LONDON-Moody's Investors Service ("Moody's") has October 7, 2022 changed the Government of Tanzania's outlook to positive from stable and affirmed the B2 foreign and local currency long-term issuer ratings.
The outlook change to positive reflects Moody's view that political risks have lessened under the government's new approach to promoting economic development and engagement with the international community.
The government's efforts to improve the business and investment climate and attract foreign direct investment (FDI), most notably in the mining and hydrocarbon industries, offers the prospect for higher potential growth and improving international competitiveness.
Tanzania's re-engagement with the IMF also has the potential to support higher government revenue generation capacity and unlock greater concessional financing from development partners, supporting debt affordability and increased social spending.
In turn, such indications that lower political risk may improve the country's economic and financial environment support Tanzania's capacity to face the implications of the global shock following Russia's invasion of Ukraine.
The B2 rating affirmation reflects Tanzania's low GDP per capita and institutional weakness, which undermines fiscal strength, notwithstanding its high growth potential and relatively diversified economy, which reduces its vulnerability to shocks.
Moody's expects Tanzania's moderate debt burden to remain stable and below the B2 median while inflation has remained relatively low and stable despite global price pressures.
The local-currency and foreign-currency country risk ceilings remain unchanged, at Ba3 and B1, respectively.
The two-notch gap between the local-currency ceiling and the sovereign rating reflects the weak institutions and policy predictability, moderate political risk and weak infrastructure set against are relatively small footprint of the government in the economy and limited external imbalances.
The one-notch gap between the foreign- currency ceiling and the local-currency ceiling reflects relatively low policy effectiveness balanced against low external debt and an open capital account, which reduces the incentives to impose transfer and convertibility restrictions.
RATINGS RATIONALE
RATIONALE FOR THE CHANGE IN OUTLOOK TO POSITIVE FROM STABLE
LOWER POLITICAL RISKS ARE SUPPORTIVE OF HIGHER GROWTH POTENTIAL
Despite Tanzania's wealth of natural resources, inflows of FDI have been muted in recent years due to ongoing policy and regulatory uncertainty. Policy uncertainty was most notably impacting investment in the mining sector until a protracted dispute was finally settled in late 2020 and an export ban was lifted.
After assuming power in 2021, the new presidential administration began actively courting international investors and nascent signs of improving investor sentiment towards Tanzania have since emerged, including several investments in the mining sector and renewed momentum behind the long-delayed energy projects.
Sustained foreign investment in export sectors would increase growth potential in Tanzania, the country's resilience to external shocks and the government's fiscal capacity.
The government's structural reform agenda offers the prospect of delivering lasting improvements to Tanzania's institutional framework and supporting private sector growth.
Initial steps to improve the business and investment climate include relaxing regulations for foreign work permits, streamlining VAT refunds, and tabling legislation that supports local businesses. Ongoing efforts to improve the regulatory environment, reduce non-tariff barriers and improve the quality of national statistics offers the prospect of delivering sustained increases to potential growth.
In the current context of a global shock triggered by Russia's invasion of Ukraine, and while inflationary pressures in Tanzania have remained relatively muted, the signs of improvements in the business environment above support the country's capacity to face potential future economic and financial pressure.
THE GOVERNMENT'S RE-ENGAGEMENT WITH THE INTERNATIONAL COMMUNITY HAS POTENTIAL TO IMPROVE FISCAL OUTCOMES
President Samia Suluhu Hassan has traveled extensively regionally and abroad in an effort to improve international relations and attract investment since assuming power.
Efforts to re-engage with the IMF have been successful in securing funding to bolster the government's pandemic response and implement price subsidies to limit inflationary pressures in response to the recent commodity price shock.
Conditions met under the IMF's Rapid Credit Facility give credibility to the goals in the new IMF Extended Credit Facility program to target institutional capacity development and increase the government's revenue generation capacity, supporting improvements to fiscal policy effectiveness.
The administration has also taken steps to improve relations with international development organizations by moving to open the civic space and lifting some restrictions on media and political opposition, opening the possibility for additional concessional funding from development partners and easing risks to government liquidity and cost of funding.
RATIONALE FOR AFFIRMING THE B2 RATING WEAK INSTITUTIONS ENGENDER REFORM IMPLEMENTATION RISKS
Tanzania's weak governance and policy effectiveness are constraints on the rating. While the Worldwide Governance Indicators improved slightly in 2021, Tanzania still ranks in the bottom third among the sovereigns Moody's rates and even lower for government effectiveness and regulatory quality.
More generally, despite the nascent signs of improvements mentioned above, institutions and governance strength remains low.
In particular, government intervention in the economy has been particularly disruptive in the mining sector, while larger-than-expected tax bills and delayed tax refunds were disruptive to small and medium-sized enterprises.
Tanzania's weak institutional profile brings into question the durability and sustainability of the government's new approach and reforms.
The sharp change in direction under the new administration demonstrates the relevance of key actors rather than the capacity of the broader institutional framework to the overall policy direction, and the current reform agenda could be disrupted under a new administration.
A weak institutional track record of policy stability and lack of consensus towards credit-positive policies implementation suggests the sustainability of the government's new approach translating into a durable improvement in credit metrics is less than assured and constrains upside credit potential.
HIGH GROWTH AND DIVERSIFICATION SUPPORTS SHOCK ABSORPTION CAPACITY BUT INCOMES REMAIN VERY LOW
Sustained elevated growth rates of 6.2% on average in Tanzania between 2011 and 2021 compare favourably to the B-rated median of 3.7%.
Tanzania's economy is relatively well diversified given its significant and varied exploitable natural resources as well as emerging industrial and services sectors, which supports shock absorption capacity.
The construction industry has become increasingly important in recent years and will contribute significantly to economic growth as the government invests heavily in public infrastructure.
Tanzania's export base is also one of the most highly diversified by product in the region, with gold and other mined minerals making up the largest export sector while tourism also composes a sizeable and growing share of exports, pandemic-related disruptions notwithstanding.
Despite elevated growth rates and a relatively diversified economy, Tanzania's income levels remain very low on a global scale and remain a source of social risks, as explained below, and a key credit constraint.
Incomes will remain low as rapid population growth will limit gains in GDP per capita and low education outcomes limit potential demographic dividends for growth.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Tanzania's ESG Credit Impact Score is highly negative (CIS-4), reflecting its highly negative exposure to environmental risks, very highly negative exposure to social risks, and weak governance.
Beside governance constraints, resiliency is undermined by low incomes. Tanzania's exposure to environmental risks is assessed as highly negative (E-4 issuer profile score).
Environmental considerations weigh on Tanzania's economic strength and credit profile. High dependence on water for agriculture and hydroelectricity generation has increased environmental risks, with major rivers drying up because of the combination of increased water demand and recurring droughts.
Climate change will exacerbate existing issues and add further strain on the country's water reliance. Exposure to social risks is very high (S-5 issuer profile score), mainly related to Tanzania's high levels of poverty and income inequality, and limited access to basic services, including health, education and housing.
Very high rates of malnutrition and low school enrolment and completion rates constrain human capital, weighing on potential growth and undermining favourable demographics.
The influence of governance on Tanzania's credit profile is highly negative (G-4 issuer profile score), reflecting unpredictable policy actions that have weakened policy effectiveness and the rule of law and could hinder its growth potential.
Persistent underperformance of fiscal targets and the accumulation of domestic arrears reflect compliance issues and administrative inefficiencies.More details here>>>