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Rating Action:

Moody's assigns first-time B3 issuer rating to the Government of Tajikistan; outlook stable

28 Aug 2017

Singapore, August 28, 2017 -- Moody's Investors Service has today assigned first-time local and foreign-currency issuer ratings of B3 to the Government of Tajikistan. The rating outlook is stable.

The rating and outlook reflect Tajikistan's robust medium-term economic growth prospects, which are supported by hydropower generation, notwithstanding inherent project risks attached to the construction and operation of the Rogun HPP project.

The rating also incorporates the credit challenges posed by institutions that are weak on a global scale, although progress on financial reforms and macroeconomic stability indicate some improvements. In addition, external vulnerability risks are significant as a result of low, albeit rising, foreign reserves relative to external debt. The government's fiscal position is characterised by a moderately high and rising government debt burden with limited funding sources and outstanding contingent liability risks posed by the weak banking sector.

Moody's has also assigned a B1 ceiling for local-currency bonds and deposits, a B3 ceiling for foreign-currency bonds and a Caa1 ceiling for foreign-currency deposits. In addition, the short-term foreign-currency bond and deposit ceilings are "Not Prime.''

These ceilings act as a cap on the ratings that can be assigned to the obligations of other entities domiciled in the country.

RATINGS RATIONALE

RATIONALE FOR B3 RATING

ROBUST MEDIUM-TERM GROWTH PROSPECTS SUPPORTED BY HYDROPOWER GENERATION NOTWITHSTANDING PROJECT RISKS

Tajikistan has enjoyed robust real GDP growth of around 7% per annum on average in the past five years. However, very low per capita income levels and limited sectoral diversification raise the sovereign's susceptibility to economic and financial shocks. GDP growth is reliant on agriculture and aluminium exports, and remittances from Tajiks working in foreign countries, which drive domestic private consumption.

In this context, the construction of the Rogun HPP project, a hydropower project, is supporting GDP growth and has the potential to significantly boost income levels. The government's National Development Strategy 2030, which aims to boost GDP growth and support diversification into manufacturing, is tied to enhancing energy supply.

A shortage of domestic power, particularly during the winter months, has been a constraint on the economy's productive capacity. Once the first phase of the project is completed in 2018, the existing and planned transmission line system will allow early generation production to serve both regional and domestic markets.

The increase in electricity supply would support industry, investment and exports. Tajikistan's access to markets in the Kyrgyz Republic (B2 stable), Turkmenistan (unrated) and Afghanistan (unrated) and strong demand from South Asia including through existing power purchase agreements with Pakistan (B3 stable) bolster prospects for exports of power.

Risks to the project include delays to the timeline of construction, financing of equipment costs, political risks and weather-related risks. Should these risks crystallise, they could delay or diminish the economic benefits from the project, while also raising the fiscal costs associated with it.

WEAK INSTITUTIONS ALTHOUGH ONGOING REFORMS AND MACROECONOMIC POLICY RESPONSES POINT TO SOME STRENGTHENING

Tajikistan's institutions are weak relative to other sovereigns, as reflected in very low rankings on government effectiveness, rule of law, and control of corruption in the Worldwide Governance Indicators.

Nonetheless, the National Development Strategy 2030 focuses in part on strengthening the country's institutions. Already the National Bank of Tajikistan (NBT), the central bank, and the government have taken several measures to improve the operating environment, suggesting some strengthening of the institutional framework.

The measures include new laws to give the central bank greater supervisory power, the requirement that banks be more transparent, the appointment of temporary NBT management to troubled banks to strengthen governance and the conduct of asset quality reviews to evaluate potential financial risks.

Despite the severe stress in the banking system, the government and central bank have maintained relative economic stability. The economy continues to grow strongly and poverty rates are falling. Tighter monetary policy, including foreign exchange controls -- such as the requirement to convert ruble-denominated remittances into local currency -- are working to support exchange rate stability. These measures are also helping to de-dollarise the economy, reducing the share of deposits in foreign currency from around 70% in 2015 to around 60% at end-2016.

Tajikistan has a track record of volatile inflation. But more recently, the NBT's increases in interest rates, reserve requirements and sterilisation of the money supply have helped control inflation expectations and inflation in the past few years, notwithstanding a temporary weather-related spike in recent months.

SIGNIFICANT EXTERNAL VULNERABILITY RISKS

Low foreign exchange reserves relative to annual external public and private sector debt repayments point to a vulnerability to external risks.

Foreign exchange reserves (excluding gold) reached $101 million in March 2017, rising significantly from $34 million in 2015. Despite this increase, foreign exchange reserves are lower than the total short-term external debt of the government and the private sector, which amounted to $1.15 billion in 2016.

Reserve accumulation has been facilitated by stable foreign exchange markets and gold purchases in the last two years. The recovery in prices for key exports such as aluminium and the central bank's membership to the World Bank's reserve management program have also bolstered the foreign reserve position. We expect the external environment to continue to contribute to a further accumulation of reserves, although they will likely remain very low in relation to external payment commitments.

The external vulnerability risks highlighted by the ratio of short-term debt to foreign exchange reserves are somewhat mitigated by Tajikistan's relatively substantial gold reserves. At around 80%, the share of gold in total foreign reserves is the highest in the world. As of 30 June 2017, 93% of gold holdings were in the form of relatively liquid monetary gold. The potential for monetising gold bolsters Tajikistan's capacity to meet its external repayment commitments, although the value of any gold sale would be subject to fluctuations in international prices.

RELATIVELY HIGH AND RISING GOVERNMENT DEBT BURDEN

A moderately high and rising government debt burden also weighs on Tajikistan's credit profile.

Government debt rose to 44.8% of GDP in 2016, up from 33.3% in 2015, mostly as a result of government support to the banking system.

We expect government borrowing to increase to finance construction of the Rogun HPP project, which will weaken the government's fiscal strength in coming years. We forecast that the government debt-to-GDP ratio will rise to about 55% to 60% in 2017-18, a relatively high level to sustain for a small economy with limited financing sources.

In addition, a significant proportion of government debt is foreign-currency denominated, exposing debt servicing costs to exchange rate movements.

On the other hand, debt affordability benefits from the mostly concessional nature of government debt, which has maintained debt servicing costs at low levels.

Moreover, the government's accumulation of deposits at the central bank, which equate to 6.3% of GDP as of May 2017, indicates availability of a domestic pool of funding.

WEAK BANKING SYSTEM WILL CONTINUE TO POSE CONTINGENT LIABILITY RISKS TO THE GOVERNMENT

Banking sector weaknesses pose contingent liability risks for the government. Asset quality and liquidity related stress led to the government recapitalising the two largest banks in 2016. Still, system-wide non-performing loan (NPL) ratios -- classified as loans overdue for 30+ days -- remain high at around 40% of total loans. Although half of these problem loans relate to the two recapitalised banks, the NPL ratio for the system, even when measured by conventional standards, is high, and suggests some of the other banks could potentially require government support, particularly in the event of an unanticipated economic or external shock.

Banks' asset quality challenges stem from exposure to external trade, remittance and exchange rate volatility. Moreover, with system deposits insufficient to finance loans and banks relying on wholesale markets, pressure on banks' liquidity position will persist.

Nevertheless, there are positive trends in the banking system. Non-performing loan ratios are trending downward, albeit from high levels, banks are returning to profitability and recovery in remittance earnings will support household incomes and debt servicing.

RATIONALE FOR STABLE OUTLOOK

The stable outlook balances Tajikistan's robust medium-term economic growth prospects and implementation of reform against persistent external vulnerability risks and potential further banking sector weaknesses that would raise contingent liability risks to the government.

We expect construction of the Rogun HPP project to continue ahead of planned power generation in late 2018. The potential tax and export revenues from the project would bolster the government's fiscal position and the central bank's stock of foreign reserves.

We also expect the authorities to continue to pursue reform in the financial sector to ensure macroeconomic and financial stability.

These credit positive trends are balanced by risks related to the external liquidity position and contingent liabilities related to the banking system.

WHAT COULD CHANGE THE RATING UP

Upward rating pressure could develop as a result of 1) the successful implementation of the Rogun HPP project that delivers increasing tax and export revenues, in turn durably boosting fiscal strength and reducing external liquidity risks, or 2) effective implementation of banking and fiscal reforms that support macroeconomic and financial stability on a sustained basis and, 3) steps to address governance weaknesses such as rule of law and control of corruption that strengthen scores on institutional quality.

WHAT COULD CHANGE THE RATING DOWN

Downward rating triggers could stem from 1) deterioration in the foreign reserve position that raises repayment risks on external debt obligations, or 2) significant delays or underdelivery of the Rogun dam hydropower project that leads to lower economic activity, tax receipts and foreign currency revenues than we currently expect, 3) materially larger fiscal costs than we currently assume for the recapitalisation of banks and, 4) lack of progress on reform that hinders macroeconomic stability and potential foreign direct investment inflows, weakening the economy's growth potential and the balance of payments position.

GDP per capita (PPP basis, US$): 3,093 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 6.9% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 6.1% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -4.9% (2016 Estimate) (also known as Fiscal Balance)

Current Account Balance/GDP: -3.6% (2016 Actual) (also known as External Balance)

External debt/GDP: 67.5% (2016 Actual)

Level of economic development: Very Low level of economic resilience

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

On 27 June 2017, 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 institutional strength/ framework, 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 these ratings was Sovereign Bond Ratings published in December 2016. 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 or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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.

Matthew Circosta
Analyst
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

Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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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