Fitch Affirms Cameroon at 'B'; Outlook Stable

Fri May 19, 2017 8:05pm GMT
 

(The following statement was released by the rating agency) LONDON, May 19 (Fitch) Fitch Ratings has affirmed Cameroon's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'B' with a Stable Outlook. The issue ratings on Cameroon's senior unsecured foreign-currency bonds and the Short-Term Foreign- and Local-Currency IDRs have also been affirmed at 'B'. The Country Ceiling has been affirmed at 'BB+'. KEY RATING DRIVERS Cameroon's 'B' IDRs reflect the following key rating drivers: Cameroon's 'B' ratings balance a low GDP per capita of USD1,225 and weak governance indicators, against sustained economic growth and macroeconomic stability provided by membership of the CEMAC franc zone, which ensures currency convertibility and reduces foreign exchange liquidity risks. We expect Cameroon's fiscal deficit to narrow to 4.7% of GDP in 2017, after widening to 6.3% in 2016, and higher than the 'B' median of 4.2%. Last year's deterioration stemmed from a sharp contraction in oil revenues, lower growth and rising public investments. Recovering oil prices, improved non-oil receipts due to better performances in the non-oil sector and a slower increase in capital expenditure will lead to a moderate narrowing of the fiscal balance in 2017. Fitch views public finance management as a key rating weakness. The government routinely runs up arrears, notably to public companies, as a form of financing. The IMF estimates Cameroon's cash deficit (including arrears repayment to suppliers) at about 7% of GDP in 2016. Fiscal management is also hampered by the weak quality and timeliness of data. Fiscal buffers are declining and financing options are narrowing. Deposits at the central and commercial banks decreased sharply to 4.4% of GDP at end-2016, from 7.3% a year earlier following the full drawdown of the proceeds of the 2015 eurobond, and advances from the central bank are unlikely to be tapped any further as CEMAC governments are wary of putting pressure on the CFA franc's peg to the euro. We therefore expect Cameroon will meet its recurrent financing needs by tapping the local market and increasing recourse to international borrowing, leading to a further rise in public debt/GDP. General government debt is set to increase to 35.9% of GDP in 2017 and to 38.8% in 2018, up from 22.0% in 2014, albeit still below the 'B' median of 56.4%. The interest burden more than doubled in 2016 to 5.1% of general government revenues as fiscal receipts sharply contracted and interest payments surged due to an increase in non-concessional borrowing, including the eurobond issuance in November 2015. Fitch forecasts this ratio will stabilise at around 6% in 2017-2018 as public revenues recover. Fitch expects that discussions initiated with the IMF earlier this year will lead to a financial support programme. IMF loans are likely to alleviate growing financing pressures and IMF monitoring will encourage some moderate reforms. However, we believe it could prove difficult for the government to implement substantial fiscal tightening in the face of low GDP per capita, high level of income inequalities, high youth unemployment and ongoing social unrest in the English-speaking part of the country. A programme with the IMF is likely to entail some additional co-financing by other supranational and bilateral actors, further easing Cameroon's liquidity constraints. International reserves within the CEMAC zone have been declining at a fast pace due to lower oil prices, dropping to USD4.7 billion at-end 2016 from USD10.1 billion at end-2015 and USD15.3 billion at end-2014. Failure to tackle large twin deficits in CEMAC members could lead to further falls in reserves. The monetary arrangement between France and CEMAC member countries states that as a last resort, the exchange rate between the CFA franc and the euro can be devalued to address imbalances (as occurred in 1994). Devaluation would have a significant impact on Cameroon's government debt metrics, with 77% of public debt in foreign currency (39% in euro, 28% in USD). However, in our view, pressures on the peg are easing as we believe likely IMF engagement in the zone will help correct imbalances and restore fiscal and external buffers. Implementation of a slightly more restrictive monetary policy with the BEAC hiking rates by 50bp in March 2017 and governments of the zone freezing BEAC statutory advances to the 2014 ceiling denotes member states' strong commitment towards the current peg. Fitch forecast economic growth to decelerate further in 2017 to 4%, after slowing to 4.7% in 2016, from 5.8% in 2015. Contracting oil production limited the increase in capital expenditure and will weigh on growth this year. Improved agriculture output, supported by recovering commodity prices, an uptick in public investment and completion of large infrastructure and energy projects should push growth up to 4.6% in 2018. The banking sector remains weak and concentrated with the five largest banks accounting for more than 70% of total assets and deposits. However, liquidity and capitalisation ratios remained above regulatory requirements at end-2016, except for the three small troubled banks under provisional administration. The government has already participated in the recapitalisation of one of them, and further support could imply additional cost of 0.5%-1% of GDP. The current account deficit will progressively narrow in 2017-2018 to an average 3.5% of GDP from 3.9% in 2016. The pick-up in oil prices, the start of gas exports following the expected completion of the floating liquefied natural gas project in 2017 will likely offset rising interest payments and import-intensive investments. We expect increased recourse to external financing, including from the IMF and an improved current account balance will limit further decline in reserves, which we forecast to stabilise at 3.4 months of current account payments over 2017-2018. Uncertainty surrounding the 84-year old President Biya's succession is a political risk. Presidential elections are set to take place in 2018 and our base case is that Biya will name a successor of his own party to help to achieve a smooth transition. The constitutional process for succession is untested and risks exist due to different religious, ethnic and linguistic groups. The security environment is unstable in the north due to the activity of the Boko Haram terrorist group. We believe current unrest in the English-speaking part of Cameroon might continue but will remain contained. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Cameroon a score equivalent to a rating of 'B' on the Long-Term FC IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main risk factors that could, individually or collectively, trigger negative rating action are: -Persistent large fiscal deficits that lead to a rapid increase in the government debt/GDP ratio. -A widening of the current account deficit, leading to growing external indebtedness. -Heightened political instability that adversely affects public finances or the economy, for example a disorderly succession to President Biya. -A devaluation of the CFA franc against the euro. The main factors that could, individually or collectively, trigger positive rating action are: -A reduction in the budget deficit and the government debt/GDP ratio, particularly if supported by improved management of public finances. -Improvement in the business climate and growth performance. -An increase in hydrocarbons production related to new discoveries coming on-stream, generating an additional source of income and reversing the trajectory of depleting oil reserves. KEY ASSUMPTIONS Fitch does not expect the conflict with the Boko Haram terrorist group to be resolved soon, but at the same time it does not expect the tensions to escalate significantly. Security issues linked to the activity of the Boko Haram terrorist group remain confined to the north of the country. Fitch assumes no break-up of the CEMAC monetary arrangement. Fitch assumes that the oil price (Brent) will be USD45.1/b in 2016, USD52.5/b in 2017 and USD55/b in 2018. Contact: Primary Analyst Marina Stefani Associate Director +44 20 3530 1809 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Eric Paget-Blanc Senior Director +33 1 44 29 91 33 Committee Chairperson Ed Parker Managing Director +44 20 3530 1176 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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