Sovereign Analysis / Tajikistan

Tajikistan: V-shaped recovery forecast, but not all good news

  • Tajikistan’s economy has been hit hard by the global crisis. However, projections assume a V-shaped recovery.
  • The IMF Executive Board approved US$189.5mn in emergency financing for Tajikistan on 6 May, as it responds to Covid-19.
  • Coronavirus impact: Slow to respond, but not overwhelmed.
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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.

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 Figure 2 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. 

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.

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).

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Strategy Note / Saudi Arabia

Saudi pares fiscal deficit, hits consumer, prepares for long oil war, splits GCC

  • Fiscal measures equate to 4% of GDP, shaving about a third off the 2020 deficit
  • Saudi consumer hit: 15% VAT (from 5%), end of public worker cost of living allowance, job losses, salary cuts
  • Implications: Partly addresses Russia fiscal advantage in oil war, pressures expat remittances, may split GCC further
Hasnain Malik @ Tellimer Research
11 May 2020
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The fiscal cuts announced by Saudi Arabia on 11 May equate to c4% of GDP and a prior fiscal deficit of 12.6% (2020 forecast from IMF). The measures include a VAT hike (from 5% to 15%), ending a cost of living allowance for public sector workers and project spending delays. The VAT increase is, in our view, unlikely to be reversed and could equate to 4% of GDP in annual recurring fiscal revenue.

We draw the following domestic, regional and global implications.

(1) Saudi consumer – This is another blow to consumer spending growth that has already decelerated very sharply (following the oil price fall and Covid-19 disruption to retail and tourism): the hike in VAT and the removal of public sector cost of living supplemental allowance compounds the effect of job losses, and the removal of private sector salary and hours cuts (of up to 40%), and likely job losses (particularly in the expatriate labour force).

(2) Saudi income tax – The existing VAT framework (reporting requirements, auditing procedures) allowed for rapid implementation of an increase in the tax rate. Longer-term, this is another indicator that wider corporate and personal income taxes are an inevitable part of the non-oil fiscal armoury.

(3) Saudi political risk – The centralisation of power under Crown Prince Muhammad bin Salman has demonstrably dealt with dissent in the wealthier segment of society and projected a mix of nationalism, security, social reform, the liberalisation of entertainment, and targeted welfare to preserve social stability among the less affluent mass population. Of course, domestic political threats remain ever present and a much weaker economic climate increases vulnerability. But we reiterate our view that as long as the Crown Prince retains monopolistic control over the military and security apparatus and the US remains a key supporter, then the risk of social discontent turning into something which puts the succession or the regime at risk remains a very low probability.

(4) Saudi equities – The local Tadawul index is down 20% year to date, broadly in line with MSCI EM (down 18%). Banks, Cement, Chemicals, and Consumer Non-Food have, in general, under-performed Aramco, Consumer Food, Healthcare and Telecom. Trailing price/book of the index is 1.6x, merely a 7% discount to the 5-year median. We are not that enthusiastic about Saudi equities relative to alternatives in the Middle East (Egypt), oil exporters (Kazakhstan), large and liquid EM (Technology). Within the narrow peer group of the GCC, Qatar is better able to withstand the current crisis environment (with greater firepower for fiscal stimulus) but when conditions normalise (in terms of Covid-19) we see more low-hanging fruit for non-oil diversification in Saudi.

(5) Saudi US$ sovereign debt – The 2028 3.625% Saudi US$ sovereign bond, rated A1 by Moody’s and A by Fitch, currently has a mid-yield to maturity of 2.8%, broadly in line with the start of the year but down from a mid-March peak of 4.3%. The current z-spread of 229bp is over 300bp narrower than EMBI (compared to about 180bp narrower at the start of the year). Clearly, actions which rein in fiscal deficits should be positive for fixed income investors.

(6) GCC disunity and competition – A common framework for 5% VAT across the GCC was agreed in June 2016. But implementation has been very uneven with Saudi and the UAE moving ahead first in January 2018, Bahrain in January 2019, and with Kuwait, Oman and Qatar yet to implement. A differential of 15% at one end (Saudi) and zero at the other (eg Qatar) creates a substantial competitive disadvantage when it comes to cost and attractiveness of doing business. This is another example of a lack of coordination in the GCC: a strain most evident in the Qatar blockade and one that is likely to worsen for this regional bloc – as it is for others like the EU – through the Covid-19 and oil crises.

(7) Oil price – This partly addresses one of the weaknesses of Saudi in fighting with Russia over the power to set the marginal price of oil: Russia entered the oil price war with much lower fiscal break-even oil price (approximately US$40 versus US$85 for Saudi). This could be interpreted as Saudi preparing itself for lower oil prices for much longer.

(8) Remittances in oil importers (and labour exporters) – GCC remittances (of which Saudi accounts for over half) equate to a substantial portion of GDP (approximately 2% to 8%) for the likes of India, Bangladesh, Philippines, Lebanon, Sri Lanka, Pakistan, Jordan and Egypt. Pressure on overall economic growth and consumer growth in particular usually negatively impacts the expatriate community disproportionately (because they do not represent as politically important a constituency as the citizen base).

Below we present charts on Saudi consumer and corporate confidence metrics, GCC fiscal forecasts (prior to the April OPEC+ deal and most of the crisis stimulus or austerity actions), global oil exporter fiscal break-even oil prices and tax revenues, and recent performance of Saudi equities and sovereign US$ debt.

Related reading

GCC: The Gulf is not a safe haven unless (at least) oil prices recover, 1 April 2020

Oil spat turns into a splat: A reminder of the winners and losers in EM, 21 April 2020

Kuwait, GCC: The expat debate stirs again, 15 April 2020

GCC: Sovereign wealth warning from the IMF (again), 7 February 2020

If remittances drop 20% who is exposed in emerging and frontier markets?, 29 April 2020

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Strategy Note / Kuwait

Kuwait: MSCI EM delayed to Nov 2020, no change to fundamentals

  • Kuwait stock market still fully functional but MSCI states foreign accounts will not be set up in time due to Covid-19
  • Kuwait weights in MSCI indices: FM 37.3%, FEM 19.5%, EM 0.7% (potentially)
  • No comment from MSCI on ad hoc market closures in Jordan, Mauritius, Sri Lanka, or interference in Bangladesh
Hasnain Malik @ Tellimer Research
9 April 2020
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MSCI-related flows: repeat-cycle for passive funds, more pain for some FM funds

The MSCI announcement on 8 April is a surprise and important, in the short-term, but in no way changes the long-term picture. 

(1) Kuwait stocks earmarked for inclusion in the EM index (the original decision to upgrade in May 2020 was taken in June 2019) likely suffer a temporary outflow of funds positioned for that upgrade (indeed at the time of writing, the stock market has hit a intra-day, 5% limit-down circuit-breaker); and

(2) Countries whose weights in the FM (Vietnam, and potentially Iceland) and FEM (Philippines, Peru, Vietnam, Colombia) indices may have increased substantially will have to wait another six months.

The combined effect is likely to add to the pain felt so far this year by FM funds, many but not all of whom we sense were positioned in Kuwait mainly because of this inclusion. A market that has been so tricky for FM managers given its very large size in their benchmark index and its complete dominance by index-related flows (related to FTSE EM, first, and MSCI EM, second) over the past two years is delivering one last sting in its tail.

Kuwait investment case: very cheap equities, resilient sovereign, but structural weaknesses

Overall, Kuwait is not one of our preferred markets in a region, the GCC, which we do not regard as a safe haven in these times (at least, until oil price recovers).

In a time of Covid-19 economic disruption and the oil price war, Kuwait's top-down strengths are its deep sovereign reserves, which make for minimal FX rate risk and firepower for fiscal stimulus. Although recent warnings from the IMF and downgrades by sovereign credit rating agencies are a reminder that there are limits to this. 

In any more normal era, Kuwait's weaknesses are too great a dependence on welfare provision by the state (which blunts citizen incentives, drives reliance on expatriate labour, constrains the ability to implement austerity in periods of weaker oil revenue, and crowds out growth of the private sector) and a political system (a hybrid of absolute monarchy and parliamentary democracy) where obstructionism blocks the efficient execution of non-oil diversification project spending, structural reform, and, potentially, could cause a problematic succession

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Equity Analysis / Global

FM and EM Banks: The 3-D threat from Coronavirus

  • For EM banks, we see three principal modes of transmission: Weaker revenues, liquidity pressure & falling asset quality
  • We think banks in Bangladesh and Argentina are most at risk, together with Rwanda and Russia
  • Banks in Uganda, Nigeria and Egypt seem better equipped to handle the challenging macro environment ahead
Rahul Shah @ Tellimer Research
16 March 2020

The US Federal Reserve yesterday cut interest rates by 100bps, in addition to the 50bps cut announced on 3 March, and also announced a massive asset purchase programme and international co-ordination to protect USD-liquidity in the financial system. These moves highlight the central bank’s concern over the significant negative effect that Covid-19 will have on the US and global economies.

This impact stems not just from the effect of the virus itself (in terms of lost output and consumption by infected workers and their families) but also from the response to this threat from policymakers (border closures, restrictions on gatherings etc) and the private sector (voluntary factory closures, homeworking, reduced consumption and so on). The consequent disruption to supply chains, capital flows and investment activity is likely to be profound. Longer-term political and geopolitical repercussions can also not be discounted.

For EM banks, we see three principal modes of transmission:

Weaker revenues: This will play out through lower margins (the vast majority of banks in our coverage experience a margin squeeze when interest rates fall), reduced investment returns (due to asset price declines) and lower business volumes (less loan demand, potential pressure on deposits (see below), lower transactional activity).

Pressure on liquidity: Fiscal stimulus measures (such as those announced by the UK government last week) may lead governments to tap domestic savers and/or their banking systems. Global capital markets are likely to become increasingly segmented, reflecting border restrictions and heightened uncertainty. Reduced risk appetite (the financial equivalent of stocking up on toilet roll) could also inhibit the availability of liquidity to banks

Asset quality deterioration: While this may take longer to play out than the first two factors, it could ultimately prove to be the most significant impact of Covid-19 for banks. Weaker economic activity and lower collateral prices could see increasing numbers of borrowers defaulting on their loans, leading to banks’ capital erosion.

Which banking systems are most at risk?

Ranking our coverage markets across these three risk factors, and assuming that Covid-19 risks in each market are ultimately broadly equivalent, we see banks in Bangladesh and Argentina as being most at risk, together with Rwanda and Russia. In contrast, banks in Uganda, Nigeria and Egypt seem better equipped to handle the challenging macro environment we are likely to experience over the coming months; they already have significant operational and balance sheet buffers in place.

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