We maintain our Hold recommendation on the TAJIKI 2027 bond. We downgraded to Hold from Buy on 10 March, on rising commercial borrowing costs and uncertainty over the financing outlook for the Rogun Dam project. The bond has been among the third worst performers in the EMBI, with a total return of -13% YTD, although definitely not the worst. Yields dropped back to 15% on Friday after exceeding 18% in late March. The price ended last week at almost US$70 (up 10pts, about 16%) but we suggest caution ahead of the September coupon date, or until the government clarifies its intentions regarding DSSI on the bond.
The IMF Executive Board approved US$189.5mn in emergency financing for Tajikistan on 6 May, as it responds to the coronavirus-induced economic shock, while the Tajikistan authorities have followed an orthodox economic policy response. As of 18 May, Tajikistan has 1,524 official cases and 39 recorded deaths, but the health system has not been overwhelmed. Discussions are underway for further donor support. The Fund also published a country report alongside the decision, which included its latest economic forecasts for the country.
Tajikistan’s economy has been hit hard by the global crisis. However, projections assume a V-shaped recovery, with real GDP growth reaching 7.5% in 2021, the same as in 2019 after a contraction of 2% this year. The Fund said that debt sustainability has improved since the previous Debt Sustainability Analysis in 2019, but also projects a balance of payments gap of almost 5% of GDP this year. The key credit positives remain the strong reserves (5.1 months’ import cover), the relatively low public debt burden (c52% of GDP) and China’s involvement (Tajikistan is a BRI country). The IMF emergency financing disbursement could even be a precursor to a Fund programme, which could be positive.
However, bondholders may face a risk of debt service suspension in the near-term. Tajikistan is included in the G20 debt service suspension initiative (DSSI), which allows for debt service suspension on official bilateral debt when necessary. This could possibly be extended to private creditors, on a voluntary basis at the authorities’ request, albeit interest on the bond is low. The next coupon on the bond is due in September.
Latest economic forecasts: V-shaped recovery
Tajikistan has been hit hard by the impact of the coronavirus pandemic, more because of the global economic consequences than the domestic health impact of the pandemic itself. It has suffered from disruptions in trade and transport, a fall in remittances and a decline in government revenue. Indeed, on some metrics, Tajikistan is among the worst-hit countries in terms of the impact on growth, and the fiscal and external accounts.
Real GDP is now expected to fall by 2% this year, compared to a projection of 1% growth as recently as the IMF WEO in April. Coming after growth of 7.5% in 2019, that would represent a near 10ppt slowdown. Pre-Covid-19, Tajikistan was expected to see growth of c4.5% this year. See the chart below for how forecasts have changed between the October 2019 WEO and the RCF report this month.
Services accounts for 41% of Tajikistan’s economy, but other key sectors may be more heavily impacted by any coronavirus containment measures, such as industry (including construction), which accounts for 27% of the economy. Under the IMF’s expected V-shaped global recovery, Tajikistan’s growth is forecast to recover in 2021, reaching 7.5%, before declining to a trend rate of 4% over the medium term.
As has been the case for many developing economies, the Covid-19 induced crisis has led to a sharp deterioration in the country’s fiscal balance and given rise to a balance of payments financing gap. IMF forecasts for the overall fiscal deficit (including Public Investment Programme) are now 7.7% of GDP for this year, before improving to 4.4% next year and then c2.5% fiscal deficits each year to 2025.
The current account deficit is expected to widen this year – to 7.8% of GDP in 2020 (from 2.3% in 2019) – but forecasts for 2021 are better than previously, again based on a V-shaped recovery. A combination of sharply lower remittances and lower non-gold exports are expected to be drivers of this year’s C/A deficit, although the extent of the deterioration may be mitigated to some extent by lower imports.
Most of Tajikistan’s trade is with China, Russia and its neighbouring countries (Tajikistan is one of the countries in China's Belt and Road Initiative), so any predictions for its performance must assume a trajectory for coronavirus containment measures in the region; many central Asian countries have closed their borders.
Coronavirus impact: slow to respond, but not overwhelmed
Tajikistan was slower than other countries in the region to respond to the coronavirus outbreak, according to media reports during April, despite having a land border with China of almost 500km. President Emomali Rahmon was even pictured with a crowd on 26 March celebrating Nowruz (Iranian New Year and spring equinox), with no face masks or any other signs of precaution. After weeks of insisting that the virus was not present in the country – despite local speculation that there had been coronavirus-related deaths – authorities finally declared the first official deaths on 30 April.
The World Health Organisation (WHO) has planned a technical visit to central Asia and in particular to Tajikistan and Turkmenistan – which has still declared no cases – although the timing of this visit is not yet known. Some media sources report that Tajikistan has only one laboratory capable of testing for coronavirus. It is also the poorest former Soviet country, and the health system would likely be overwhelmed by a large outbreak.
The IMF is more positive about the authorities’ response than media sources, and reports that as of 30 April, Tajik authorities had placed 2,100 people under quarantine and imposed a range of containment measures. As of 18 May, Tajikistan has 1,524 official cases and 39 recorded deaths.
Policy response: orthodox monetary policy moves, with US$190mn IMF emergency rapid credit facility secured
The authorities have pursued an orthodox economic policy response to coronavirus. The National Bank of Tajikistan (NBT) cut its key interest (refinancing) rate by 100bps on 28 April, to 11.75%, to support activity, after hiking rates by 50bp on 28 January to contain inflation pressures. Inflation is now above the target range, at 9.26% yoy in March, driven up by higher staple goods prices. The NBT has provided FX liquidity to banks and allowed a one-off 5% depreciation of the somoni against the US dollar in March. The pandemic has led to spending pressure on the budget, while weaker economic activity has reduced government revenue, causing a sharp deterioration in the fiscal position. However, the government has yet to announce any specific fiscal stimulus measures.
To support the authorities in their coronavirus response, the IMF Executive Board approved a US$189.5mn (80% of quota) disbursement under the emergency Rapid Credit Facility (RCF) on 8 May. The funds will provide liquidity to help meet urgent balance of payments (BoP) and fiscal needs due to the pandemic, and allow fiscal space to adjust the response as necessary, including with healthcare and social expenditure. The IMF estimates a BoP gap this year of US$384mn (4.9% of GDP). The IMF noted that the authorities regard the RCF disbursement and policy commitment as a possible bridge to a proper Fund programme if the economic situation persists, which could also catalyse more donor support.
The RCF itself should catalyse additional support. The IMF report notes that discussions are ‘well advanced’ to obtain grant funding of US$47mn from the World Bank Group and US$86mn from the Asian Development Bank, and that discussions were also ongoing for a concessional financing operation of US$40-60mn with the Eurasian Fund for Stability and Development. This adds further optimism to views around public finance liquidity.
Public debt expected to jump to 52.9% of GDP this year
Public debt is expected to increase and the IMF notes that while Tajikistan’s public debt is sustainable, it is at high risk of debt distress. Public debt is expected to jump to 52.9% of GDP this year, from 44.6% last year. Based on the assumption of strong growth returning in 2021, next year’s public debt burden is expected to be 52.8%, even as the overall fiscal balance (including PIP but excluding bank recapitalisations) is projected at -7.7% and -4.4% of GDP in 2020 and 2021 respectively. In the 2020 Debt Sustainability Analysis (DSA), the IMF does however note that public debt and external debt sustainability have improved since the 2019 DSA, helped by the authorities’ commitment to fiscal consolidation and avoiding non-concessional borrowing. While the pandemic causes some indicators to breach thresholds, they fall back below or near thresholds in the medium term. However, the public debt burden will be vulnerable to further currency devaluation.
Eligible for G20 debt service suspension initiative
In the short term, as a World Bank IDA-eligible country, Tajikistan is one of the countries included in the G20 debt service suspension initiative (DSSI) announced on 15 April, as supported by the World Bank and IMF. This allows a time-bound payment standstill if the debtor country requests it from its bilateral creditors, allowing some extra flexibility for authorities if public finances come under strain. Tajikistan’s biggest bilateral creditor is China (43.5% of public external debt as of the eurobond prospectus in 2017). Under the DSSI, private sector creditors, including bondholders, may also be expected to suspend debt service payments on a voluntary basis, at the request of the authorities. Such a request would be indicative of the authorities’ capacity to respond to the pandemic and keep current on future payments. It is not yet clear whether the government will seek forbearance from its bilateral creditors and if so, whether it will then seek comparability of treatment on the bond. But doing so could lead to downward rating pressure (currently rated B3/B-/-) and could limit commercial funding options, especially for the dam, going forward. That might be a good reason for not seeking comparability of treatment on the bond, as well as its small size of the bond and low debt service (hence limited savings), but it’s difficult to predict the outcome of this.
This year, while there is no externally financed capital expenditure for the Rogun Dam project, the IMF reports that 4.1% of GDP in domestically financed capital expenditure is planned. It is unclear if this includes the remaining proceeds from the 2017 eurobond. Over the next five years, externally financed Rogun capital expenditure is expected to be c2% of GDP, with domestically financed Rogun capital expenditure slightly higher than that each year. As a major use of public funding, and as future funding sources remain unclear, this is an important factor in considering the sustainability of public finances.
Implications for bondholders
There are plenty of reasons why bondholders might feel some concern: 1) the lack of transparency about the virus’ presence, its economic impact, and its effect on fiscal and external accounts, debt and financing; 2) the lower growth forecasts this year, although Tajikistan is far from alone in this; 3) the dependence of future growth on the pandemic’s path, again a problem shared by so many countries at present; 4) dependence on the Rogun Dam; and 5) little visibility on financing options. While the composition of the debt – with China being the largest creditor – may have been seen to offer some protection to bondholders in the event of greater debt distress, such comfort may be reduced under the DSSI.
Rogun Dam – progress is being made, but further funding will be needed
Progress on the Rogun Dam project – which was the sole use of the funds raised in the 2017 eurobond offering – continues, with new potential funding sources emerging. Multilateral agencies, and China, have been considered possible future creditors, and last month, Ukraine’s foreign minister reaffirmed his country’s interest in supporting development in Tajikistan, including the hydropower sector. As the country has widespread power shortages, President Rahmon considers the dam to be part of his legacy and will likely pursue all opportunities to gain further funding for the project, which has a total projected cost of cUS$3.9bn. The government acknowledged last year that further funding was needed. This includes in 2021 as existing turbines at Rogun will need to be replaced. However, there might also be some concern about the viability of its export potential given the main offtakers are Afghanistan and Pakistan.
Reasons for optimism
But there are reasons for optimism. We have previously cited the country’s liquidity position as a strength. Total reserves exceeded US$1.4bn in March 2020, up from US$1.17bn in March 2019, based on IMF IFS figures. The majority of this is in the form of gold, as Tajikistan has significant gold reserves (see chart below).
We still think debt service on the bond looks manageable given strong reserves' coverage (annual eurobond interest is currently US$35.625mn). The IMF’s latest 2020 projection of gross reserves is 5.1 months’ cover of next year’s imports of goods and services, declining to c4.7 months’ over the next few years. Debt service on public and publicly guaranteed external debt will rise to 17.3% of exports of goods and services this year, before declining each year to 12.3% in 2024, before eurobond amortisations begin in 2025. IMF support, commitment to fiscal consolidation and a relatively mild public debt burden are also positives.
TAJIKI 2027s – still a Hold
We downgraded TAJIKI 2027s to Hold from Buy on 10 March, on rising commercial borrowing costs and uncertainty over the Rogun project. Yields are currently c15%, up from 10% in February pre-Covid-19, although they have narrowed somewhat from their peak of 18% in late March . We maintain our Hold given the balance of risks.