Moody’s assesses Tanzania’s institutional strength at “Very Low (+),” as reflected in weak governance indicators.
The rating Agency describes Tanzania’s outlook as negative. However…
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The Banking Sector Risk score of “Very Low (-)” takes into account the small size of the banking system as well as overall solid capital and liquidity buffers.
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The average maturity of Tanzania’s debt is relatively long because of a large share of multilateral, concessional external borrowing, which helps partly offset a very low revenue base and supports debt affordability.
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A key credit challenge relates to the very large share of foreign-currency denominated debt which leaves the debt trajectory susceptible to exchange rate volatility.
New York: The Global Credit Research organization, Moody’s Investors Service (“Moody’s”) has assigned first-time local- and foreign-currency issuer ratings of B1 to the Government of Tanzania. The rating outlook is negative.
Tanzania’s creditworthiness negative outlook may be interpreted as a measure of the probability of default. The rating assignment reflects the following factors, according to a report published on the Moody’s website:
1. Moderate economic strength balancing the country’s very high economic growth, which Moody’s expects to average 6.7% between 2018 and 2020, a very small economy as measured by nominal GDP, and very low wealth levels.
2. Very low institutional strength constrained by governance challenges that have hampered effective fiscal policy-making, which is partially offset by evidence of moderately effective monetary policy.
3. Low fiscal strength driven by a moderate level of government debt given the country’s level of institutional strength and economic development. Tanzania benefits from a relatively favorable maturity profile thanks to a large share of multilateral, concessional external borrowing, which partially mitigates the risks associated with the very large share of foreign currency denominated government debt.
4. Moderate susceptibility to event risk, driven by government liquidity risk. Gross borrowing needs are relatively low; however, the large share of external debt in the total debt stock implies a less captive investor base and potential liquidity pressures. Commercial external debt, which accounts for 30% of government external debt, has increased in recent years and raises rollover risk.
The negative outlook indicates that the balance of risks to the country’s credit profile are tilted to the downside due to an increasingly unpredictable policy environment weighing on the business climate. Uncertainty over the regulatory environment and policy stance of the government, particularly as it relates to the mining sector, could have a long-term negative impact on the country’s growth potential and ability to attract foreign investment.
Concurrent with the first-time rating assignment, Moody’s has also assigned a Ba2 ceiling for local currency bonds and deposits as well as a Ba3 foreign currency bond ceiling and a B2 foreign currency deposit ceiling. The local-currency country ceiling reflects the maximum credit rating achievable in local currency for a debt issuer domiciled in Tanzania (similarly for a bank deposit). The ceilings on foreign currency bonds and bank deposits capture foreign currency transfer and convertibility risks.
RATINGS RATIONALE: ECONOMIC STRENGTH BALANCES HIGH GROWTH RATES AGAINST LOW WEALTH LEVELS
Moody’s assessment of Tanzania’s economic strength at “Moderate (-)” balances Tanzania’s very strong growth potential, which has led to a rapid expansion of its economy, against its very low income levels. Since 2010, real GDP growth has averaged 6.8%, a very high rate in global comparison and the second fastest rate of growth among B1-rated peers. Moody’s expects growth to remain at a similar rate over the medium term, driven by strong production in the natural resources sector, given still untapped potential, as well as continued investment in large infrastructure projects.
Tanzania’s average income, with GDP per capita of $3,090 at Purchasing Power Parity at end-2016, is very low on a global scale and lower than the median for B-rated sovereigns, representing a key credit constraint. Very low income levels denote limited capacity for households to absorb any economic and income shock.
Moreover, Tanzania’s economic competitiveness is constrained by a number of factors, as reflected in the relatively low ranking of 113th out of 137 in the 2017-18 World Economic Forum’s (WEF) Global Competitiveness Index. According to the latest edition of the WEF competitiveness report, the most problematic factors for doing business include access to finance, tax rates, and inadequate supply of infrastructure. Moody’s does not expect these constraints to be alleviated in the foreseeable future. Low competitiveness is a constraint on both the capacity of the economy to attract investment and its ability to recover quickly from economic shocks.
INSTITUTIONAL STRENGTH CONSTRAINED BY GOVERNANCE CHALLENGES
Moody’s assesses Tanzania’s institutional strength at “Very Low (+),” as reflected in weak governance indicators. According to the 2016 Worldwide Governance Indicators (WGI), Tanzania falls in the bottom third for Moody’s rated sovereigns on scores for Government Effectiveness, Rule of Law, and Control of Corruption. Tanzania’s scores across all of these measures are broadly in line with the B-rated median, but ahead of the Sub-Saharan Africa median.
Moody’s assessment of institutional strength is also informed by a low level of budget credibility due to persistent underperformance on revenue and expenditure plans, an accumulation of arrears (approximately 6% of GDP as of June 30, 2017), and weak policy implementation. Arrears to contractors and suppliers are estimated at 2% of GDP, while the remaining arrears are to pensions funds and suppliers to TANESCO, the national power utility.
GOVERNMENT’S BALANCE SHEET VULNERABLE TO EXCHANGE RATE VOLATILITY
Tanzania’s “Low (-)” fiscal strength score takes into account a moderate debt burden given the country’s level of institutional strength and economic development. Moody’s expects the debt burden to rise gradually but remain below that of important regional peers as well as the B-rated median.
Moody’s expects the fiscal deficit to widen over the forecast horizon as the government prioritizes infrastructure investment to meet the goals within the National Five-Year Development Plan II of becoming a middle income and semi-industrialized country by 2025. As a result, Moody’s forecasts government debt to rise to 43% of GDP in 2020.
The average maturity of Tanzania’s debt is relatively long because of a large share of multilateral, concessional external borrowing, which helps partly offset a very low revenue base and supports debt affordability.
However, a key credit challenge relates to the very large share of foreign-currency denominated debt which leaves the debt trajectory susceptible to exchange rate volatility.
SUSCEPTIBILITY TO EVENT RISK DRIVEN BY GOVERNMENT LIQUIDITY RISK
Moody’s assesses the susceptibility to a sudden event risk as “Moderate (-),” driven by Government Liquidity Risk. Although gross borrowing needs are relatively modest (at 9% of GDP), a large share of external debt in the total government debt stock and limitations in liquidity management inform Moody’s assessment of liquidity risk. The Political Risk sub-factor score of “Low (+)” incorporates a low level of ethnic tensions and relative political stability.
The Banking Sector Risk score of “Very Low (-)” takes into account the small size of the banking system as well as overall solid capital and liquidity buffers. External Vulnerability Risk is assessed at “Very Low (+)” and balances sizable current account deficits, which are only partially financed by FDI, and a growing negative net international investment position against international reserves that are more than sufficient to cover the short-term debt and principal payments on long-term debt falling due over the next year.
This rating was initiated by Moody’s and was not requested by the rated entity.
Moody’s considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody’s. On this basis, the rated entity or its agent(s) is considered to be a nonparticipating entity. The rated entity or its agent(s) generally does not provide Moody’s with information for the purposes of its ratings process.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects the increasingly unpredictable policy environment weighing on the business climate. Uncertainty over the regulatory environment and policy stance of the government, particularly as it relates to the mining sector, could have a long-term negative impact on the country’s growth potential and ability to attract foreign investment. Even though mining represents only a small share of GDP, the mining sector is an important source of government revenue and export earnings.
WHAT COULD CHANGE THE RATING UP
Given the negative outlook, an upgrade is unlikely in the foreseeable future. Moody’s could change the outlook to stable from negative if the government were to exhibit a more predictable policy framework that continues to support very high economic growth over the medium term. A demonstrated resilience in credit metrics despite the unpredictable policy environment could, over time, lead Moody’s to stabilize the outlook.
WHAT COULD CHANGE THE RATING DOWN
Conversely, a deterioration in the business and regulatory environment, which undermines growth prospects and the country’s ability to attract foreign financing, would put downward pressure on the credit profile. Evidence that policy unpredictability is resulting in slower growth, either actual growth or forecast growth, and a decline in FDI, an important source of financing for the current account deficit, would also put downward pressure on the rating.
