Singapore, October 17, 2022 -- Moody's Investors Service ("Moody's") has today confirmed the Government of Tajikistan's B3 long-term issuer and senior unsecured ratings and changed the outlook to negative. Prior to this action, the B3 ratings were on review for downgrade.
This action concludes the review initiated on 30 March 2022, which had cited the likelihood that a sharp and prolonged economic downturn in Russia would lead to a sustained deterioration in Tajikistan's growth potential, primarily through a material fall in remittances that would also pressure external balances and financial stability.
In the period since the initiation of the review, the Tajik economy has demonstrated a degree of resilience to the fallout from Russia's invasion of Ukraine. Real economic activity has continued to expand, the relative stability of the external payments position has bolstered foreign reserve buffers and the pipeline for external concessional financing has remained intact. At the same time, the downside risks posed by the ongoing military conflict between Russia and Ukraine have not eased, underpinning the negative outlook.
Tajikistan's local and foreign currency ceilings remain unchanged at B2 and B3, respectively. The one-notch gap between the local currency ceiling and the sovereign rating is driven by the government's relatively large footprint in the economy, weak institutions balanced against domestic political stability, and relatively high susceptibility to external vulnerability risk. The one-notch gap between the foreign currency ceiling and the local currency ceiling reflects incomplete capital account convertibility and moderate external debt.
RATINGS RATIONALE
RATIONALE FOR THE CONFIRMATION OF THE B3 RATING
In the period since the initiation of the review, the Tajik economy has demonstrated a degree of resilience to the fallout from Russia's invasion of Ukraine. Real economic activity has continued to expand, the relative stability of the external payments position has bolstered foreign reserve buffers and the pipeline for external concessional financing has remained intact.
Despite the strong historical correlation between economic growth in Russia and Tajikistan, and incorporating other considerations such as ruble depreciation, the heavy concentration of Tajikistan's remittances from Russia, and the large proportion of remittances as a share of Tajikistan's GDP, Tajikistan's economy has been more resilient over the past six months than Moody's had previously expected. In contrast to Moody's projection of a 3.5% contraction for the full year in 2022, the government has reported that real GDP over the first nine months of the year actually expanded by 7.8% year-on-year. The stability of the ruble against the US dollar has preserved the purchasing power of remittances, which in turn has been cushioned by a surge in the deployment of Tajik migrant workers to Russia, as per data published by the Russian Ministry of Internal Affairs. In addition, favorable weather conditions have supported agricultural production, while import substitution has reinforced industrial production.
Cross-border financial transactions have not seen significant disruptions as Tajik financial institutions have not been subject to international sanctions and new correspondent banking relationships have been established with banks outside of Russia. Tajikistan remains current on debt servicing of payment obligations to its official creditors and for its outstanding sovereign bond.
Moreover, remittances and trade have remained largely unfettered notwithstanding the deterioration in global credit conditions, contributing to the stabilization of the exchange rate and the overall balance of payments despite a widening in the trade deficit partly owing to higher global prices for imported commodities. Consequently, as reported in the IMF's International Financial Statistics, foreign exchange reserves excluding gold have climbed to a record high of $3.1 billion as of August 2022 from $2.3 billion at the end of 2021. These reserves remain sufficient to meet external debt servicing requirements over at least the next year.
RATIONALE FOR THE NEGATIVE OUTLOOK
The ongoing military conflict between Russia and Ukraine, if prolonged or intensified, continues to pose downside risks to the Tajikistan's credit profile given still significant linkages with Russia. In particular, risks around the geo-political situation, associated downside risks for the Russian economy and migrant worker employment remain. The negative outlook provides a longer time frame to assess the durability of its near-term resilience and to account for still heightened geopolitical uncertainties.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Tajikistan's ESG Credit Impact Score is highly negative (CIS-4), reflecting its weak governance profile, moderately negative exposure to environmental risks and highly negative exposure to social risks. The country's low incomes and weak institutions constrain its ability to respond to ESG shocks.
Tajikistan's moderately negative exposure to environmental risks (E-3 issuer profile score) is driven by its vulnerability to the depletion of water resources over the long run – especially in the context of the importance of hydropower generation to its economy; at the same time, carbon transition is not a risk given rising hydropower output. Moderately negative environmental risks include physical climate risks – mainly from periodic instances of drought – and the degradation of the country's natural capital, including soil erosion afflicting the country's relatively small endowment of arable land.
Exposure to social risks is highly negative (S-4 issuer profile score). While the country's Soviet legacy left most of the population with access to social infrastructure such as education, housing, healthcare and other basic provisions, the quality of service delivery is generally very low and has limited the development of human capital. This is reflected in the country's weak social metrics, such as its relatively low life expectancy and access to clean drinking water. Tajikistan's demographic profile is benign, allowing for the export of labour and the inflow of remittances – a key source of foreign exchange earnings; however, this also reflects the relative dearth of domestic economic opportunities.
The influence of governance on Tajikistan's credit profile is highly negative (G-4 issuer profile score), reflecting weak policy effectiveness and control of corruption, consistent with cross-country surveys such as the Worldwide Governance Indicators. Governance considerations weigh heavily on the country's business environment, serving as a key impediment to foreign direct investment and, ultimately, on economic development.
GDP per capita (PPP basis, US$): 4,329 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 9.2% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 8% (2021)
Gen. Gov. Financial Balance/GDP: -4.7% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: 8.4% (2021) (also known as External Balance)
External debt/GDP: 85.0% (2020) (includes Public and Private Sector debt)
Economic resiliency: b2
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 12 October 2022, 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 institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially increased. The issuer's susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
Given the negative outlook, which largely reflects potential downside risks from external factors, an upgrade of Tajikistan's ratings is remote. The outlook could be revised to stable if Moody's were to conclude that the near-term resilience of its economic, fiscal and external metrics are sufficiently durable to withstand the downside risks posed by the challenging geopolitical backdrop.
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
Tajikistan's rating would likely be downgraded if Moody's concluded that the negative impact of the Russia-Ukraine military conflict would undermine the economy's near-term resilience, leading to a lasting deterioration in fiscal metrics and the external payments position. The emergence of constraints to the government's access to external concessional financing would also lead to a downgrade, which could result from a deviation from the commitment to policy reform and medium-term fiscal consolidation that demonstrates weaknesses in institutions and governance strength.
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.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 on https://ratings.moodys.com/rating-definitions.
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Christian de Guzman
Senior Vice President/Manager
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
71 Robinson Road #05-01/02
Singapore, 068895
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
71 Robinson Road #05-01/02
Singapore, 068895
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
