Thursday 08, June 2017 by Matthew Amlôt

Moody's: Gabon's credit challenges include reliance on oil and low institutional strength

The Government of Gabon's B1 rating and negative outlook reflect a range of credit challenges, including the country's very low institutional strength, as well as its reliance on oil for growth, exports and government revenues, Moody's Investors Service said in a report this past week.

"The Gabonese government's capacity to diversify the economy and to restore the strength of its balance sheet will remain a key credit driver going forward," said Lucie Villa, a Moody's Vice President - Senior Analyst and co-author of the report. "While the modest rebound in oil prices and a likely IMF programme will be supportive, any improvement is likely to be gradual at best."

Gabon's public finances and foreign exchange reserves deteriorated substantially during the oil price shock. The oil sector accounted for around 29 per cent of GDP or 19 per cent in real terms in 2016.

The government plans to diversify the economy and accelerate growth through increased exploitation of other natural resources, such as mining and timber. However, the natural decline in oil production constrains the economy's medium-term growth at around three per cent.

Gabon's fiscal strength has deteriorated due to the oil price shock, as the government derived 39 per cent of its revenue from the oil sector in 2014. As oil prices gradually recover, Gabon's key fiscal and debt metrics will slowly start improving.

Moody's projects that Gabon's fiscal deficit based on commitments will fall to about 0.8 per cent of GDP in 2017, from an estimated 4.2 per cent in 2016. Continued fiscal consolidation, coupled with limited US dollar appreciation against Gabon's local currency, will put government debt on a progressive downward trend.

Gabon's susceptibility to event risk is moderate and mostly driven by political and government liquidity risks.

The country's credit strengths include the economy's relatively high wealth levels, its membership of the franc zone which supports macroeconomic stability, as well as the development of its non-oil sector.

The negative outlook reflects the uncertainty related to the government's capacity to cover its financing needs (principal payments and fiscal deficits) of around 10 per cent GDP in a constrained financing environment.

Gabon's ratings could come under downward pressure if government liquidity pressures intensify and/or if government finances continue to deteriorate. The outlook could be stabilised if the government secures its financing requirements and stabilises government debt metrics or even brings them down.

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