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Successful Tajikistan bond debut could encourage neighbors

Central Asian state raises $500 million for controversial dam

ALMATY -- Tajikistan has raised $500 million with its first international bond issue to help fund the construction of the world's tallest dam after years of failed attempts to attract foreign investment for the project.

The move by Central Asia's most impoverished country could encourage neighboring countries into the debt markets, but remittance-dependent Tajikistan may struggle to keep up payments, with no guaranty the hydropower project will be completed and start bringing in revenue from electricity exports.

The bonds have raised only a fraction of the funds required to build the controversial $3.9 billion Rogun dam. Neighboring Uzbekistan strongly opposes its construction, fearing it will deprive its cotton fields of needed water. But Tajikistan hopes the 3,600 megawatt hydropower plant will solve chronic power shortages and bring in money from electricity sales to Afghanistan and Pakistan.

Uzbekistan's fierce opposition to the construction of the dam has been an obstacle to the flow of materials and to drawing financing from international development banks. In 2012, Islam Karimov, then president of Uzbekistan, warned that the struggle over water could lead to "not just serious confrontation but even wars."

The dam, first proposed under Soviet rule in 1976, advanced after the World Bank published a feasibility study in 2014. The bank concluded that the best design option was the most ambitious, setting the dam at 335 meters high, 30 meters higher than the current tallest dam, China's Jinping-I. This suited the aggrandizing tendencies of Tajik President Emomali Rakhmon, the country's leader since 1992. Dushanbe is home to the world's biggest tea house and once boasted the tallest flagpole.

Tajikistan announced the resumption of construction of Rogun after Karimov's death was announced by Uzbekistan in September 2016. Dushanbe contracted Italian construction group Salini Impregilo to build the dam, with an eye toward starting power generation by the end of 2018.

Uzbekistan's current stance is ambiguous. Foreign Minister Abdulaziz Kamilov said in July "that we have not reacted to [the resumption of the construction of] Rogun yet another time does not mean that our position has changed." Maximilien Lambertson, a Central Asia analyst at the Economist Intelligence Unit in London, said, "It is possible that Uzbekistan will renew its vocal opposition to Rogun at some point over the coming years, given the tensions surrounding water resources in the region."

Tajikistan's 10-year bonds were placed on Sept. 7 with a yield of 7.125%. The bankers handling the deal had originally signaled a yield of 8% but demand was strong, with bids exceeding $4 billion. S&P Global Poor's gave the bond a B- rating while Moody's Investor Service put it as B3.

"Risks to the [Rogun] project include delays to the timeline of construction, financing of equipment costs, political risks and weather-related risks," said Moody's in its ratings announcement. "Should these risks crystallize, they could delay or diminish the economic benefits from the project, while also raising the fiscal costs associated with it."

Investor appetite

On the sidelines of a forum on sovereign wealth funds in Astana on Sept. 7, Eugene O'Callaghan, director of the Ireland Strategic Investment Fund, said "there is big appetite for such bonds" as Tajikistan's. "Hedge funds are also very inclined to invest in high-yield bonds. There will also be one or two mainstream investors who will be attracted to the idea of investing in the bonds."

Most mainstream investors will steer clear however out of caution and the absence of familiarity with the country. "I am well out of my depth when discussing Tajikistan," said a manager with a large Western asset management house last week.

Berlin-based Transparency International ranked Tajikistan 151st out of 170 countries in its Corruption Perception Index 2016. Like other autocratic regimes in Central Asia, Rakhmon does not tolerate political opposition and runs the country as his personal fiefdom.

According to the World Bank, just over 30% of the population lived below the poverty line in 2016 while hundreds of thousands of Tajik migrants work abroad to support families back home. Economic troubles in Russia, the main destination for Tajik labor, have resulted in remittances falling from $3.9 billion in 2014 to $1.9 billion in 2016, yet this was still equivalent to 28% of GDP.

"Indications of a liquidity and foreign exchange crisis have been apparent for the last couple of years, and have forced the introduction of capital controls at a number of banks," said Eimear O'Casey, a Central Asia and Caucasus analyst at Control Risks consultancy in London. "The ongoing crisis engulfing the banking sector is largely due to politicized lending practices and a high proportion of non-performing loans, underscoring that there are also institutional weaknesses."

Tajikistan's difficulty in finding an investor for the dam project is partly explained by "high levels of state intervention in foreign business activity," said O'Casey, referring to a long-running contract dispute between Russian aluminum giant Rusal and local aluminum company Talco. In 2006, the International Monetary Fund demanded the country pay back a $47 million loan after an independent audit revealed that $856 million had been embezzled from the central bank.

Kazakhstan, the only Central Asian nation with an international credit history, returned to global debt markets in 2014 for the first time in 14 years, issuing $1.5 billion in 10-year bonds and $1 billion in 30-year bonds. It went back to the market again the following year.

Tajikistan "may be a model for the Kyrgyz Republic to raise funding for hydropower projects, or for Uzbekistan to possibly one day raise funds on international markets, if the new government maintains its plans to open up the economy," the EIU's Lambertson said. Yet rising U.S. interest rates could further raise borrowing costs for emerging markets in the medium term. "This could deter Tajikistan's peers from following in its footsteps," he said.

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