Fitch Upgrades the Republic of Congo's IDRs to 'CCC'
The issue ratings on senior unsecured foreign currency bonds have been upgraded to 'CCC' from 'D'. The Short-Term Foreign and Local Currency IDRs have been affirmed at 'C'. The Country Ceiling has been affirmed at 'BBB-'.
Under EU credit rating agency (CRA) regulation, the publication of sovereign reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations. Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that Fitch believes makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. The next scheduled review date for Fitch's sovereign rating on the Republic of Congo is 2 September 2016, but Fitch believes that developments in the Republic of Congo warrant such a deviation from the calendar and the rationale for this is laid out below.
KEY RATING DRIVERS
The upgrade of Congo's IDRs to 'CCC' reflects the following key rating driver and its relative weight:-
The Republic of Congo resumed debt payment on its bond maturing 2029 (ISIN XS0334989000) on which it had failed to make a payment initially due on 30 June 2016. The payment was made only after the end of the 30-day grace period.
Congo's' CCC' IDRs also reflect the following key rating drivers:
The Republic of Congo's failure to pay interest and principal of USD17m due on 30 June 2016 on time, combined with repeated arrears on other financial bilateral commitments, illustrates major weaknesses in governance and specifically public debt management and a severe liquidity squeeze in the context of low oil prices.
Poor governance, including weak public finance management, has historically been a key rating weakness. Non-oil revenues are particularly low, data transparency is very weak, and the government has a poor track record of timely payment to creditors and suppliers. Unsettled domestic and external claims by domestic suppliers and bilateral creditors have lingered since the 1990s and amounted to around 12% of GDP in 2015.
The Republic of Congo faces an extremely weak economic, fiscal and financial position. The sharp fall in oil prices, which accounted for around 75% of government revenues in 2010-2014, combined with the absence of consolidation measures, has led to the emergence of large fiscal and external imbalances. As a result of a fall in budget revenues by 47%, the government deficit worsened to around 18% of GDP in 2015, from an already high 7.5% in 2014. Government deposits fell to 17% of GDP at end-2015 from 28% in 2014 and government debt increased to 45% of GDP from 38% in 2014. On the external side, the current account deficit widened to 14% of GDP in 2015, from 5.3% in 2014, turning Congo into a net external debtor.
The liquidity squeeze worsened in early 2016 as oil prices slid further and as public wages were increased ahead of the March 2016 presidential election, triggering further arrears to suppliers and bilateral creditors. The revised budget currently under discussion in Parliament, which maintains public investment expenditure at around 20% of GDP, therefore appears unrealistic.
Financing options going forward have considerably narrowed, given that the government has already fully tapped available central bank advances and support from multilateral creditors is unlikely at least in the near-term. Apart from drawing on remaining deposits, other potential financing options include tapping the regional bond market or contracting more loans from bilateral sources. But the lack of regional market track record, the eurobond default and the already large debt owed to China (exceeding USD3bn) make these options uncertain.
Dependence on oil production, which accounts for around 55% of GDP and 80% of current external revenues, is higher than for most peers, resulting in a structural exposure to shocks. Despite heavy investment in infrastructure in recent years and untapped potential in mining and agriculture, diversification of the economy is only a long-term prospect. Over the short term, oil production is expected by Fitch to increase in 2017-2018 with new oil fields coming on-stream. This will support a rise in real GDP growth to 4.5% in 2018 from 2% in 2015 and 2016. .
Membership in the franc zone has created a supportive macro and external environment, reflected in lower and less volatile inflation (2.5% over the past five years) than most peers. The unlimited guarantee provided by the French Treasury to support the peg at time of FX scarcity also reduces the risk of a balance of payment crisis, despite the current account widening to double digits since 2015.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns the Republic of Congo a score equivalent to a rating of 'CCC' on the Long-term 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.
The Long-Term IDRs do not have an Outlook.
Developments that could, individually or collectively, result in a downgrade include:
-Intensified economic and financial stress leading to heightened risk of non-payment on principal or interest due on bonds rated by Fitch
Developments that could, individually or collectively, result in an upgrade include:
-Improving liquidity of the government, resulting from rising budget revenues, a material tightening of investment spending or improving deficit financing options
-Marked reduction in external and fiscal balances and a stabilisation of the government debt/GDP ratio
-Evidence of a material improvement in public finance management capacity
Fitch assumes Brent oil prices of USD42/bbl in 2016 and USD45/bbl in 2017
Fitch assumes no break-up of the CEMAC monetary zone and no devaluation of the CFA franc.