London, 21 August 2020 -- Moody's Investors Service ("Moody's") has today downgraded the foreign
and local currency issuer ratings of the Government of Tanzania to B2
from B1 and changed the outlook to stable from negative.
The downgrade to B2 reflects Moody's view that governance remains
very weak, raising risks to Tanzania's credit profile.
In particular, policy unpredictability has not materially diminished
and is likely to weigh on foreign investment, growth potential and
the government's fiscal strength and liquidity risks.
The stable outlook balances Tanzania's relatively large and diversified
economy against institutional weaknesses which undermine fiscal strength.
The outlook is underpinned by a moderate debt burden that is broadly stable
and below the B2 median. The economy is relatively diversified
which helps to mitigate the impact of shocks. Some other areas
of relative strengths include adherence to fiscal consolidation objectives,
and a track record of relatively low and stable inflation. These
credit supports are balanced by particularly weak revenue mobilization
capacity and weak fiscal policy credibility, evidenced by persistent
underexecution of budget targets as well as an elevated level of budget
arrears.
Concurrently, the long-term local currency bond and bank
deposit ceilings were revised down to Ba3 from Ba2. Tanzania's
long-term foreign currency bond ceiling was lowered to B1 from
Ba3 and the long-term foreign currency bank deposit ceiling was
lowered to B3 from B2.
RATINGS RATIONALE
RATIONALE FOR THE DOWNGRADE TO B2 FROM B1
WEAK GOVERNANCE REFLECTED IN POLICY UNPREDICTABILITY POSES RISKS TO POTENTIAL
GROWTH, FOREIGN DIRECT INVESTMENT
Ongoing uncertainty over the regulatory environment and policy stance
of the government, particularly as it relates to the mining sector,
has a long-term negative impact on the country's growth potential
and ability to attract foreign investment. The government has achieved
limited progress on key areas of reforms, particularly on the business
environment, notwithstanding a number of initiatives published since
2018. Moody's expects policy unpredictability and a generally
adverse business environment to hamper investment. In turn,
this will hinder Tanzania's capacity to sustain high GDP growth
rates, which is necessary to increase the economy's shock
absorption capacity.
While Moody's acknowledges the deal signed between the government
and a leading gold mining company in January 2020, slow and unpredictable
government policy implementation continues to hinder the country's
investment attractiveness as evidenced by a thin pipeline of investment
projects compared to other countries with high mining potential.
In the context of a general anticipated slump in foreign direct investment
(FDI) flows across the world as a result of the coronavirus outbreak,
Tanzania's policy unpredictability -- a manifestation of political
risks - is likely to exacerbate the FDI shortfall. Tanzania's
net direct investment inflows have remained just under 2% of GDP
over the last four years. They are unlikely to rise on a sustained
basis in the near future and may, at least temporarily, dip
further.
The coronavirus outbreak and run-up to elections in October 2020
combine to make significant governance reforms addressing policy unpredictability
unlikely in the foreseeable future.
WEAK GOVERNANCE ALSO UNDERMINES AVAILABILITY OF FUNDING, RAISING
LIQUIDITY RISKS
Policy unpredictability also contributes to fiscal and liquidity risks
as exemplified by the withholding aid funding by the World Bank in 2018.
The government's lack of commitment on reforms had led to a significant
reduction in grants and concessional financing. As bilateral and
multilateral development partners delay new lending programmes on account
of uncertainty in the policy making environment, the Tanzanian authorities
increasingly rely on more costly non-concessional funding,
deteriorating further already weak debt affordability metrics.
Moody's expects further delays in external financing arrangements
especially from development partners. The government has not been
transparent on the spread of the coronavirus outbreak and has not received
emergency financing from international financial institutions.
At the same time, slow and unpredictable reforms are likely to hamper
funding availability over the medium term.
As a result, while Moody's expects a modest deterioration
in the fiscal balance to a 4.2% of GDP deficit in fiscal
year 2020/2021 (the year ending on 30 June 2021), compared with
an estimated 0.8% in fiscal year 2019/20, the higher
financing needs will in large part be covered by more expensive non-concessional
sources. Moreover, the small size of Tanzania's domestic
banking system at 26% of GDP in 2019 and the sovereign's limited
track record in accessing international capital markets indicate that
a prolonged period of lower international concessional funding is likely
to put pressure on domestic borrowing costs. Moody's expects
the interest-to-revenue ratio to increase above 14%
in fiscal year 2020/2021, further constraining the government's
fiscal flexibility.
RATIONALE FOR THE STABLE OUTLOOK
RELATIVELY DIVERSIFIED ECONOMY WEIGHED AGAINST LOW FISCAL STRENGTH
The Tanzanian economy is relatively well diversified, with growth
driven by a mix of agriculture, manufacturing, construction,
and services. Robust growth, averaging 6.7%
between 2010 and 2019 according to official figures, that is not
particularly exposed to sector-specific vulnerabilities,
lends some capacity to the economy to absorb shocks, despite very
low income levels and notwithstanding the risks mentioned above related
to the negative impact of policy unpredictability.
However, institutional weaknesses undermine Tanzania's fiscal
strength. Tanzania ranks in the 11th percentile on the Worldwide
Governance Indicators (WGI) among Moody's-rated sovereigns
for government effectiveness and in the 25th percentile for rule of law.
A relatively narrow revenue base, at around 15% of GDP,
limits the sovereign's debt carrying capacity. Overall,
relatively moderate fiscal deficits of 1.5% of GDP on average
over the last three years mask challenges on revenue mobilization and
arrears accumulation (5.7% of GDP as of June 2018).
Without prospects of effective increase in revenue, the government's
weak fiscal strength will remain a credit constraint.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental considerations are material to Tanzania's economic
strength and credit profile. Given the prominence of agriculture
in the economy and reliance on rainfall to drive irrigation and hydroelectric
plants, recurring droughts can have a significant negative impact
on the agriculture and energy sectors. In addition, land
degradation and deforestation weighs on the credit profile.
Social considerations are material to the rating. Tanzania suffers
from low wealth levels, income inequality, and high levels
of poverty which constrain its development. Access to quality basic
services such as education, healthcare and access to roads and general
infrastructure is a challenge. Moody's regards the coronavirus
outbreak as a social risk under its ESG framework, given the substantial
implications for public health and safety.
Weak governance, particularly government effectiveness, is
material to the rating and a driver of today's rating action.
Notwithstanding some instances of positive developments, governance
is stymied by unpredictable policy actions which weaken the government's
interaction with the private sector. In addition, the government's
inability to fully implement its budget also weighs on Moody's view
of government effectiveness. While efforts have been made to better
control corruption, the related weakening of voice and accountability
and ongoing changes in rule of law provisions, silencing of journalists,
restrictions on the actions of opposition political parties, and
in general the stemming of criticism of civil society actors, all
weigh on the quality of governance in Tanzania.
GDP per capita (PPP basis, US$): 3,403 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 7.0% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3.8%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: -2.5%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -1.9% (2019 Actual)
(also known as External Balance)
External debt/GDP: 36.6 (2019 Actual)
Economic resiliency: b1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 17 August 2020, a rating committee was called to discuss the
rating Tanzania, 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 increased. The issuer's susceptibility to event
risks, particularly political risks and banking sector risk have
materially increased.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATING UP
Over time, Moody's would likely upgrade the rating if it seemed
increasingly likely that revenue mobilisation capacity was improving,
supporting fiscal consolidation. This could be in part the result
of a significant improvement in the business environment enabling private
sector development through the pursuit of a sound regulatory framework
that attracts greater FDI, allowing to sustain growth at high levels.
WHAT COULD CHANGE THE RATING DOWN
Moody's would likely downgrade Tanzania's rating should unpredictable
policymaking become increasingly likely to weigh on investment and negatively
affect GDP growth and the government's liquidity and fiscal positions.
In general, an increasing likelihood that the debt burden would
rise markedly and for a prolonged period of time would also likely lead
to a downgrade. This could result from persistently high or rising
budget arrears and/or a build-up in external pressure leading to
a marked depreciation of the currency. Such developments would
indicate weaker policy effectiveness than Moody's currently assesses.
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 unsolicited.
a.With Rated Entity or Related Third Party Participation:
NO
b.With Access to Internal Documents: NO
c.With Access to Management: NO
For additional information, 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
Items color coded in purple in this from to list relate to unsolicited
ratings for a rated entity which is non-participating.
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.
Kelvin Dalrymple
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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 Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
