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Rating Action:

Moody's changes Tajikistan's rating outlook to negative from stable; affirms B3 ratings

10 Dec 2018

Singapore, December 10, 2018 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Tajikistan's issuer rating to negative from stable and affirmed the long-term issuer and senior unsecured B3 ratings.

The decision to change the outlook to negative reflects the risk that Tajikistan's fragile external position may weaken further, given the country's very large external financing needs to complete the Rogun hydropower generation project (HPP), very low foreign exchange reserves (excluding gold) in a period of tightening global liquidity conditions, and with downside risks on exports in a range of sectors. Moreover, persistent acute weakness among some banks and state-owned enterprises will continue to pose material contingent liability risks to the government.

Moody's decision to affirm the B3 rating balances a robust medium-term growth outlook, supported by hydropower generation, improving political relations with neighbours, and a high share of concessional government borrowings that helps maintain low debt servicing costs; against significant external vulnerabilities, weak institutions, and high government debt levels for a small, low income economy.

The local-currency bond and deposit ceilings are unchanged at B1. The foreign-currency bond ceiling is unchanged at B3 and the foreign-currency deposit ceiling is unchanged at Caa1. In addition, the short-term foreign-currency bond and deposit ceilings are unchanged at "Not Prime.''

RATINGS RATIONALE

RATIONALE FOR THE NEGATIVE OUTLOOK

ALREADY FRAGILE EXTERNAL POSITION RISKS WEAKENING GIVEN LARGE FINANCING NEEDS, LOW RESERVES, TIGHTENING GLOBAL LIQUIDITY CONDITIONS

Tajikistan's foreign exchange reserves (excluding gold) are insufficient to cover external debt repayments due over the next year and cover less than two months of imports of goods and services as of September 2018. Ongoing large financing needs to finance the next phases of Rogun HPP in a period of tightening global financing conditions and downside risk to export revenue point to rising external liquidity pressure.

Public and private sector external debt payments due over the next year are materially higher than foreign exchange reserves. The stock of short-term public and private sector debt stood at $908 million in the first half of 2018, which, added to maturing external debt obligations over the next year, remains much higher than the stock of foreign exchange reserves of $417 million as of 12 October 2018.

Moody's projects its External Vulnerability Indicator (EVI), which measures short- and long-term debt repayments relative to official foreign currency reserves (excluding gold), to remain very high at above 800% in 2019 and 2020 and much higher than similarly rated sovereigns.

Significant financing needs to complete the Rogun HPP project will continue to put pressure on reserves adequacy. The authorities estimate the overall cost of the project at $3.9 billion, or about 55% of 2017 GDP. While power production will start in 2019, construction will continue for at least another 10 years, financed by the remaining proceeds from the $500 million Eurobond issuance in September 2017, domestic financing, including government contingency fund and state budget, early generation profits from the project and additional external funding.

Additional external funding could come from a mix of concessional and commercial market sources. The IMF in October indicated the potential for an economic reform program that could be supported by financial arrangement, which if it materialised, would support financing for Rogun HPP and would likely catalyse additional concessional funding.

Looking forward, downside risks to export revenue add to significant external vulnerability risks. Notwithstanding a possible increase in remittances as the Russian economy continues to recover, export shortfalls could result from the slowdown in Turkey (Ba3 negative) (about 21% of Tajikistan's exports through the first eight months of 2018), further fall in primary aluminium prices (aluminium accounted for around 23% of export revenue in the first half of 2018).

Moody's forecasts the current account deficit to widen to around 4% to 5% of GDP in the next few years, following a 2.1% surplus in 2017 as imports continue to increase, including for Rogun HPP construction, placing downward pressure on the stock of foreign exchange reserves.

External debt and imports payments will, to some extent, rely on sales from the central bank's significant gold reserves that are regularly replenished. The potential to monetise liquid gold reserves, which amounted to $773 million as of 12 October 2018, supports Tajikistan's capacity to meet its external repayment commitments, although the value of any gold sale would be subject to fluctuations in international gold prices.

A relatively high share of direct investor lending for investment purposes and between related entities, which accounted for around 27% of Tajikistan's stock of short-term external debt in the first half of 2018, partly mitigates the risk of a sharp reversal of funds in the near future.

MATERIAL CONTINGENT LIABILITY RISKS POSED BY BANKS AND STATE-OWNED ENTERPRISES

Ongoing weakness among some banks and SOEs will continue to pose contingent liability risks that, if materialising, would weaken fiscal strength and the credit profile.

Resolution of the two large troubled banks that required recapitalisation following asset and liquidity stress in 2016 has yet to be finalised. The potential for some other banks to come under stress, particularly those lending predominately to financially weak state-owned enterprises, may require additional government support, particularly in the event of an unanticipated domestic or external shock. In 2016, the recapitalisation of the two banks cost the government TJS 3.3 billion or about 6% of GDP.

High dollarisation rates of loans and deposits, notwithstanding some decline in recent years, will continue to leave the banking sector exposed to local currency depreciation. Reliance on remittances earnings exposes some borrowers to shifts in economic conditions in Russia (Ba1 positive). Combined, these factors will continue to pose downside risks to banks' asset quality.

Aided by international financial institutions, the National Bank of Tajikistan has implemented financial sector reforms and additional banking regulation to improve the operating environment in the wake of the recent banking crisis. Bank profitability and capital have shown some recovery. Although banks' non-performing loan ratios have declined since 2016, a large legacy of problem loans remains.

Outstanding debt of financially weak state-owned enterprises (SOEs), particularly in the energy sector, pose contingent liability risks to the government. With revenue collection below cost levels, arrears to creditors and suppliers has grown. Tajikistan has implemented a new electricity tariff methodology, with technical support from international financial institutions, among other measures, to achieve full cost recovery from all consumers and restore the financial health of SOEs. However, the effectiveness of these measures in shoring up the financial health of SOEs through economic and financial cycles is untested.

RATIONALE FOR THE RATING AFFIRMATION AT B3

HYDROPOWER GENERATION AND IMPROVING POLITICAL RELATIONS SUPPORT MEDIUM-TERM GROWTH PROSPECTS

Rogun HPP will support GDP growth in the near and longer term. The government's National Development Strategy 2030, which aims to boost GDP growth and support diversification into manufacturing, is tied to enhancing energy supply, which Rogun HPP is likely to deliver.

The first of six turbines is now operational as of November 16, 2018, and the authorities expect a second turbine to be in operation in April 2019. Besides providing more stable power to the domestic economy, Moody's expects the project will boost exports of electricity to neighbouring countries, including Afghanistan (unrated) and Pakistan (B3 negative).

The recent improvement in Tajikistan's relations with Uzbekistan (unrated) also supports an increase in exports, particularly of electricity to both Uzbekistan and the broader Central Asia region. Tajikistan's goods exports to Uzbekistan reached $137 million through the first eight months of 2018, up from $40 million in the corresponding period in 2017, and significantly higher than the $10 million per year, on average, from 2010-2016.

In the context of improved foreign relations, construction of new transmission lines, funded by international financial institutions and bilateral partners, will enable a further increase in electricity exports in the coming decade through the reconnection of Tajikistan's electricity system to the Central Asia Power Grid and construction of the new Central Asia-South Asia power project (CASA-1000).

There are inherent project risks attached to the construction, financing and operation of Rogun HPP, particularly given the large size of the project. Competition from increased investments in power generation elsewhere in the region could limit the export benefits.

Balancing robust potential growth are very low incomes and a narrowly diversified economy, which raise the sovereign's susceptibility to economic and financial shocks. In particular, the economy is reliant on agriculture and aluminium production and remittances from Russia, which accounted for about 32% of GDP in the first half of 2018, to drive private consumption.

DEBT AFFORDABILITY REMAINS HIGH DUE TO RELIANCE ON CONCESSIONAL DEBT; GOVERNMENT'S FINANCING NEEEDS ARE LOW

A large share of concessional borrowing helps maintain low debt-servicing costs for the government. Debt affordability is also supported by the government's relatively large revenue base, which Moody's estimate at about 28% of GDP in 2018.

Moody's expects interest payments to absorb about 8% of revenue in 2019-2020, up from 4.5% in 2017 due to higher-costing market debt, but remain below the 12% median ratio for B3-rated sovereigns.

Overall, Moody's estimates that government gross borrowing requirements, incorporating projections on fiscal deficits and maturing government external and domestic debt repayments, to reach about 5%-5.5% of GDP in the next few years, a low level relative to similarly rated sovereigns.

In addition, the government's accumulation of local and foreign currency deposits at commercial banks and the central bank equates to 10.1% of GDP in September 2018, providing a buffer for government funding in the next few years.

RELATIVELY HIGH GOVERNMENT DEBT BURDEN AND WEAK INSTITUTIONS

High debt affordability and low government borrowing needs are balanced by a relatively high government debt burden that constrains the flexibility of fiscal policy to counter shocks.

In the baseline, Moody's expects government debt to remain around 50% of GDP in 2019-20, up from about 27% in 2014, which is relatively high to sustain for a small, low-income economy with limited financing sources. Should the call on government spending increase, potentially related to some weak banks or SOEs, higher government debt would put downward pressure on fiscal strength.

Tajikistan's weak institutions add to the credit challenge of managing a very large project, with an already relatively high government debt burden. The country's rankings on government effectiveness, rule of law, and control of corruption in the Worldwide Governance Indicators are very low. In general, political and policy institutions are nascent, having mainly developed after the collapse of the Soviet Union in 1991.

Recent reforms at the National Bank of Tajikistan are aimed at improving the framework for bank regulation. The central bank is also transitioning to an inflation-targeting monetary policy framework, which, if effective, would be positive for anchoring inflation expectations and enhancing transparency.

Despite some progress in these areas, significant benefits are unlikely to materialise in the next few years, as high dollarisation levels in the banking sector and shallow domestic capital markets remain a constraint on the effectiveness of monetary policy.

WHAT COULD CHANGE THE RATING UP

The negative outlook signals that an upgrade is unlikely.

Moody's would consider changing the outlook to stable upon evidence that increasing non-debt creating inflows are contributing to a build-up in foreign exchange reserves (excluding gold), durably reducing external vulnerability risks.

Effective implementation of reforms in the banking sector and state-owned enterprises that significantly reduces the risk of a need for government support would also support a stable outlook at B3.

WHAT COULD CHANGE THE RATING DOWN

Moody's would likely downgrade the rating if a deterioration in the foreign exchange reserve position looked likely to raise repayment risk on external debt obligations. This could result from underperforming revenue from Rogun HPP, potentially due to project delays or weaker demand for power from export markets.

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

GDP per capita (PPP basis, US$): 3,187 (2017 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 7.1% (2017 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 6.7% (2017 Actual)

Gen. Gov. Financial Balance/GDP: -6.5% (2017 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 2.1% (2017 Actual) (also known as External Balance)

External debt/GDP: 77.3% (2017 Actual)

Level of economic development: Low level of economic resilience

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

On 05 December 2018, 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 materially decreased. 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 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 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

Marie Diron
MD - Sovereign Risk
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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