Tanzania’s first credit rating is already on review for downgrade
Euromoney’s risk survey suggests it should have been lower in the first place. President John Magufuli’s erratic policy making could have a detrimental impact on Tanzania’s credit rating
On March 2, Moody’s became the first main credit rating agency to award a sovereign rating to Tanzania, and plumped for B1 with a negative outlook, annoying the authorities anticipating a stable rating. However, Euromoney’s country risk survey suggests Moody’s was right to be cautious.
In fact, a lower B2 stable rating would have been more suitable considering Nigeria, which is one place higher in the global rankings, and Kenya (four places higher), are both a notch lower than Tanzania. The consensus scoring of analysts taking part in the survey indicates there should be no distinction between the three borrowers.
All are medium-to-high risk credits within the fourth of ECR’s five categories and all are roughly equivalent in terms of their aggregated (and weighted) economic, political and structural risks. The survey factors in a wide range of variables affecting creditworthiness along with scores for capital access and debt ratings. Tanzania presently scores 36.5 out of a maximum 100 points overall and its score has drifted gently downwards during the past decade.
Positively, values assigned for bank stability, the economic outlook and currency stability improved slightly in 2017, and the country regularly enjoys decent levels of real GDP growth, averaging not less than 6% in real terms per annum, and normally close to, if not exceeding, 7% in most years, which is crucial for development. However, scores for unemployment and government finances have deteriorated, with the fiscal predicament the main concern undermining the rating.
Under-execution of the budget has kept the financing requirement down, but projections by the IMF show the cash deficit widening from 1.5% of GDP in 2016/17 (July-June), to 4.2% in 2017/18, and higher still to 4.6% in 2018/19. The current-account deficit is also foreseen widening to 6% of GDP in just a few years’ time, although it largely reflects development projects relying on imported machinery and materials representing investments in future export capability.
Still, there are still domestic arrears weighing on the credit profile, and the debt ratio is rising and projected to peak at around 44% of GDP by 2019/20, which, linked to the fiscal deficit prognosis, relies on the various underlying economic assumptions being realized.
Meanwhile, the scores for all political risk indicators were downgraded in 2017, except for corruption, highlighting the growing trend of intolerance towards political opposition, and the increasingly erratic policymaking by the government led by president John Magufuli. Protectionist and resource-nationalism measures are hurting manufacturing and deterring foreign ownership in the mining sector. New, tighter regulations stipulate minimum shareholdings for resident Tanzanian investors and the state in the mining sector, priority for Tanzanian companies in mining concessions and that banks, insurance companies and legal firms used by mining companies must be Tanzanian majority-owned.
Locking out foreign companies and deterring resource investment could have a detrimental impact on budget financing and import payments, even though Tanzania has been hitherto an attractive, moderate regional risk due to its comfortable debt levels and political stability. And most analysts seem to agree. Rafiq Raji, one of ECR’s survey contributors and chief economist at Macroafricaintel, a research company providing independent analysis on the region, echoes the views of others by saying the negative credit rating outlook “points to what Moody’s likely thought the rating should be; as with recently downgraded Kenya, Tanzania is probably also a B2”. He states: “Thus, the current ECR ratings are more appropriate, in my view,” adding that political risk is largely the same across East Africa for now, noting the fact most countries have “strongman administrations”.
Moody’s will unlikely downgrade for the time being. It has a history of waiting an inordinate amount of time before actioning any rating changes. However, if Tanzania’s ECR score continues to drift lower, it will certainly provide an indication of what is to come, and a B2-rating should already be the rule of thumb.