Moody's Investors Service ("Moody's") has today changed the Government of Tajikistan's rating outlook to stable from negative. Concurrently, Moody's has affirmed the B3 long-term foreign and local currency issuer ratings, as well as the B3 long-term senior unsecured foreign currency rating.
The outlook change to stable from negative reflects progress made by Tajikistan in stabilizing its external payments position over the past year, as indicated in a material increase in foreign currency reserves, which Moody's expects to remain around the current level. As a result, the likelihood of significant pressure on Tajikistan's credit profile from mounting external and liquidity risks has diminished.
The affirmation of the rating reflects Moody's view that Tajikistan's credit profile remains consistent with a B3 rating. Notwithstanding its relative resilience to the global pandemic shock, Tajikistan's structural weaknesses remain, including very low income levels, very low competitiveness, weak institutions and governance strength, contingent liability risks from state-owned enterprises (SOEs) and event risks related to political, liquidity and external vulnerability risks, as well as banking sector risks.
Tajikistan's local and foreign currency country ceiling remain unchanged at B2 and B3, respectively. The one-notch gap between the local currency ceiling and the sovereign rating reflects the government's relatively large footprint in the economy, the limited predictability and reliability of institutions and material —but easing—external vulnerability risks. The one-notch gap between the foreign currency ceiling and the local currency ceiling incorporates a relatively closed capital account that points to potential transfer and convertibility restrictions, as well as a limited track record of policy effectiveness. These ceilings typically act as a cap on the ratings that can be assigned to the obligations of other entities domiciled in the country.
RATIONALE FOR THE CHANGE IN OUTLOOK TO STABLE FROM NEGATIVE
HIGHER FOREIGN CURRENCY RESERVES REDUCE EXTERNAL VULNERABILITY AND LIQUIDITY RISKS
Tajikistan's external payments position has stabilized over the past year, resulting in foreign currency reserves surpassing previous highs and bolstering resources to meet forthcoming external payment obligations. Moody's expects Tajikistan to maintain that higher level of reserves, reducing external vulnerability risks and the related liquidity risks.
The export of domestically produced gold and the compression of imports, have more than offset the pressures from lower non-gold exports and a relatively mild decline in overseas remittances, leading to the reversion of the current account to a surplus of around 4% of GDP in 2020 from a deficit of around 2.5% the previous year. Moreover, net inflows in the financial account were sustained by a large rise in official bilateral and multilateral funding for the government as gross disbursements amounted to around $380 million, while the monetization of gold reserves further added to the stock of more freely convertible foreign currency reserve assets.
Consequently, Moody's estimates that Tajikistan's external vulnerability indicator, which measures short-term debt and currently maturing long-term debt against foreign currency reserves, has fallen to under 100% from over 300% in 2020 and a peak of over 4,000% in 2016.
Going forward, the resumption of growth in remittances, the commencement of electricity exports on the back of progress on key infrastructure projects and continued financial assistance from development partners supports the view of ongoing stabilization of the external position, even as the current account surplus returns to a moderate deficit as domestic demand recovers from the pandemic shock. In particular, Moody's assumes that Tajikistan's continued commitment to policy reform and medium-term fiscal consolidation will assure that concessional sources of funding will meet the bulk of projected external and fiscal funding gaps.
RATIONALE FOR THE AFFIRMATION OF THE B3 RATING
The decision to affirm the rating reflects Moody's view that Tajikistan's credit profile remains consistent with a B3 rating.
Notwithstanding its relative resilience to the pandemic shock—as evidenced by the 4.5% expansion in real GDP in 2020 as reported by the government—and relatively robust medium-term growth outlook, Tajikistan's structural economic constraints remain, including very low per capita incomes and limited economic diversification. It also continues to be exposed to economic developments in Russia as a result of its reliance on remittance inflows, while its competitiveness faces challenges from deficiencies in infrastructure and low productivity.
Also, governance remains weak, but has shown some signs of improved policy effectiveness. The global coronavirus pandemic shock has catalyzed Tajikistan's engagement with development partners, fostering further improvements in the policy framework and sustaining reform momentum.
The government's fiscal position continues to be characterized by relatively high debt for a country at these income levels, a heavy reliance on foreign currency-denominated—albeit largely concessional—sources of financing, and contingent liability risks from weak state-owned enterprises. The government's debt burden was to a significant extent driven by previous borrowing to finance the Rogun hydropower project. Despite some delays, the project remains broadly on track to provide a stream of foreign-currency revenue expected to support the government's debt service.
Susceptibility to event risks remain prominent constraints to the rating. Political risks relate to concerns related to leadership succession, as well as periodic tensions with bordering countries. Against the backdrop of the manageable impact of the global pandemic shock on Tajikistan's relatively small domestic financial system, Moody's assessment of banking sector risk continues to reflect contingent liability risks associated with the incomplete resolution of two of the country's largest lenders following asset and liquidity stress in 2016.
ENVIRONMENTAL, SOCIAL, 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 income levels and weak institutions constrain its ability to respond to ESG shocks.
Tajikistan's exposure to environmental risk is moderately negative (E-3 issuer profile score), 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, high rates of undernourishment and constrained access to clean drinking water. Tajikistan's demographic profile is benign, allowing for the export of labour and the inflow of remittances -- a significant 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$): 3,676 (2020 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.5% (2020 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 9.4% (2020 Actual)
Gen. Gov. Financial Balance/GDP: -6% (2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 4.2% (2020 Actual) (also known as External Balance)
External debt/GDP: 80.8% (2020 Actual)
Economic resiliency: b2
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 07 June 2021, 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 materially increased. The issuer's governance and/or management, have materially increased. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become less susceptible to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
FACTORS THAT COULD LEAD TO AN UPGRADE
Upward pressure on the rating would likely emanate from material progress on fiscal and debt consolidation, likely related to significant improvements in institutions and governance strength, with progress on structural reform and addressing contingent liability risks from the SOE sector and banking system.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Downward pressure on the rating could come from an emergence of constraints to the government's access to external concessional financing, which could result from a deviation from the current commitment to policy reform and medium-term fiscal consolidation. Also, a material deterioration in the external payments position—including a reversal of the recent build-up in foreign currency reserves—that raises repayment risks on external debt obligations would weigh on Tajikistan's credit profile.
A materialisation of contingent liabilities posed by SOEs or banks with large fiscal costs would weigh on fiscal strength and likely prompt Moody's to downgrade the rating.
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.