July 29, 2016 / 8:11 PM / a year ago

Fitch Affirms Cabo Verde at 'B'; Outlook Stable

(The following statement was released by the rating agency) PARIS/LONDON, July 29 (Fitch) Fitch Ratings has affirmed Cabo Verde's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'B' with Stable Outlooks. The Country Ceiling has been affirmed at 'B+' and the Short-Term Foreign and Local Currency IDRs at 'B'. KEY RATING DRIVERS Cabo Verde's 'B' rating balances low growth and high public and external debt with strong governance indicators and a high degree of concessionality of public and external debt. More specifically, it reflects the following key rating drivers: Public debt, at 125.5% of GDP at end-2015, is a key rating weakness. Its ballooning trajectory over recent years (it was 57% of GDP in 2008) resulting from low growth and an ambitious public investment programme, has brought it significantly above 'B rated peers, to the highest level of Fitch-rated sovereigns in Sub-Saharan Africa. Its structure is favourable, with 77% extended by official external creditors on highly concessional terms, including low cost and long maturities. However, its cost has increased in recent years to nearly 10% of government revenues in 2015, above 'B' rated peers. It is also exposed to USD appreciation risk and contingent liabilities from state-owned companies, some of which are incurring significant losses and may require continued state support over the coming years. Fitch does not expect public debt to start declining until 2018. The newly-elected government intends to tighten the budget deficit to 3% of GDP by 2020, largely through better tax collection and a gradual reduction in public investment. However, in the short-term, the 2016 budget is expansionary, targeting a 5.2% of GDP deficit (2015: 3.7%), as postponed infrastructure projects are being implemented. Fitch forecasts a slightly higher budget deficit for this year, at 5.4% of GDP, which would drive public debt up to 127% of GDP by year-end. Public debt dynamics are largely dependent on growth performance, which has lagged peers in recent years, at 1.6% over the past five years (against a 'B' median of 4%). Fitch sees some uptick in growth prospects, largely as a reflection of the large pipeline of FDI under execution in the tourism sector. Linkages with the rest of the economy are moderate, but it could lift real GDP growth above 2% in 2016 and beyond, balancing the decline in public investment over the forecast horizon. Although economic performance is inherently volatile in small, open countries, and could rebound fast, Fitch sees limited prospects of reaching the 7% growth currently targeted by the government. Cabo Verde's structural current account deficit tightened significantly, in line with the fall in international oil and food prices, to an estimated 4.3% of GDP in 2015. It will likely rise again from 2017, bringing net external debt upwards despite the expected rise in FDI. At an estimated 58.6% of GDP at end-2015, net external debt is already much higher than the 'B' median of 19% but risks on external finances are somewhat mitigated by its low cost and long maturity (it primarily consists in government external debt and stable diaspora deposits). Also, the peg to the euro has proven stable and is supported by high reserves, which reached nearly six months of import cover at end-2015, reducing risks of sudden exchange rate adjustment. As a small, open economy lacking natural resources, Cabo Verde is inherently subject to economic shocks. However, the peg with the euro reduces volatility of inflation and exchange rate. Debt tolerance is also enhanced by higher development indicators than in many sub-Sahara African peers, as well as by sound governance indicators, which are more in line with 'BBB' medians. This reflects political stability and democratic institutions, as illustrated by the recent legislative elections, which brought the MPD party to power after 15 years of PAICV majority. Fitch expects the municipal and presidential elections that will take place in the second half of the year will also proceed smoothly. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Cabo Verde a score equivalent to a rating of 'B+' on the Long-term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: - Public Finances: -1 notch, to reflect the country's particularly high public debt stock and exposure to potential contingent liabilities from state-owned companies. 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 Stable Outlook reflects Fitch's assessment that the upside and downside risks to the rating are broadly balanced. The main factors that, individually or collectively, could trigger negative rating action are: -Rise in public debt to GDP ratio above our current assumptions, resulting from a failure to consolidate public accounts or from the materialisation of contingent liabilities. -Declining growth prospects. -A sharp increase in the sovereign's debt service burden. The main factors that, individually or collectively, could trigger positive rating action are: - A marked decline in the public debt to GDP ratio. - A structural improvement in growth potential. KEY ASSUMPTIONS Fitch assumes the peg with the euro will remain. Fitch assumes that concessional financing to Cabo Verde will continue declining in line with the country's graduation to middle income status, therefore reducing public investment, and supporting a gradual reduction in budget deficits. Fitch assumes that eurozone growth will be 1.7% and 1.4% in 2016 and 2017, respectively. Contact: Primary Analyst Amelie Roux Director +33 144 299 282 Fitch France S.A.S. 60 rue de Monceau 75008 Paris Secondary Analyst Kit Ling Yeung Associate Director +44 20 3530 1527 Committee Chairperson James McCormack Managing Director +44 20 3530 1286 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings (pub. 20 Aug 2015) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1009742 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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