Moody's: Tajikistan's credit profile balances robust growth prospects against external vulnerability risks and banking sector weaknesses

Moody's Investors Service says that Tajikistan's (B3 stable) credit profile reflects the country's very low per capita income and institutional strength, as well as its robust growth prospects.

Low foreign-exchange reserves in relation to short-term public and private external debt, along with banking sector weaknesses, represent key credit challenges for the sovereign.

Moody's conclusions were contained in its recently released annual credit analysis titled "Government of Tajikistan -- B3 stable" and which examines the sovereign in four categories: economic strength, which is assessed as "low (+)"; institutional strength "very low"; fiscal strength "moderate (-)"; and susceptibility to event risk "moderate (+)".

The report constitutes an annual update to investors and is not a rating action.

Moody's report says that Tajikistan's concessional borrowing helps maintain low debt-servicing costs, but a high and rising government debt burden will weaken fiscal strength in the coming years.

Government borrowing is increasing to finance the construction of the Rogun Dam hydropower project. Moody's forecasts that government debt will rise to about 55% of GDP in 2017-18, which is relatively high to sustain for a small economy with limited financing sources.

And, a significant proportion of foreign-currency denominated debt exposes the debt burden and debt servicing costs to currency depreciation.

As for the country's growth prospects, Tajikistan's robust medium-term economic growth prospects are supported by hydropower generation through the Rogun HPP project, despite the inherent risks related to its construction and operation. Balancing this strength is the country's very low per capita income and a narrowly diversified economy. These factors raise the sovereign's susceptibility to economic and financial shocks.

The stable outlook on the sovereign rating indicates balanced credit risks.

The report notes that the rating could be upgraded if the Rogun HPP project is successfully implemented and delivers increasing tax and export revenues; or banking and fiscal reforms that support macroeconomic and financial stability are effectively implemented; and improvements in the rule of law and control of corruption strengthen institutional quality.

On the other hand, the sovereign rating could be downgraded if a decline in foreign reserves raises repayment risks on external debt obligations; or, significant delays or under-delivery of the Rogun HPP project leads to lower-than-expected economic activity, tax receipts and foreign currency revenues; or, there are materially larger fiscal costs than Moody's expects for the recapitalisation of banks; and progress on reforms to support macroeconomic stability stalls, hindering potential foreign direct investment inflows and thereby weakening the economy's growth potential and balance of payments.