Culled—March 30, 2018/BMI Research
BMI View: Tanzania’s current account deficit will widen in the coming quarters on the back of a rising import bill. This will likely see the country’s external debt stock rise.
Tanzania’s current account deficit is set to widen in the coming months as the country’s import bill continues/begins to rise. While exports are likely to grow in 2018 because of improved harvests and a probable increase in gold exports, a substantial import bill will likely outweigh any increase in foreign revenues as capital goods and services are imported from abroad to supply various infrastructure projects. As such, we forecast current account deficits of 5.3% and 5.4% of GDP in 2018 and 2019, up from a projected 5.0% in 2017. We expect that foreign loans and foreign direct investment (FDI) will finance much of this shortfall, but note that the latter is likely to decline compared to previous years on the back of a more hostile business environment, meaning the external debtstock is likely to rise.
Lifting Of Export Ban And Better Weather To Boost Exports
We anticipate an overall boost in exports in the coming quarters. Our Mining team expects that the government ban on the export of mineral concentrates – which will hurt mineral export revenue in 2017 – is likely to be lifted in early 2018. This will likely lead to greater receipts from gold and other metals. Moreover, we expect that improving harvests, which will lead to higher food production, will contribute to greater coffee, tea and cashew crops.
After crop production was badly hit by drought in Q416 and H117, we expect this to be a key driver of export growth.
Capital Imports And Brent Crude Will Increase Import Bill
Meanwhile, we expect Tanzania’s import bill to rise in the coming quarters as capital import spending and the value of oil imports rise. While 2016 and H117 saw project implementation broadly slow down, we expect it to speed up in the coming quarters as construction of key projects such as the standard gauge railway connecting Tanzania’s
Dar es Salaam port to neighbouring countries begin. Furthermore, given increased currency stability making imports more affordable, investment by smaller firms is also likely to pick up. We also expect that higher oil prices will weigh on the trade balance.
Our Oil & Gas team forecasts Brent crude to average to USD57.0 per barrel (/bbl) and USD63.0/bbl in 2018 and 2019 respectively, up from a projected USD53.5/bbl in 2017. Given that oil makes up the largest share of the country’s imports, this w ill add furtherpressure to Tanzania’s import bill.
External Debt Load To Rise
As a result of greater import spending and a likely slowdown in FDI, we expect that the use of foreign loans will rise in order to finance Tanzania’s current account deficit. The government has been relatively successful in securing foreign concessional financing to fund spending, but we note that greater non-concessional borrowing will likely be necessary in order to bridge the funding gap given that the authorities will be unlikely to entirely finance it through concessional loans which require negotiation. This is because the deterioration in the business environment after President John Magufuli’s government imposed a number of protectionist policies will likely hit investor sentiment and FDI. Furthermore, the Ministry of Finance announced plans to issue a eurobond in fiscal year 2017/18 or afterwards, which will likely see the debt load and debt servicing costs rise. Given that this trend is likely to continue out to the long term, we expect external debt to rise to near 40.0% in the second half of our forecast period. While this poses some risks, our core view is that the level of debt will remain sustainable.
