Moody’s Upgrades Tanzania to B1 from B2 and Expects Continued Robust GDP Growth

On 22nd March 2024, credit rating agency Moody’s Ratings (Moody’s) upgraded the Government of Tanzania’s long-term issuer ratings to B1 from B2 and changed the outlook to stable from positive.

The agency explains that the upgrade to B1 reflects Tanzania’s track record of economic resilience throughout multiple external shocks in recent years, providing confidence in its shock absorption capacity going forward.

A diversified economic base and exports, stable debt burden, limited contingent liabilities, and Moody’s expectation for a continuation of conservative fiscal policy support the rating at the B1 level.

Structural reform momentum is building and the authorities have taken tangible steps to improve institutional strength and foster an improving business environment, although progress remains gradual and in the early stages.

Initial signs of improvements in the business environment are materializing via an increase in lending to the private sector and increasing investment, both foreign and domestic.

The B1 rating level also takes into account still weak institutions, high reliance on foreign-currency debt, a fragile external position, and low income levels, all of which constrain the rating.

The stable outlook reflects Tanzania’s track record of economic and fiscal resilience to shocks, while low incomes and high levels of poverty increase exposure to social risks and potential future shocks.

Moody’s expects continued robust and stable GDP growth supported by higher private sector investment and gradually improving competitiveness.

Ongoing fiscal discipline and declining infrastructure investment (with large public sector-led projects now reaching completion) will support a stable debt burden, while increasing social spending will gradually ease social risks.

The persistent current account deficit and the potential for external imbalances that would weigh on economic growth are downside risks, as is high exposure to climate shocks given the high dependence on rain-fed agriculture for economic growth and employment.

Moody’s has also raised the local-currency country risk ceiling to Ba1 from Ba3 and the foreign-currency country risk ceiling to Ba3 from B1.

The three-notch gap between the local currency ceiling and the sovereign rating reflects the high government footprint in the economy and moderate external imbalances against low political and geopolitical risk, diversified government revenue sources and an improving track record of policy predictability.

The two-notch gap between the foreign-currency ceiling and the local-currency ceiling reflects moderate policy effectiveness and transfer and convertibility risks, given the structural current account deficits and history of periods of difficulty accessing foreign currency, against low external debt, which reduces the incentives to impose transfer and convertibility restrictions.

Rationale For the Upgrade To B1 From B2

Moody’s explains that Tanzania’s rating is underpinned by its economic resilience amid pandemic, inflationary, and global liquidity shocks since 2020.

Real GDP growth averaged 6.0% from 2015 to 2022, bolstered by growth across diverse sectors like agriculture, tourism, mining, and construction. Despite a dip in the tourism sector during the pandemic–a key source of foreign exchange generation–a rise in gold exports partially offset these losses and demonstrated resilience in the export base.

Exports have rebounded since 2020, driven by a resurgence in tourism, increased gold production, and growth in the agriculture and logistics sectors.

Low, stable inflation has been maintained since 2018 as a high share of food consumed is produced domestically and through temporary government subsidies on certain imports, such as fuel, which insulated households from global price shocks.

Moody’s expects these credit strengths to continue to support resilience to future shocks and ongoing robust growth across various sectors, bolstered by easing global liquidity conditions and government reform efforts aimed at enhancing the business climate.

Downside risks to growth include environmental shocks that disrupt production in the agriculture sector and weigh on hydroelectricity generation as well as persistent foreign currency shortages that disrupt imports and weigh on investment.

The government’s fiscal discipline is evident in a track to maintaining a low debt burden despite large social and infrastructure spending needs. This discipline has supported the sovereign credit profile’s resilience to the recent tightening in global liquidity conditions by supporting a stable debt burden and low financing needs despite rising global interest rates.

Contingent liabilities from state-owned enterprise debt are less than 1% of GDP and other contingent liabilities, such as from unfunded pensions or fiscal payment arrears, are limited.

Re-engagement with the IMF and other international concessional lenders has supported an increase in concessional financing and a stable interest burden. Moody’s expects the government’s track record of fiscal discipline to continue as it scales back investment in new infrastructure megaprojects and prioritizes social spending.

Visit Moody’s for its full analysis and rating of Tanzania: https://www.moodys.com/research/Moodys-upgrades-Tanzanias-rating-to-B1-from-B2-changes-the-Rating-Action–PR_487356