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Rating Action:

Moody's affirms Togo's B3 ratings, maintains stable outlook

26 Nov 2021

Paris, November 26, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the government of Togo's B3 long-term issuer ratings. The outlook remains stable.

Today's action balances the resilience of the Togolese economy to the pandemic shock against weak institutions and governance. Moody's expects that the government debt burden will stabilise at about 60% of GDP in the next couple of years before receding. Moreover, while sizeable government funding and debt roll-over needs give rise to liquidity risks, Togo's membership of the WAEMU (West African Economic and Monetary Union) tempers these risks.

Togo's local currency country ceiling remains unchanged at Ba3, maintaining the existing gap with the sovereign rating. The three-notch gap reflects Togo's WAEMU membership and support from stronger members of the union, which mitigates the risks associated with Togo's weak institutions and external imbalances. The foreign currency country ceiling also remains unchanged at B1, one notch below the local currency country ceiling. This reflects limited transfer and convertibility risks, given the French Treasury's guarantee of the peg of the CFA franc to the euro, as part of the WAEMU membership.

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION OF THE B3 RATINGS

ECONOMY HAS PROVEN RESILIENT; DEBT BURDEN INCREASES LIKELY TO REVERSE BY 2025

Togo entered the pandemic from a fiscal surplus position and was able to use counter-cyclical policies, introducing fiscal measures worth 3% of GDP in 2020 to support the economy from the brunt of the crisis. Partly as a result, the economy has been relatively resilient to the shock and grew in real terms by 2% in 2020, down relatively modestly from 5% over 2017-19. The extractive industries, utilities, construction as well as transportation and storage sectors held up particularly well. Activity at Port de Lomé did not face disruption and continued to expand at a rapid pace because sea borders remained open. Meanwhile, the improved business environment has supported the economy's attractiveness for private investment.

Being part of the WAEMU, the Togolese economy also benefited from the measures introduced by the Central Bank of the WAEMU to mitigate the impact of the shock on economic activity. Interventions included reductions in its policy rate, easier access to the central bank's liquidity facilities, and payment deferrals.

Moody's expects the authorities will gradually wind down the 2019-2020 surge in spending, leading to a gradual narrowing of fiscal deficits to 6.5% in 2021 and 5% in 2022, from 7% of GDP in 2020. But even under Moody's relatively loose fiscal policy scenario, government indebtedness is likely to recede supported by a pickup in growth from 2021 onward. Government debt will likely stabilise at about 60% of GDP in 2022-23 and trend down thereafter.

WAEMU MEMBERSHIP TEMPERS RISKS FROM SIZEABLE GOVERNMENT FUNDING NEEDS

In the next couple of years the government will face large funding needs of around 15% of GDP. These are primarily driven by local currency debt redemptions to WAEMU creditors, including roll-over of short-term debt, in addition to fiscal deficits and external, foreign currency debt redemptions.

Liquidity risks stemming from large funding needs are mitigated by the government's reliable access to domestic sources of funding and to a variety of official lenders externally. While the WAEMU market is shallow, it is large relative to the Togolese government's borrowing needs which represent 9% of the six Moody's-rated sovereign's borrowing needs in the WAEMU.

Official lending is the main channel of external funding for the government and primarily comes from multilateral institutions. In 2020, Togo benefited from additional funding from the IMF in the context of the coronavirus crisis, with an augmentation of access under the three-year Extended Credit Facility (ECF) arrangement of 48.7 percent of Togo's quota (SDR 71.49 million or about US$97.1 million).

INSTITUTIONS REMAIN WEAK WITH LIMITED ADMINISTRATIVE CAPACITY

Weaknesses in national policy effectiveness remain salient in the fiscal domain. The government's pre-IMF programme history of fiscal slippages in 2017, its track record of arrears and volatile fiscal accounts point to weak fiscal policy effectiveness that undermine the administrative capacity to implement fiscal adjustment in the wake of the significant global shock.

Togo ranks particularly poorly on government effectiveness under the Worldwide Governance Indicators. Meanwhile Togo ranks better on other factors that are more significantly influenced by its WAEMU membership such as control of corruption and rule of law. Indeed, WAEMU membership strengthens Togo's institutions given the level of transparency and reporting enforced by the WAEMU institutions, including the central bank.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that an IMF programme will be signed in the first part of 2022, notwithstanding the likelihood of a lengthy negotiation process. The Togolese authorities officially started negotiations with the IMF on an Extended Credit Facility in June 2021. The programme would help anchor fiscal policies and help avoid a repeat of past fiscal slippage, with a likely focus on tax collection and external debt sustainability. Togo only has a history of reducing large fiscal deficits when under an IMF programme as in 2017-19. The programme would also help Togo mobilize official sector funding.

In addition, liquidity risks from a potentially steeper tightening in monetary policy than currently expected by Moody's are contained and consistent with the current rating. Togo's membership to the WAEMU tempers liquidity risks from tighter monetary policy primarily because it contains inflation pressures due to the credible peg to the euro, where the credibility is supported beyond the foreign exchange reserves level by the Government of France's (Aa2 stable) backing.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Togo's ESG Credit Impact Score is highly negative (CIS-4), reflecting its high exposure to social and governance risks and its moderately negative exposure to environmental risks, as well as its weak resilience to social and environmental risks.

Togo's exposure to environmental risks carries moderately negative credit risks, reflected in its E-3 issuer profile score. Exposure to physical climate risk is moderately negative, driven by the economic importance of the primary sector, which is dominated by subsistence agriculture and which is less resilient than sophisticated agriculture to climate-related disruptions.

Exposure to social risks is highly negative (S-4 issuer profile score), mainly related to poverty, low education outcomes, and poor access to basic services. In reaction to low social results, popular dissatisfaction toward the ruling Gnassingbé family, in power for more than 50 years, has resulted in sometimes-violent waves of protests in the past, as was the case in 2017.

Togo has a highly negative governance profile score (G-4 issuer profile), reflecting particularly weak public financial management, exhibited by poor fiscal policy outcomes and constrained administrative capacity. These aspects underpin its very low resilience to shocks and limited capacity to respond to social and environmental risks and are the main driver of the CIS-4.

GDP per capita (PPP basis, US$): 2,222 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 1.8% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 3.7% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -7% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -1.5% (2020 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: b2

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

On 23 November 2021, a rating committee was called to discuss the rating of the Togo, Government of. The main points raised during the discussion were: 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.

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

FACTORS THAT COULD LEAD TO AN UPGRADE

Upward pressure on the ratings could emerge if government debt was on a clear downward trend, backed by a track record of more prudent fiscal policies, combined with the lengthening of the debt maturity profile and lower debt roll-over needs.

FACTORS THAT COULD LEAD TO A DOWNGRADE

Downward pressure on the ratings could result from a sustained increase in government debt or liquidity pressures -- two related factors more likely to materialize in the absence of an IMF programme. Other factors, such as large-scale shocks to the economy from climate change or from socio-political sources, would likely exert downward pressure on the ratings if they were likely to weaken the sovereign's fiscal or liquidity position.

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.

Lucie Villa
VP - Senior Credit Officer
Sovereign Risk Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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