November 17, 2017 / 9:25 PM / a year ago

Fitch Affirms Cameroon at 'B'; Outlook Stable

(The following statement was released by the rating agency) LONDON, November 17 (Fitch) Fitch Ratings has affirmed Cameroon's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS Cameroon's 'B' IDRs reflect the following key rating drivers: Cameroon's 'B' ratings balance a low GDP per capita of USD1,270 and weak governance indicators, against sustained economic growth and macroeconomic stability provided by membership of the Central African Economic and Monetary Community (CEMAC) franc zone, which ensures currency convertibility and reduces foreign exchange liquidity risks. We expect the IMF three-year Extended Credit Facility programme secured in June 2017 to support fiscal consolidation, ease liquidity constraints and help contain non-concessional indebtedness. Additional funding from multilateral and bilateral creditors is tied to the programme. Fitch forecasts the fiscal deficit to narrow to 3.4% of GDP in 2017, from 6.5% in 2016, and compared with a 'B' median of 4.2% of GDP. The expected improvement stems from reduced capital expenditure, to 7.3% of GDP from 8.3% in 2016, contained current spending and improved oil revenues due to recovering oil prices. We expect the deficit to narrow further in 2018 to 2.8% of GDP, although there are risks of slippage in view of the heavy electoral agenda and the 2019 African Cup of Nations, for which infrastructure has to be completed. Financing options are limited but we expect multilateral and bilateral financial support will help Cameroon meet its large fiscal financing needs. The IMF estimates the financing gap at 6.7% of GDP over 2017-2020 (USD2.2 billion), of which 31.9% will be financed by the Fund (2.2% of GDP or USD666 million), and the rest will be financed by other official creditors including the World Bank, the African Development Bank, France and the European Union. The government still has some room to draw on central bank (BEAC) statutory advances in 2017 and can issue locally, although the shallowness of the market would constrain volumes. Disbursements from official creditors are tied to meeting programme conditions and implementation risks are relatively high. The programme entails fiscal consolidation of 5% of GDP over 2017-2020 (3.1% of GDP over the first year of the programme). The adjustment relies on higher mobilisation of non-oil revenues, through removal of tax exemptions, a wider tax base, improved tax collection, the removal of oil and electricity subsidies, and structural fiscal reforms, including the rationalisation of spending. We forecast Cameroon's public debt to increase to 36.7% of GDP in 2017 and 38.9% in 2018, from 34.1% in 2016, but still below the 'B' median of 58.5%. The debt statistics include domestic arrears to suppliers (4% of GDP) and direct statutory advances from BEAC of 1.3% of GDP. The IMF programme entails an audit of domestic arrears and subsequent adoption of a clearance schedule through 2020. As Cameroon has not fully drawn on its allocated direct advances from BEAC, the obligation to repay those will only start binding in the medium term. The shift in the debt profile towards higher-cost non-concessional debt has inflated the debt burden with interest-to-revenues forecast at 4.9% of GDP over 2017-2019 from 2.3% in 2015. After showing strong resilience, growth is set to decelerate in 2017 to 3.7% as oil production keeps contracting, capex declines and gas production only starts to rise towards the end of the year. Growth will pick up to 4.2% in 2018 and 4.6% in 2019, supported by large infrastructure and energy projects, including the Memve'ele, Mekin and Lom Pangar dams, and investments in the agriculture sector. The current account deficit will remain stable at 3.7% of GDP in 2017 but will narrow slightly in 2018 to 3.5%, compared with a 'B' median of 5.2%. The improvement stems from stronger export performance more than offsetting the recovery in imports after the sharp contraction in 2016. Gas exports are set to start in 2018 as the floating liquefied natural gas project comes on stream, and will compensate for declining oil export receipts. International reserves within the CEMAC zone have been declining at a rapid pace to USD4.4 billion in June 2017, from USD5.0 billion at end-2016 (or 2.3 months of import cover) and USD15.5 billion in December 2014. Tighter monetary policy and the reinforced involvement of the IMF in the zone are likely to support structural adjustments and the build-up of external buffers. Two of the six members, Republic of Congo and Equatorial Guinea, have yet to agree a programme with the IMF. Stabilising reserves will therefore depend on the ability of members to individually address their imbalances and to collectively avoid "free riding" behaviour. The regional central bank is playing a more substantial role in tightening liquidity in the banking sector, preventing further downward pressure on reserves and encouraging import contraction. BEAC raised its reference rates by 50bp in March to 2.95% and has implemented a cap to bank refinancing based on sovereign securities collateral. The private sector has also reported that access to foreign currency has been tightened. Cameroon's banking sector has weakened in view of tightened liquidity, tighter monetary conditions and the deteriorating balance sheet of the private sector. Capitalisation and profitability are relatively low and declining, but capitalisation remains above the regulatory threshold. Non-performing loans decreased to 13.4% of total loans in August 2017 from 14.6% a year earlier but this was due to a one-off improvement in one of the largest banks, BICEC, and mostly deteriorated in the rest of the sector. Five small banks are deemed insolvent by the IMF, including three public banks and the overall fiscal costs of their resolution could reach 0.7% of GDP. Uncertainty surrounding succession to the 84-year old President Biya is a political risk. Presidential elections are set to take place in 2018 and Biya is likely to run again with a high likelihood of being re-elected. The process for an eventual transition is untested. Risks also exist due tensions between different religious, ethnic and linguistic groups. The security environment is unstable due to large inflows of refugees from Central African Republic and Nigeria and activity of the Boko Haram terrorist group in the far North of the country. Fitch does not expect the conflict with Boko Haram to be resolved soon, but we also do not expect the tensions to escalate significantly. We believe current unrest in the English-speaking part of Cameroon might continue and could lead to an uptick in violence in the run-up to the elections. 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 Foreign-Currency (LT 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 or financing stress. -A widening of the current account deficit, leading to growing external indebtedness. -Heightened political instability that adversely affects public finances or the economy. 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. KEY ASSUMPTIONS Fitch assumes no break-up of the CEMAC monetary arrangement and no devaluation of the CFA franc against the euro. Fitch assumes that the oil price (Brent) will be USD52.5/b in 2017, USD52.5/b in 2018 and USD55/b in 2019. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'B'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'B'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'B' Short-Term Local-Currency IDR affirmed at 'B' Country Ceiling affirmed at 'BB+' Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at 'B' Contact: Primary Analyst Marina Stefani Associate Director +44 20 3530 1809 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Mahmoud Harb Director +852 2263 9917 Committee Chairperson Paul Gamble Senior Director +44 20 3530 1623 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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