The IMF statement released on Friday after the Executive Board concluded its 2019 Article IV consultation with Tajikistan on 13 January, highlights fiscal and debt risks, and risks from the construction and financing of the Rogun dam. But we don’t think there were any major surprises.
The Fund reported that 2018-19 economic growth has been strong (5.5% in 2019), amid expansionary fiscal policy and the recovery of the financial sector following the crisis of 2015-16, while inflation increased (although within the central bank’s target range). Weak remittances and exports, and strong imports contributed to a deterioration of the external current account, while the real effective exchange rate appreciated.
The IMF also noted that foreign exchange shortages have emerged. The budget deficit was projected at 3.8% of GDP in 2019 (compared to 2.8% in 2018), although public and publicly guaranteed (PPG) debt has been stable, at 45% of GDP. Moreover, improvements have been made in monetary and macroprudential frameworks, banking sector supervision and regulation, and poverty reduction. Among other measures, the IMF recommended fiscal consolidation measures to put debt on a downward trend, including broadening the tax base and gradually phasing out tax incentives, as well as greater exchange rate flexibility.
Vulnerabilities include: (i) an expected high budget deficit over the medium term (projected by the Fund at 4.3% of GDP), due to investment at the Rogun dam, where cost overruns or implementation difficulties pose additional downside risks; (ii) a weak external position (the current account deficit is seen at over 5% of GDP) and limited FX flexibility; (iii) a rise in non-guaranteed SOE debt; and (iv) weaknesses in the financial sector.
We see the IMF statement as broadly in line with our view, although we think such concerns are already somewhat discounted by the market. However, we also think a bond default is unlikely in the near-term. While the IMF noted that Tajikistan’s risk of external debt distress remains high, we think external liquidity continues to improve while China’s position as a key bilateral creditor and strategic partner may provide alternative funding options.
Indeed, that the Article IV was completed and a press release published at all is progress in our view. Previously, the last completed Article IV was in 2017 (the staff report wasn’t published though, only a press statement) and engagement has appeared somewhere patchy. The authorities’ consent to the publication of the staff report this time around would be another welcome sign in our view (at the time of writing, the country report had not been published).
Finally, we assume any IMF programme discussions are now dead. The authorities had previously expressed interest in a Fund-supported programme in the past (2018). But we note that there was no mention of an IMF programme in the Fund’s latest statement.
We retain our Buy on Tajikistan’s 7.125% 2027 eurobond, with a yield of 9.9% as of cob 17 January (indicative YAVL on mid price basis on Bloomberg). The bonds have risen by nearly 9.5 points since their recent low in mid-December (now indicated at 86.9 on a mid-basis). See our research Tajikistan: Dam-ed if you do, dam-ed if you don’t for more details.