Tuesday 15, May 2018 by Matthew AmlĂ´t

Fitch affirms Cameroon at 'B'; outlook stable

Fitch Ratings has affirmed Cameroon's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B' with a Stable Outlook.

Cameroon's 'B' IDRs reflect the following key rating drivers:

Cameroon's 'B' ratings balance a low GDP per capita of $1,410 and weak business environment and governance indicators, against sustained economic growth and macroeconomic stability provided by membership of the Central African Economic and Monetary Community (CEMAC) franc zone, which ensures currency convertibility and reduces foreign exchange liquidity risks.

The IMF completed its first review under the three-year extended credit facility arrangement in December 2017 and subsequently approved the disbursement of the second tranche in December, bringing total disbursements to US292.9 million. Performance criteria in the first and second reviews on non-concessional external debt were missed, but Fitch expects the programme will remain broadly on track. Disbursements from other multilateral and bilateral creditors were made in 4Q17 and 1Q18.

Fitch forecasts Cameroon will miss its fiscal target in 2017. While the IMF programme aimed at three per cent of GDP fiscal adjustment, we forecast the fiscal deficit will decline by 2.2pp to 3.9 per cent of GDP (on a commitment basis). Fiscal revenues outperformed helped by reforms and improved tax collection, but security issues in the English-speaking region weighed on spending, while investment expenditure was higher than projected and little changed on 2016 at 8.3 per cent of GDP.

We forecast the fiscal deficit to narrow to 3.4 per cent of GDP in 2018 and 2.7 per cent in 2019, compared with a 'B' median of 4.1 per cent. A small decrease in capex will partly offset rising current spending as higher oil prices will lead to the re-emergence of subsidies to the state oil refinery, SONARA. Improved prices and output will support oil fiscal receipts while gradual removal of tax exemptions and reform implementation will boost non-oil revenues, although total revenues will grow more slowly than nominal GDP.

Fiscal risks stem from the heavy electoral agenda, including presidential elections scheduled in October 2018, the required investments for the 2019 African Cup of Nations (CAN) and ongoing security issues. Weak public finance management could also delay the adjustment. Off-budget spending by the national oil company (SNH) and ex-post budget appropriation weighs on liquidity and cash management and prevents transparent budget execution. The government recurrently accumulates domestic arrears as a way of financing. These were estimated at 2.9 per cent of GDP at end-September 2017.

Fitch forecasts gross general government debt to reach 37.1 per cent of GDP in 2018, lower than the 'B' median of 60.4 per cent. The government has increasingly turned to non-concessional external debt, leading to a sharp rise in the interest burden, with interest expenditure set to account for an average five per cent of government revenues in 2018-2019, from 2.3 per cent before the 2015 Eurobond issuance, and compared with a 'B' median of 9.3 per cent.

Contingent liabilities represent an additional risk to the sovereign balance sheet, with the potential cost related to public private partnerships amounting to 2.7 per cent of GDP at end-October 2017. Debt of state-owned enterprises rose sharply to an estimated 17 per cent of GDP in 2016, from four per cent in 2015 mostly driven by a sharp increase in SONARA's debt.

Political stability is a weakness versus peers. Tensions in the two Western Anglophone regions are rising in the run-up to the elections and have disrupted economic activity. Additional security risks stem from the terrorist threat from Boko Haram in the far north and insecurity at the border with Central African Republic. Uncertainty around the succession of the 85-year old President Biya is a political risk. Biya is likely to run again in the next presidential elections with a high likelihood of being re-elected. The process for an eventual transition is untested.

Economic growth will be lower than expected in 2017 at a forecast 3.4 per cent, due to the delayed start of the liquefied natural gas project off the coast of Kribi, weak oil production and subdued regional demand. We forecast growth to rise in 2018 to 3.9 per cent as hydrocarbons production picks up, better electricity supply supports the agriculture and manufacturing sectors, and investments for the 2019 CAN boosts construction activity. Rebased national accounts from 1989-90 to 2005 caused an 8.2 per cent upward revision in the 2005 nominal GDP.

Cameroon's banking sector remains weak. Liquidity has tightened given the change in regional monetary policy and asset quality has deteriorated, with nonperforming loans accounting for 14.3 per cent of total loans in February 2018. Capitalisation and profitability are relatively low and declining, but capitalisation remains above the regulatory threshold. Five small banks are deemed insolvent by the IMF, including three public banks and a resolution plan is to be submitted by June 2018.

We forecast the current account deficit will narrow slightly in 2018 to 2.9 per cent of GDP, compared with a 'B' median of 4.5 per cent, and from 3.0 per cent in 2017. Tighter monetary policy and ongoing fiscal adjustment will lead to weak import levels while good performance in the hydrocarbons, agriculture and manufacturing sectors will boost export receipts. Foreign direct investment, which we project at two per cent of GDP in 2018, and multilateral and bilateral external financing will help rebuild reserves. Net external debt is forecast to increase to 15.1 per cent of GDP in 2018, from 12.6 per cent in 2017 ('B' median of 20 per cent). Official imputed reserves for Cameroon stabilised at $3.2 billion in 2017 from $2.2 billion in 2016.

Fitch's proprietary SRM assigns Cameroon 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.

The main risk factors that could, individually or collectively, trigger negative rating action are:

-Persistent large fiscal deficits or crystallisation of contingent liabilities onto the sovereign balance sheet that lead to a rapid increase in the government debt/GDP ratio, or financing stress.

-A widening of the current account deficit, leading to growing external indebtedness.

-Heightened political instability that adversely affects public finances or the economy.

The main factors that could, individually or collectively, trigger positive rating action are:

-A reduction in the budget deficit and the government debt/GDP ratio, particularly if supported by improved management of public finances.

-Improvement in the business climate and growth performance.

Fitch assumes no break-up of the CEMAC monetary arrangement and no devaluation of the CFA franc against the euro.

Fitch assumes that the oil price (Brent) will be $57.5/b in 2018 and $57.5/b in 2019.

The full list of rating actions is as follows:

  • Long-Term Foreign-Currency IDR affirmed at 'B'; Outlook Stable
  • Long-Term Local-Currency IDR affirmed at 'B'; Outlook Stable
  • Short-Term Foreign-Currency IDR affirmed at 'B'
  • Short-Term Local-Currency IDR affirmed at 'B'
  • Country Ceiling affirmed at 'BB+'
  • Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at 'B'

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