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Fitch Affirms Cote d'Ivoire at 'B+'; Outlook Stable
August 22, 2017 / 11:31 AM / 4 months ago

Fitch Affirms Cote d'Ivoire at 'B+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, August 22 (Fitch) Fitch Ratings has affirmed Cote d'Ivoire's Long-Term Foreign-Currency Issuer Default Ratings (IDRs) at 'B+' with Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS Cote d'Ivoire's IDRs are weighed down by low governance and development indicators, weak albeit improving public finance management reflected in the two defaults in 2000 and 2011, high dependence on agricultural commodities and persistent risks to political stability. This is balanced against strong macroeconomic performance and low inflation, a structural trade surplus and moderate debt ratios. Security risks have increased in 2017 with Cote d'Ivoire witnessing recurrent sporadic acts of violence, including two episodes of mutinies by former rebels and military claiming the payment of allegedly promised bonuses. The accommodation of mutineers' demands assuaged their revolt but raised worries of similar uprisings by other groups seeking pay-outs and of a possible weakening of the government control over the armed forces. Despite the strides achieved towards political normalisation, persistent regional rifts, incomplete national reconciliation, lacking integration of former rebels in the army and imperfect disarmament pose continued risks to stability. Heightened security and political tensions will persist in the run-up to the 2020 presidential elections and could constrain the reform impetus. The question of succession to President Ouattara in 2020 has come early to the fore, leading to deepening political divisions. The unity of the ruling RHDP coalition has been weakened by increasing rivalries between and within its member parties. The government reshuffle in July has consolidated the power of President Ouattara's allies and strengthened their ability to implement their policy agenda. The outlook for medium-term growth is a credit strength. We expect growth to average 6.8% in 2017-2019, well above the 'B' category median of 3.8%. While remaining strong, growth will decelerate from an average of 9.1% in 2012-2016 due to the gradual waning of the rebound effect resulting from the recovery after the civil war and the pass-through of lower cocoa prices to domestic demand. Public investment will remain strong, lifted by sustained spending under the 2016-2020 National Development Plan (PND) and private investment will be stimulated by the improvements in the business climate and infrastructure. Exports will benefit from increased diversification of industrial and agricultural production and expanding mining output. Budget consolidation was stymied by pay-outs to mutineers, a collapse in cocoa prices and a reduction in the fuel tax. These developments will cost the budget XOF440 billion (1.9% of GDP) according to official estimates. They will be partially offset by a XOF178 billion (0.8% of GDP) cut in investment spending from the initially budgeted level. Consequently, Fitch forecasts the budget deficit to widen to 4.7% of GDP in 2017 from 4% in 2016. This compares with the current government forecast of 4.5%, versus an initial budget target of 3.7%. The fall in cocoa prices, which have averaged 34% below their 2016 levels in 2017, will constrain the authorities' fiscal flexibility over the medium term. The loss in revenue derived from the sector (9% of initially budgeted revenue in 2017) will be contained to 0.5% of GDP in 2017, due to a record crop owing to favourable weather, forward sales above spot prices until end-March and a subsequent 36% cut in the guaranteed farm-gate price. Cocoa revenue will decline further in 2018 as sale prices will be lower for the full year and will feed through to the sector's profits and domestic demand, while the crop volume may decline. The cut in the farm-gate price could also exert upward pressure on social spending by weakening the purchasing power of one third of the population. A shortage in rainfalls would compound these risks by lowering production. We expect the budget deficit to decline to 3.8% by 2019 compared with the government's target of 3%. The government's plan to freeze current outlays and the wage bill in nominal terms will be challenging in the run-up to the 2020 presidential election and increasing social tensions could lead to further slippages. The authorities plan to raise revenue by pursuing public finance management (PFM) reforms, phasing out inefficient tax exemptions identified through an audit of the investment code which is expected to be concluded in August and closing tax loopholes. However, these revenue mobilisation efforts could yield less income than envisaged by the government as evidenced by the stagnation in the tax revenue-to-GDP ratio over the last five years. Larger-than-targeted budget deficits will not undermine the government's financing flexibility under our baseline scenario. We expect government debt to rise to 44 % of GDP at end-2017, still well below the 'B' category median of 56%. The sovereign's financing flexibility is supported by moderate financing needs, continued support from bilateral and multilateral creditors, compliance with the IMF programme milestones and improved PFM. Recent issuance on the international and regional markets have allowed the government to smoothen its debt repayment profile but the increasing recourse to non-concessional and foreign-currency financing has increased the cost of debt service and the sovereign's exposure to exchange rate risk. Contingent liabilities for the sovereign stem from the ongoing restructuring and weak profitability of several state-owned enterprises in the transport, energy and banking sectors. The clearance of arrears in the electricity sector could also weigh on the budget. Addressing the shortcomings of the cocoa marketing system, which were unveiled by the collapse in prices, with poor contract enforcement reflected in defaults by exporters on forward contracts and low transparency, could also generate costs for the sovereign. Additional risks arise from the country's large portfolio of public-private partnerships, which is poised to expand further with the implementation of the 2016-2020 XOF30 trillion PND. Contingent liabilities stemming from the banking sector are moderate. The sector's capital adequacy ratio is at the minimum regulatory level of 8%, well below the 'B' category median of 15.8%. The gradual phasing-in of the Basel II framework decided by regional regulators will require significant bolstering of equity to reach the new minimum of 11.5% by 2022. Non-performing loans are declining but remain elevated, at 10.3% at-end June 2017 and risks are aggravated by the concentration of the loan portfolio. These weaknesses are mitigated by the high share of foreign-owned banks, which represent 68% of the sector's assets and the moderate size of the banking sector with total assets amounting to 41% of GDP at end-2016 The current-account deficit will widen to average 3.5% of GDP in 2017-2019 compared with 0.2% in 2012-2016, due to the fall in cocoa prices which accounted for 40% of exports in 2014-2016 and growth in import-intensive investment. The risks to external financing are however moderate due to the below-median level of external debt (41% of GDP against 49%), sustained inflows of foreign direct investments (FDI) and the stable reserve coverage of the West African Economic and Monetary Union (foreign exchange reserves being pooled at the regional level). The ratings are entrenched in the 'B' category due to weak structural features. Governance and development indicators are significantly below 'B' medians. Although nominal GDP has more than doubled over 10 years, poverty rates are high and have remained little changed. The country has risen 25 notches in the World Bank's 'Doing Business' ranking but the business climate remains a credit weakness. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Cote d'Ivoire a score equivalent to a rating of 'B-' on the Long-Term Foreign Currency IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign Currency by applying its QO, relative to rated peers, as follows: - Macroeconomic Performance: +1 notch, to reflect high medium-term growth potential, preserved macroeconomic stability, increased diversification of the economy and sustained reform impetus; - External finances: +1 notch, to reflect Cote d'Ivoire's structural trade surplus and external financing flexibility resulting from moderate financing needs, support from official creditors, improved market access and sustained FDI inflows. 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 Long-Term Foreign Currency 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 are broadly balanced. The main factors that could, individually or collectively, trigger negative rating action are: -Deterioration in political stability or aggravation of security incidents leading to material fiscal slippages or jeopardising the sovereign's ability to honour its commitments; -A significant worsening in public debt dynamics resulting, for instance, from widening deficits or from a materialisation of contingent liabilities on the sovereign's balance sheet; -A material slowdown of growth resulting from external or domestic shocks. The main factors that could, individually or collectively, trigger positive rating action are: -A significant and sustainable improvement in public finances with smaller-than-projected government deficit leading to a decline in public debt; -An improvement in development and governance indicators over the medium term. KEY ASSUMPTIONS We assume that the monetary arrangement with France will continue to support macroeconomic stability and the fixed parity of the CFA franc with the euro will remain unchanged. We expect global economic trends and commodity prices to develop as outlined in Fitch's Global Economic Outlook. The full list of rating actions is as follows: Long-Term Local- and Foreign-Currency IDRs affirmed at 'B+; Outlook Stable Short-Term Local- and Foreign-Currency IDRs affirmed at 'B' Country Ceiling affirmed at 'BBB-' Issue ratings on long-term senior-unsecured foreign-currency bonds affirmed at 'B+ Contact: Primary Analyst Mahmoud Harb Director +852 2263 9917 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Jan Friederich Senior Director +852 2263 9910 Committee Chairperson Michele Napolitano Senior Director +44 20 3530 1882 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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