Moody’s downgrades Tanzanian banks

Moody’s Investors Service has downgraded the long-term domestic currency deposit of two largest lenders in the country, NMB Bank Plc and CRDB Bank Plc, to B2 from B1.
Moody’s has also altered the outlook on the banks ratings to stable from positive.
The downgrade to B2 reflects Moody’s view that governance remains very weak, increasing risks to Tanzania’s credit profile.
In particular, policy unpredictability also contributes to fiscal and liquidity risks such as with- holding aid funding by intention- al donors. policy unpredictability has not materially diminished and is likely to weigh on foreign direct investment (FDI), growth potential and the government’s fiscal strength and liquidity risks.
However, Moody’s stresses that slow and unpredictable government policy execution continues to hinder the country’s investment attractiveness as evidenced by a thin pipeline of investment projects compared to other countries with high mining potential. Moody’s notes that in turn, this will hinder Tanzania’s capacity to sustain high GDP growth rates, which is necessary to increase the economy’s shock absorption capacity. As a result, while Moody’s expects a modest deterioration in the fiscal balance to a 4.2 per cent of GDP deficit in fiscal year 2020/2021 (the year end- ing June 30, 2021), compared with an estimated 0.8 per cent in fiscal year 2019/20, the higher financing needs will in large part be covered by more expensive non-concessional sources. In the context of a general anticipated slump in foreign direct invest- ment (FDI) flows across the world as
a result of the coronavirus outbreak, Tanzania’s policy unpredictability is likely to exacerbate the FDI shortfall.
According to Moody’s, the stable outlook balances the country’s relatively large and diversified economy against institutional weaknesses which under minefiscal strength.
The outlook is underpinned by a moderate debt burden that is broad- ly stable and below the B2 median. The economy is relatively diversified which helps to mitigate the impact of shocks.
Some other areas of relative strengths include adherence to fiscal consolidation objectives, and a track record of relatively low and stable inflation.
The credit supports are balanced by particularly weak revenue mobilisation capacity and weak fiscal policy credibility, evidenced by persistent underexecution of budget targets as well as an elevated level of budget arrears.
Concurrently, the long-term local currency bond and bank deposit ceilings were revised down to Ba3 from Ba2. Tanzania’s long-term foreign currency bond ceiling was lowered to B1 from Ba3 and the long-term foreign currency bank de- posit ceiling was lowered to B3 from B2.
Rationale for stable outlook, the country’s economy is relatively well diversified, driven by a mix of agriculture, manufacturing, construction, and services, as well as a robust GDP growth, averaging 6.7 per cent between 2010 and 2019.
However, a relatively narrow revenue
base, at around 15 per cent of GDP, limits the government’s debt carrying capacity. The relatively moderate fiscal deficits of 1.5 per cent of GDP on average over the last three years mask challenges on revenue mobilisation and arrears accumulation.
Additionally, environmental, social and governance considerations are central to Tanzania’s economic growth and credit profile.
Furthermore, given the central place of agriculture within the Tanzanian economy as well as reliance on rain- fall to drive irrigation and hydroelectric plants, recurring droughts can have a significant negative impact on the agriculture and energy sectors.