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Fitch Upgrades the Republic of Congo's Foreign-Currency IDR to 'CC'
September 6, 2017 / 11:48 AM / 2 months ago

Fitch Upgrades the Republic of Congo's Foreign-Currency IDR to 'CC'

(The following statement was released by the rating agency) HONG KONG, September 06 (Fitch) Fitch Ratings has upgraded the Republic of Congo's Long-Term Foreign-Currency Issuer Default Rating to 'CC' from 'RD' (Restricted Default). The issue rating on long-term senior-unsecured foreign-currency bonds also been upgraded to 'CC' from 'D' (Default). A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The upgrade of Congo's Long-Term Foreign-Currency IDR reflects the following key rating drivers: The payment of principal and interest, initially due on 30 June 2017, on Congo's US dollar notes maturing in 2029 (ISIN XS0334989000) was made to investors last week. The funds had been frozen in the custody of Congo's trustee in the US under two restraining notices issued on behalf of Commissions Import Export SA (Commisimpex), a former contractor of the Republic of Congo. The restraining notices were lifted by a New York District Court on 22 August on the court's assessment that the issuer no longer held an interest in the frozen funds. Fitch downgraded Congo's Long-Term Foreign-Currency IDR to 'C' from 'CCC' on 17 July after the payment was missed and entered the grace period. We further downgraded the IDR to 'RD' on 2 August following the expiry of the stipulated grace period. The upgrade to 'CC' reflects the resumption of payments, which has cured the default. It is based on our view that some legal uncertainty persists leading to lingering risks of disruptions to future payments to bondholders. It also reflects Congo's fundamental weaknesses including weak public finance management, tight financing conditions and high and growing government debt. Congo's 'CC' Long-Term Foreign-Currency IDR also reflects the following key rating drivers: Some uncertainty surrounds the actual level of Congo's gross general government debt (GGGD). Based on the currently available information, we forecast Congo's GGGD to increase to 88.5% of GDP at end-2017, more than quadrupling since 2010. However, media reports have pointed to the accumulation of undisclosed liabilities by the government and state-owned enterprises, notably in the oil sector, which could lead to a material upwards revision to our GGGD estimate. Congo's weak governance and public finance management is a major credit weakness. Congo's payment track record to creditors and suppliers has been historically weak, as illustrated by the two missed payments on Congo's Eurobonds since June 2016. Transparency and data availability are weak and public finances are highly dependent on oil revenues. Fitch expects financing conditions to remain tight. Fiscal buffers have dwindled as Congo's deposits with Banque des Etats d'Afrique Centrale (BEAC, the Central Bank of the CEMAC region) have fallen to XAF115.2 billion at end-May 2017, equivalent to 2.4% of GDP, down from 19.3% at end-2014. Statutory advances from BEAC have reached their ceiling and have been frozen at that level under a decision taken by the CEMAC heads of states in December 2016. Access to external bilateral loans has reportedly become more difficult. Tapping the regional market is unlikely to secure sufficient financing given its limited absorption capacity and the tight liquidity conditions prevailing in CEMAC. We expect the negotiations between Congo and the IMF on a support programme to resume shortly, after the holding of legislative elections in July and the formation of a new government in August. An IMF programme would ease the strain on funding in the short term and contribute to stabilising CEMAC's pooled foreign exchange reserves. Should an agreement be concluded, compliance with the programme's milestones will remain subject to material risks due to the structural weaknesses of the PFM framework and the magnitude of the fiscal adjustment needed to stabilise debt. Even with an IMF programme, additional support from official bilateral creditors will also be needed to restore the sustainability of public finances. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) As per its published sovereign criteria, for ratings of 'CCC' and below, Fitch has not utilised the SRM and QO to explain the ratings, which are instead guided by rating definitions. 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 Long-Term IDRs do not have an Outlook. Developments that could result in a downgrade include: - New legal procedures initiated against the sovereign and causing disruptions to payments to bondholders -Intensified economic and financial stress leading to heightened risk of non-payment of principal or interest due on debt securities issued in public markets Developments that could, individually or collectively, result in an upgrade, include: -Reduced risk of litigation-related disruptions to payments to bondholders -Improvement in the liquidity of the government, resulting for example from a successful agreement on an IMF support programme -Evidence of a material improvement in public finance management capacity. KEY ASSUMPTIONS Fitch assumes no break-up of the CEMAC monetary zone and no devaluation of the CFA franc. Global economic trends and commodity prices are expected to develop as outlined in Fitch's Global Economic Outlook. Fitch assumed that Brent crude will average USD52.5/barrel in 2017, USD55/barrel in 2018 and USD60/barrel in 2019. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR upgraded to 'CC' from 'RD' Long-Term Local-Currency IDR affirmed at 'CCC' Short-Term Foreign-Currency IDR affirmed at 'C' Short-Term Local-Currency IDR affirmed at 'C' Country Ceiling affirmed at 'B+' Issue ratings on long-term senior-unsecured foreign-currency bonds upgraded to 'CC' from 'D' 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 Eric Paget-Blanc Senior Director +33 144 299 133 Committee Chairperson Jan Friederich Senior Director +852 2263 9910 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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