Sovereign Analysis /

Tajikistan: Dam-ed if you do, dam-ed if you don’t

    Stuart Culverhouse
    Stuart Culverhouse

    Chief Economist & Head of Fixed Income Research

    Tellimer Research
    10 December 2019
    Published byTellimer Research

    Tajikistan’s bonds have slumped since the summer, with the price of its sole eurobond falling by c15% since July to 80.9 (mid-price basis as of cob 9 December), and its yield rising to over 11%. Indeed, it has been among the worst performers in EM/frontiers over H2 19.

    Possible explanations may include concerns over potential funding shortfalls at the Rogun dam, which the bonds’ proceeds were used to help in part finance, and/or weak debt service capacity and liquidity.

    However, we think such concerns are overdone. Reports suggest the Rogun dam is on track, although we recognise funding concerns given the size of the project (with a total project cost of US$3.9bn) and that prevailing secondary market yields may limit funding options. The government acknowledged in August that it needed to secure more funding. That said, China’s position as a key bilateral creditor (and by far Tajikistan’s single biggest creditor overall) and strategic partner, through Beijing’s Belt and Road Initiative (BRI), may provide alternative funding options.

    Moreover, external liquidity continues to improve. Reserves have risen to US$1.4bn (c5 months of import cover on our calculations) while debt service on the bond remains very low for the next five years at just US$36mn a year in interest only. Rather, China’s willingness or otherwise to provide new loans and/or refinance its existing debt may be the main driver (or solution) of any debt service difficulties.

    Lack of news and poor transparency may also be a factor in explaining the bonds’ weakness, as might be the bonds’ relative illiquidity.

    We assign a Buy recommendation to the Tajikistan 2027 bond, at a yield of 11.4% (YAVL basis), on a mid-price basis as of cob 9 December on Bloomberg (z-spread 974bps). We think the bonds look oversold and a payment default looks unlikely in the medium term. The bonds therefore offer an attractive current yield of 9% too. The main downside risk is funding shortfalls at the dam, on which there is little public visibility at this stage, which would threaten future debt service capacity on the bonds when they begin to amortise, although that is some way off for now.