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Correct: Fitch Affirms Cameroon at 'B'; Outlook Stable
December 9, 2016 / 9:57 AM / a year ago

Correct: Fitch Affirms Cameroon at 'B'; Outlook Stable

(The following statement was released by the rating agency) LONDON, December 09 (Fitch) This commentary replaces the version published on 25 November 2016 to correct the international reserves figures. Fitch Ratings has affirmed Cameroon's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B' with a Stable Outlook. The issue ratings on Cameroon's senior unsecured foreign- currency bonds and the Short-Term Foreign and Local Currency IDRs have also been affirmed at 'B'. The Country Ceiling has been downgraded to 'BB+' from 'BBB-'. KEY RATING DRIVERS Cameroon's 'B' ratings balance a low GDP per capita of USD1,300, less than half that of the 'B' median, and weak governance indicators, against sustained economic growth and macroeconomic stability provided by membership of the franc zone of the CEMAC. This ensures currency convertibility and reduces foreign exchange liquidity risks. We forecast GDP growth to outperform rated peers, at 4.8% in 2016 compared with 4.1% for the 'B' median. This forecast is lower than the 5.5% from our last review, as we now expect oil output to stabilise in 2016, after a one-off jump in 2015. Declining Chinese demand, underperformance of the mining and agricultural sectors compared with 2015, and devaluation in neighbouring Nigeria will weigh on growth. Growth will slow to 4.2% in 2017 as capital spending eases after a significant boost in 2016. Fitch expects the general government deficit to widen in 2016 to an estimated 5% of GDP, from 2.5% in 2015, and compared with a 'B' median of 4.2%, due to lower oil prices, a jump in capital expenditure and higher security spending. The free trade agreement with the EU will also hit revenues as imported EU goods will be progressively exempt from tariffs. The fiscal deficit is forecast to narrow in 2017 and 2018 as oil prices rise. We expect public debt to increase to 36% of GDP in 2018 from 27% in 2015 as a result of deficit financing. Although the level is still well below the 'B' median of 52% of GDP, the pace of increase has been rapid since 2008. An increase in non-concessional financing has pushed up Cameroon's interest burden, which is set to rise to 8% of government revenues at end-2016 following the Eurobond issuance in November 2015 (compared with 2.3% at end-2015). Cameroon is under less financing strain than other countries in CEMAC. Proceeds of the 2015 Eurobond have not fully been drawn and deposits at the central bank are forecast at 2.6% of GDP at end-2016, down from 4.3% at-end 2015. The country has still some headroom to use central bank statutory advances, as only 25% had been used in 2015. Fitch views public finance management a key rating weakness. The government routinely runs up arrears, notably to public companies, as a form of financing. Fiscal management is hampered by the weak quality and timeliness of data. Weak commodity prices and large import-intensive investments will widen the current account deficit to a forecast 4.9% of GDP in 2016 from 4.5% in 2015. Increased interest payments of the sovereign will weigh on the income balance and further contribute to a deterioration of the external position. Stabilisation of public capital expenditure, recovering oil prices and the start of gas exports will support a narrowing of the current account deficit in 2017. Public external borrowing and foreign direct investment will finance the deficit and we forecast import cover to stay at around four months of current account payments over 2016-2018, in line with the peer median. Pressure on the CFA franc's peg to the euro has increased. International reserves within the CEMAC zone have been declining at a fast pace due to lower oil prices, dropping to XAF4,940bn at-end May 2016 from XAF6,238bn at end-2015 and XAF8,417bn at end-2014. Import cover is set to decline to 2.7 months for the zone in 2016 from five months at end-2015. Failure to tackle large twin deficits in CEMAC members could lead to further falls in reserves. The rules of the monetary zone state that, as a last resort, the exchange rate can be devalued to address imbalances (as happened in 1994). Devaluation would have a significant impact on Cameroon's government debt metrics, with 77% of public debt (accounting for 24% of GDP) in foreign currency (39% in euro, 28% in USD). The banking sector remains weak and largely concentrated. The five largest banks account for three quarters of total assets and deposits. Domestic credit to the economy increased 3.3% during 9M16, but this was mostly driven by credit to private companies implementing public projects. Non-performing loans increased 17.2% y-o-y in September 2016 to 14.3% of total loans from 12.6% a year ago, partly driven by one-off factors. Three troubled public banks are under provisional administration. The government has already participated in the recapitalisation of one of them, and further support could imply additional cost of 0.5%-1% of GDP. Succession to President Biya, aged 83, is a political risk. The constitutional process for succession is untested and risks exist due to different religious, ethnic and linguistic groups. The security environment is unstable in the north due to the activity of the Boko Haram terrorist group. Spending related to the fight against Boko Haram and the refugee influx at the border with Central African Republic is impacting the budget and constraining public investment. The downgrade of Cameroon's Country Ceiling to 'BB+' reflects the following key rating drivers: Fitch has revised its Country Ceiling criteria in August 2016. Fitch is now of the opinion that transfer and convertibility risk can differ among CEMAC member countries based on their individual risk of exit from the union and the imposition of sector-wide bank closures. Cameroon's Country Ceiling is four notches higher than the sovereign's Long-Term Foreign-Currency IDR, balancing the strength of support provided by France under the monetary agreement with CEMAC with the risk of capital control imposition in Cameroon. 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 IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final Long-Term Foreign Currency 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 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 or not fully reflected in the SRM. RATING SENSITIVITIES The main risk factors that could, individually or collectively, trigger negative rating action are: - A devaluation of the CFA franc against the euro. - Further large budget slippages or a prolonged slowdown in GDP growth that accelerates the accumulation of public debt. - A widening of the current account deficit, leading to growing external indebtedness. - Political events triggered at the time of the succession to President Biya or an intensification of Boko Haram terrorist activity. The main factors that could, individually or collectively, trigger positive rating action are: - Improved management of public finances leading to a reduction in arrears to public enterprises and state suppliers, and a reduction of the debt/GDP ratio. - Effective measures to improve the business climate and growth. - An increase in hydrocarbons production related to new discoveries coming on-stream, generating an additional source of income and reversing the trajectory of depleting oil reserves. KEY ASSUMPTIONS Fitch does not expect the conflict with the Boko Haram terrorist group to be resolved soon, but at the same time it does not expect the tensions to escalate significantly. Security issues linked to the activity of the Boko Haram terrorist group remain confined to the north of the country. Fitch assumes no break-up of the CEMAC monetary arrangement. Fitch assumes that the oil price (Brent) will be USD42/b in 2016, USD45/b in 2017 and USD55/b in 2018. Contact: Primary Analyst Marina Stefani Associate Director +44 20 3530 1809 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Eric Paget-Blanc Senior Director +33 1 44 29 91 33 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 (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016196 Solicitation Status here Endorsement Policy here 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 WEB SITE AT WWW.FITCHRATINGS.COM. 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