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.
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 Moodys.com. 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.