Fitch Affirms the Republic of Congo at 'CCC'
KEY RATING DRIVERS
The Republic of Congo's ratings primarily reflect major weaknesses in governance, translating into poor public finance management, as well as constraints on deficit financing options in the short-term induced by the lack of spending adjustment at a time of large oil revenue shortfall.
More specifically, Congo's 'CCC' IDRs reflect the following key rating drivers:-
Congo's temporary failure to pay interest and principal of USD17m (0.2% of GDP) on a Eurobond mid-2016 illustrates the country's extremely weak public debt management. Weak public financial management more generally has been a long-standing problem, with low non-oil revenues, poor data quality and transparency, and a poor track record of debt repayment.
The payment default also occurred at a time of severe cash constraints for the government. The country's fiscal deficit of 16.3% of GDP in 2015 was largely financed by tapping available deposits, which fell to around 17% of GDP at end-2015, and by contracting new debt, including from the central bank. The cash strain intensified in early 2016 following a further decline in oil revenues and a large public wage increase ahead of the March presidential elections. This reportedly resulted in a further accumulation of arrears to suppliers and bilateral creditors and a further decline in government deposits to below 15% of GDP.
Despite a revised budget being passed in August and setting ambitious capital spending targets, a contraction in public investment in response to the drying up of financing sources is likely to lead to a narrowing of the budget deficit to single digits in 2016. Apart from bilateral loans already approved, financing options mostly consist of remaining deposits and a potential recourse to regional investors. But the lack of a track record in the regional capital debt market, the Eurobond default and the already large debt owed to China (around USD3bn) make these options uncertain. The government has not resorted to multilateral creditors so far and a Eurobond issue seems unlikely.
Public debt, at an estimated 61% of GDP at end-2015, has risen rapidly due to falling nominal GDP, and new indebtedness incurred. This represents a significant weakness in the context of high budget revenue volatility and weak debt tolerance. Although its debt cost and maturity structure is favourable (it is mostly extended on concessional terms), its large foreign currency component (around 70% of total) exposes it to currency fluctuation although the peg of the franc CFA to the euro is solid.
Congo's real GDP growth is expected to be around 2% in 2016, unchanged from 2015, well below historical averages and peer medians. However, the Congolese economy is expected to rebound in 2017 as a large new oil field comes on stream, boosting oil production. This, together with higher oil prices, will likely provide a broad-based improvement in most of Congo's credit metrics next year, including growth and twin deficits. Diversification of the economy away from oil (which accounted for more than 50% of GDP in 2014) remains a long-term prospect, despite heavy investment in infrastructure and potential in agriculture and mining.
Despite macroeconomic volatility related to commodity dependence, inflation is lower and less volatile than in most peer countries, reflecting the effect of membership in the franc zone. The unlimited guarantee provided by the French treasury to support the peg at times of FX scarcity also reduces the risk of a balance of payment crisis. This is particularly relevant as the current account deficit widened sharply to an estimated 15.4% of GDP in 2015 from 5.2% in 2014 and as regional reserves pooled at the central bank fell to an estimated three months of current account payments in 1H16.
Weak development, governance and business environment indicators, which rank among the lowest of Fitch-rated sovereigns, are further reasons for Congo's highly speculative grade rating, exacerbating risks of economic shocks associated with high commodity dependence. Political tensions surged around the re-election of President Sassou N'Guesso in March 2016.
The downgrade of the Country Ceiling to 'B+' follows Fitch's update of its Country Ceiling criteria published on 16 August 2016. Fitch is of the view that transfer and convertibility risk can differ among member countries of CEMAC's currency union. The three-notch uplift of Congo's Country Ceiling from the sovereign's Foreign Currency IDR balances the strength of support provided by France to the CFA franc in the CEMAC against Congo's weak credit quality and risk of transfer problems related to potential sector-wide bank closures.
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 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.
The Long-Term IDRs do not have an Outlook.
Developments that could 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-to - 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.