October 13, 2017 / 8:15 PM / in 8 days

Fitch Downgrades Gabon to 'B'; Outlook Negative

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Gabon - Rating Action Report here LONDON, October 13 (Fitch) Fitch Ratings has downgraded Gabon's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'B' from 'B+'. The Outlook is Negative. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The downgrade of Gabon's IDRs reflects the sharp deterioration of the country's fiscal and external positions, an accumulation of large domestic and external arrears and a sharp rise in public debt, following the oil price shock starting 2014. The IMF three-year Extended Fund Facility programme secured in June will likely ease liquidity tensions, support reforms including arrears repayments, and is linked to additional funding from multilateral and bilateral creditors. The Negative Outlook reflects the downside risks to our baseline scenario, including risks of non-compliance with the IMF programme requirements, subsequent potential delay in official disbursements and arrears clearance. More specifically, the downgrade reflects the following key rating drivers and their relative weights: High The government recently accumulated external and domestic arrears (2% and 7.7% of GDP respectively), reflecting strong liquidity pressures in the wake of rising financing needs and rapidly declining buffers. The accumulation of domestic arrears on VAT refund, on budgetary expenditure and to suppliers started in 2014 and accelerated in 2016, when arrears were also accumulated on external debt to bilateral and multilateral creditors and to commercial banks. Repaying these arrears is a central part of the IMF programme. We believe failure to clear these arrears could lead to a deterioration in investor confidence and diminished access to external private financing; it could further weigh on economic activity and the banking sector. Gross general government debt (GGGD) increased sharply to 64.2% of GDP in 2016 from 44.7% in 2015. The surge stems notably from a decline in nominal GDP due to falling oil prices and the crystallisation of domestic arrears in the debt statistics. When excluding domestic arrears, we estimate GGGD at around 60% at end-2017, compared with a 'B' median of 56.2%.We expect GGGD will keep rising to peak at 65.7% in 2018, on the back of recurrent large fiscal deficits. The fiscal deficit (on a cash basis, including arrears repayment) widened to 6.6% of GDP in 2016 from 4% in 2015, larger than the 'B' median of 4.2%. We forecast the cash deficit to narrow to 4.7% of GDP in 2017, supported by recovering oil revenue and moderate growth in capex and current spending. Gross financing needs will, however, remain large at 14.4% of GDP in 2017 and 9.5% in 2018 as advances from the regional central bank (BEAC) and arrears are being gradually repaid, as per the IMF conditional requirements. The current account deficit widened rapidly in 2016 to 10% of GDP from 4.3% in 2015, due to large import-intensive investments in the non-oil sector and weak export performance. We expect the deficit to remain large at 9% of GDP in 2017 and 7.7% in 2018 as investments in agri-business and infrastructure lift imports while exports only slowly recover. International reserves declined to 1.4 months of import cover (USD789 million) at end-2016 from 3.1 months in 2015 and decreased further to USD506 million at end-July 2017. Medium Tightened liquidity conditions and sluggish economic activity are putting a strain on the banking sector although capitalisation and profitability remain adequate. Credit to the economy declined 5% in the first seven months of the year and by 10% in 2016. Deposits contracted 11% from January to July 2017, reliance on refinancing at the central bank has increased and accumulation of government arrears to the private sector led to a rise in non-performing loans to 9.7% in 2016 from 5.3% in mid-2014. The resolution of three distressed public banks is underway and represents a moderate fiscal risk (0.5% of GDP). Fitch has revised downwards its growth forecast for 2017 to 0.8% from 2.4%. The deceleration stems from a secular decline in oil production, subdued public investment and a weakened private sector. Multilateral financial support will help stabilise public spending and bolster recovery in domestic demand. We expect the economy to grow 2.7% in 2018 and 3.6% in 2019, supported by the non-oil sector including the agribusiness, mining and forestry sectors and a resumption of investments in the oil sector. Gabon's 'B' IDRs also reflect the following key rating drivers: Financing options have narrowed substantially as government deposits have fallen drastically and advances from BEAC have been frozen but we expect multilateral and bilateral financial support will help Gabon meet its large financing needs. The IMF programme entails USD642 million financial support (4.3% of GDP) and the World Bank, the African Development Bank and France are likely to contribute up to 11% of nominal GDP over 2017-2020 (USD1.5 billion). Gabon was also able to issue USD200 million bonds on the international market in August, which should help refinance its USD193 million eurobond amortisation that falls due in December. Potential policy slippage and delay in implementing reforms could, however, delay disbursements. Fiscal consolidation entailed by the programme relies on increased mobilisation of non-oil revenue, reform of the wage bill, rationalisation of investment spending, and inclusion of earmarked revenue in the budget. The programme also includes performance criteria and indicative targets for the primary fiscal balance, claims from the banking sector to the sovereign, and repayment of arrears and BEAC statutory advances. Ongoing strikes in the public service, upcoming parliamentary elections in 2018 and continuous political uncertainty might lead to fiscal slippages and delay the implementation of the reforms. International reserves within the Central African Economic and Monetary Community (CEMAC) zone have been declining at a rapid pace to USD4.6 billion in May 2017, from USD5 billion at end-2016 (or 2.3 months of import cover) and USD15.5 billion in December 2014. The CEMAC member countries' respective commitments to enter an IMF programme and implement fiscal adjustments to reconstitute the common pool of reserves are materialising with mixed results. Two of the six members, 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. Gabon's ratings are constrained by weak data quality and standards of governance. Gabon ranks 164th out of 190 in the 2017 World Bank "Ease of Doing Business" indicator. The ratings are supported by a high GDP per capita relative to peers and a stable macroeconomic environment, backed by membership in the franc zone of CEMAC. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Gabon 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 Future developments that could individually, or collectively, result in a downgrade include: - Failure to clear external arrears, to secure external financing in the short term or to implement IMF conditional requirements; - Further decline in fiscal buffers and international reserves or heightened signs of financing pressures; and - Failure to reduce fiscal deficit and increase in the general government debt-to-GDP ratio. Future developments that could individually, or collectively, result in the Outlook being revised to Stable include: - Narrowing of the budget deficit consistent with a stabilisation of the general government debt/ GDP ratio; - Stabilisation of fiscal and external buffers, which would improve the sovereign's resilience to oil price volatility; and - Successful diversification of the economy and fiscal revenue away from oil. KEY ASSUMPTIONS Fitch assumes IMF-backed programmes will support fiscal adjustment in the CEMAC zone and a stabilisation and partial recovery of fiscal and external buffers. Fitch assumes that the French Treasury support to the monetary arrangement will continue. Fitch assumes that the oil price (Brent) will be USD52.5/b in 2017 and 2018, and USD55/b in 2019. The full list of rating actions is as follows: Long-Term Foreign- and Local Currency IDRs downgraded to 'B' from 'B+'; Outlook Negative Short-Term Foreign- and Local-Currency IDR affirmed at 'B' Country Ceiling downgraded to 'BB+' from 'BBB-' Issue ratings on long-term senior unsecured foreign-currency bonds downgraded to 'B' from 'B+' Contact: Primary Analyst Marina Stefani Associate Director +44 20 3530 1809 Fitch Ratings Limited 30 North Colonade London E14 5GN Secondary Analyst Arnaud Louis Director +33 1 44 29 91 42 Committee Chairperson Charles Seville Senior Director +1 212 908 0277 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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