TOPIC OF THE WEEK: Tajikistan gets a well-warranted rating upgrade
S&P has upgraded Tajikistan to B from B- citing robust GDP growth, improved external position and moderate public debt levels. We think the upgrade is well deserved. Twice in the last year we have posited that perceptions about Tajikistan’s ability to meet external obligations have been unduly plagued by earlier assessments about Dushanbe’s risk of default. For example, in 2020 the World Bank stated that in Tajikistan “the risk of debt default is high.” In the summer of 2023, the WB re-affirmed its judgment, arguing that “Tajikistan is still at high risk of debt distress." We disagreed with this in previous reports (see reports of February 2, 2024 and November 24, 2023).
More broadly, Tajikistan’s economy has performed better than anticipated this year, with GDP growth having expanded by 8.2 % over 1H24. We forecast full-year growth of 8.0% (8.3% in 2023). Still, Tajikistan remains the poorest economy in the region in terms of GDP per capita, with little growth convergence due to its fast-growing population.
While traditionally remittances (mainly from Russia) have accounted for a third of GDP, in 2022 they posted a record by taking 50.9 percent of economic output. Household consumption is critically dependent on remittances, which form about a fourth of household incomes. Remittances moderated to a still above-average 38.5% of GDP in 2023.
Even if 2023/early 2024 has brought about a normalization in the pace of remittances, they remain strong and supportive of the CA position. We forecast that 2024 will mark the fifth consecutive year of posting CA surpluses, with a transition to small deficits only from 2026.
FX reserves were under pressure over 2023 due to higher trade deficits, which in turn were driven by technical delays in the export of gold. Now FX reserves have been built up in line with the healthier external position. FX reserves cover 7.4 months of imports of goods and 6.4 months of imports of goods and services.
Debt service has declined significantly in the last decade as a share of FX reserves, although it will rise somewhat in 2025. Next year TAJ starts to pay the first of six semi-annual principal payments of US$83 million on the country's only 2027 Eurobond issuance. These will last until Sep 2027.
Debt service will also inch up in terms of budget revenues due to that first semi-annual repayment of the Eurobond. However, access to external concessional financing and stronger foreign exchange reserves should help Tajikistan meet its Eurobond repayment requirements and mitigate potential balance of payments pressures.
While the TJS has been the second-weakest currency in the CCA space (against the US$) in the last decade, the improvement in the external position in the last couple of years reflected positively on the currency. We expect the TJS to soften, but only next year when the CA transitions into deficit.
Inflation has been well-behaved on account of an appreciating currency and lower global energy prices. Still, robust domestic demand, the sharp rise in public sector wages from Jul 1st, and a low base will facilitate a gradual move up towards the 6% CPI target towards year-end (3.4% YoY in Jul). The NBT cut the policy rate by 100bpts to 9.0% this year on lower inflation. While there could be one final 25bpt rate decrease in the last policy meeting of the year on Oct 25, we think that the return to the CPI target by 2025 will lead to slightly tighter monetary policy by mid-2025.
The issue of political transition is important as Tajikistan is the only CCA economy where the transfer at the helm has not yet transpired. We have discussed this important risk in some detail elsewhere (see our report of September 21, 2023), drawing the welcome conclusion that the transfer of power will most likely proceed peacefully, while acknowledging the challenges that might accompany the passing of the baton.
This week, we present slides of the economic and fiscal factors leading to Tajikistan's rating upgrade.
Now read on...
Register to sample a report