undermine fiscal strength. The authorities have been relatively successful at containing low-priority spending in recent years, as seen in a decline in spending on goods and services as a share of GDP. Steps taken by the administration have included reducing staff numbers in the public sector and increasing efficiency of spending, especially on goods and services. However, the government has been less successful in raising revenue. Tax receipts have stagnated as a proportion of GDP over the past three years, and overall government revenue is around 15% of GDP. Debt affordability is supported by the largely concessional nature of government debt, which accounted for 51% of total government debt in fiscal year 2018.

While deficits have been modest in recent years and Moody's expects them to remain around 2.5-3% of GDP even as public investment ramps up, very weak revenue mobilization prevents a decline in the debt burden despite robust growth. Moody's projects that government debt will hover around 40% of GDP and 270-280% of revenue in the next few years. Moreover, off-budget expenditure, including on repayment of some past arrears have in the past contributed to a higher debt burden, and may continue to do so.

MEDIUM-TERM GROWTH PROSPECTS, DIVERSIFICATION SUPPORT ECONOMIC SHOCK ABSORPTION CAPACITY DESPITE LOW INCOMES

The economy's strong growth potential and its relative diversification support shock absorption capacity, that is otherwise undermined by low incomes.

Since 2010, real GDP growth has averaged 6.6%, very high in global comparison and the eighth fastest rate of growth among B-rated sovereigns. Moody's expects somewhat slower growth over the medium term, around 6%, reflecting softening growth in services and construction after several years of very rapid expansion. Nonetheless, assuming no major policy setback to the business environment compared with the current environment, continued investment in a number of large infrastructure projects and robust output growth in mining, with large still untapped resources, will likely support GDP growth at relatively high rates.

The Tanzanian economy is relatively diversified, with growth driven by a mix of agriculture, manufacturing, construction and services. Robust growth that is not particularly exposed to sector-specific vulnerabilities lends some capacity to the economy to absorb shocks, despite very low-income levels. Tanzania's average income, with GDP per capita of $3,444 at Purchasing Power Parity at end-2018, is very low on a global scale and lower than the median for B-rated sovereigns, representing a key credit constraint.

RATIONALE FOR MAINTAINING THE NEGATIVE OUTLOOK

POLICY UNPREDICTABILITY REMAINS, POSING RISKS TO THE GROWTH, FINANCING ENVIRONMENT

The main source of downside risks informing the negative outlook continues to relate to policy unpredictability, notwithstanding some actions by the government that have helped instill a degree of transparency to policy decisions recently.

Ongoing uncertainty over the regulatory environment and policy stance of the government, particularly as it relates to the mining sector, could have a long-term negative impact on the country's growth potential and ability to attract foreign investment. Even though mining represents only a small share of GDP, the mining sector is an important source of government revenue and export earnings (41% of exports in 2018).

Should unpredictable policy decisions significantly and durably hamper Foreign Direct Investment (FDI), given the country's persistent current account deficits which Moody's expects to widen to 4.8% of GDP this year, foreign exchange reserves and Tanzania's external stability would be undermined. So far, net direct investment inflows have remained relatively stable, at just under 2% of GDP in the last three years.

Moreover, policy actions that lead to the suspension or withdrawal of international funding would raise government liquidity risks. Tensions with international donors have simmered over the past 18 months, as highlighted by the suspension of some funding programmes including by the World Bank, although engagement has resumed now. For fiscal year 2019, lower external non-concessional borrowing was compensated by higher-than-budgeted domestic borrowing, both from bank and non-bank sources. However, the small size of Tanzania's domestic banking system and the sovereign's limited track-record in accessing international capital markets indicate that a prolonged period of lower international concessional funding would likely put pressure on Tanzania's access to and cost of finance.

WHAT COULD CHANGE THE RATING UP

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

Moody's would likely change the outlook to stable should it become increasingly probable that the policy environment will not lead to a deterioration in Tanzania's credit metrics or undermine the institutional and business environment.

WHAT COULD CHANGE THE RATING DOWN

Moody's would likely downgrade Tanzania's rating should unpredictable policymaking become increasingly likely to affect GDP growth and investment negatively. Moreover, an increasing likelihood that the debt burden would rise markedly and for a prolonged period of time would also probably lead to a downgrade of the rating. This could result from persistently high or rising budget arrears and/or a build-up in external pressure leading to a marked depreciation of the currency.

GDP per capita (PPP basis, US$): 3,444 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 7.0% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 3.3% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -1.3% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -3.3% (2018 Actual) (also known as External Balance)

External debt/GDP: 33.0% (2018 Estimate)

Level of economic development: Low level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 20 August 2019, a rating committee was called to discuss the rating of the Government of Tanzania. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/ framework has not materially changed. The issuer's governance and/or management have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in this rating was Sovereign Bond Ratings published in November 2018. 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 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.

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

Items color coded in purple in this Press Release relate to unsolicited ratings for a rated entity which is non-participating.

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.

Kelvin Dalrymple
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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