Singapore, August 30, 2017 -- Moody's Investors Service has today assigned a provisional (P)B3 rating
to the Government of Tajikistan's senior unsecured US dollar-denominated
notes.
The senior unsecured notes will rank pari passu with the Government of
Tajikistan's current and future senior unsecured external debt.
The (P)B3 rating assigned to the notes mirrors the Government of Tajikistan's
issuer rating of B3.
The provisional (P)B3 rating is based on the preliminary prospectus received
on 24 August. Moody's will assign a definitive rating upon receipt
and review of the final documentation. The proceeds of the notes
are intended to primarily serve to finance government spending of the
Rogun HPP project.
RATINGS RATIONALE
Tajikistan's B3 issuer rating and stable outlook reflect the economy's
robust medium-term growth prospects, which are supported
by hydropower generation, notwithstanding inherent project risks
attached to the construction and operation of the Rogun HPP project.
The issuer 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.
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.
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.
Meanwhile, 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.
In addition, 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.
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. Gross international reserves
including monetary gold and SDRs reached $636 million in March
2017. 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.
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.
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.
ISSUER RATING OUTLOOK
The stable outlook on the sovereign's rating 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/DOWN
Upward pressure on Tajikistan's credit rating 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.
Conversely, downward triggers for Tajikistan's rating 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 28 August 2017, a rating committee was called to discuss assigning
a provisional rating to the bond offering of the Government of Tajikistan.
The main points raised during the discussion were: The committee
discussed the nature of the obligation and concluded that the expected
issuance would rank pari passu with other senior unsecured external debt
issued by the Government of Tajikistan.
The principal methodology used in this rating 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
