Togo stays firm on resilience

Togo’s long-term issuer ratings have been kept at B3 with a stable outlook, by Moody’s Investors Service. This is due to the resilience of its economy to the coronavirus disease 2019 (COVID-19) crisis shock against weak institutions and governance.

Moody’s has also affirmed Togo’s local currency country ceiling at Ba3, while the foreign currency country ceiling has been maintained at B1.

The stable outlook reflects Moody’s expectation that an IMF programme will be signed in the first part of 2022, notwithstanding the likelihood of a lengthy negotiation process.

Togolese authorities officially started negotiations with the IMF on an extended credit facility in June 2021.

The programme would help anchor fiscal policies and help avoid a repeat of past fiscal slippage, with a likely focus on tax collection and external debt sustainability.

Togo only has a history of reducing large fiscal deficits when under an IMF programme as in 2017 to 2019. The programme would also help Togo mobilize official sector funding.

In addition, liquidity risks from a potentially steeper tightening in monetary policy than currently expected by Moody’s are contained and consistent with the current rating.

Togo entered the crisis from a fiscal surplus position and was able to use counter-cyclical policies, introducing fiscal measures worth 3% of GDP in 2020. This was in a bid to support the economy from the brunt of the crisis.

Partly as a result, the economy has been relatively resilient to the shock and grew in real terms by 2% in 2020, down relatively modestly from 5% over 2017-19.

The extractive industries, utilities, construction as well as transportation and storage sectors held up particularly well.

Activity at Port de Lomé did not face disruption and continued to expand at a rapid pace because sea borders remained open.

Meanwhile, the improved business environment has supported the economy’s attractiveness for private investment.

The rating agency expects that Togo’s debt burden will stabilise at about 60% of gross domestic product (GDP) in the next couple of years before receding.

Moreover, while sizeable government funding and debt roll-over needs give rise to liquidity risks, Togo’s membership of the West African Economic and Monetary Union (WAEMU) tempers these risks.

Being part of the WAEMU, the Togolese economy also benefited from the measures introduced by the Central Bank of the WAEMU to mitigate the impact of the shock on economic activity.

Interventions included reductions in its policy rate, easier access to the central bank’s liquidity facilities, and payment deferrals.

Moody’s expects the authorities will gradually wind down the 2019 and 2020 surge in spending, leading to a gradual narrowing of fiscal deficits to 6.5% in 2021 and 5% in 2022. This is from 7% of GDP in 2020.

But even under Moody’s relatively loose fiscal policy scenario, government indebtedness is likely to recede supported by a pickup in growth from 2021 onward.

Government debt will likely stabilise at about 60% of GDP in 2022 and 2023 and trend down thereafter.

In the next couple of years, the government will face large funding needs of around 15% of GDP. These are primarily driven by local currency debt redemptions to WAEMU creditors, including roll-over of short-term debt, in addition to fiscal deficits and external, foreign currency debt redemptions.

Liquidity risks stemming from large funding needs are mitigated by the government’s reliable access to domestic sources of funding and to a variety of official lenders externally.

While the WAEMU market is shallow, it is large relative to the Togolese government’s borrowing needs which represent 9% of the six Moody’s-rated sovereign’s borrowing needs in the WAEMU.

Official lending is the main channel of external funding for the government and primarily comes from multilateral institutions.

In 2020, Togo benefited from additional funding from the IMF in the context of the covid-19 crisis. This was with an augmentation of access under the three-year Extended Credit Facility (ECF) arrangement of 48.7% of Togo’s quota, SDR 71.49 million or about $97.1 million.

Weaknesses in national policy effectiveness remain salient in the fiscal domain. The government’s pre-IMF programme history of fiscal slippages in 2017, track record of arrears and volatile fiscal accounts point to weak fiscal policy effectiveness.

These also undermine the administrative capacity to implement fiscal adjustment in the wake of the significant global shock.

Togo ranks particularly poorly on government effectiveness under the worldwide governance indicators.

Meanwhile Togo ranks better on other factors that are more significantly influenced by its WAEMU membership such as control of corruption and rule of law.

Indeed, WAEMU membership strengthens Togo’s institutions given the level of transparency and reporting enforced by the WAEMU institutions, including the central bank.

Moody’s would upgrade the rating if government debt was on a clear downward trend, backed by a track record of more prudent fiscal policies. This is combined with the lengthening of the debt maturity profile and lower debt roll-over needs.

The rating agency would downgrade Togo if there was a sustained increase in government debt or liquidity pressures. These two related factors more likely to materialize in the absence of an IMF programme.

Other factors, such as large-scale shocks to the economy from climate change or from socio-political sources, would also lead to a rating downgrade kely to weaken the sovereign’s fiscal or liquidity position.

See full rationale here