Tuesday 04, July 2017 by Matthew Amlôt

Moody's: DRC's rating balances economic potential against institutional weakness, political uncert.

The Democratic Republic of the Congo (DRC)'s B3 rating and stable outlook balances an economy that remains undiversified despite potential in the agricultural and hydroelectricity sectors against constraints that include institutional weakness and political uncertainty, Moody's Investors Service said in a report this week.

"The DRC's economy is still dominated by the mining sector, despite large potential in the agricultural and hydroelectricity sectors," said Aurelien Mali, a Moody's Vice President -- Senior Credit Officer and co-author of the report. "The drop in commodity prices, in particular copper, caused economic growth to slow to 2.4 per cent in 2016 from 6.9 per cent in 2015, and led to a larger fiscal deficit than planned. It also contributed to the depreciation of the currency, which has seen inflation rise inflation. However, with the recent modest rebound in commodity prices, the economic situation has stabilized in the first half of 2017."

If commodity prices remain steady, Moody's expects real GDP growth to reach 3.5 per cent by the end of 2017, followed by 5.0 per cent in 2018 as mining activity slowly increases.

While the agricultural and hydroelectricity sectors offer good growth potential, the economy also faces several headwinds, including commodity price volatility, a delay in foreign investment or flight stemming from political instability over the next two years, and a possible continuation of slowweaker growth in China -- the country's largest trade partner.

The DRC has a low debt burden compared to many single B-rated peers. The country's public finances are in the process of modernisation, although they remain constrained by a number of key factors. Positive rating pressure could develop in the event of a material strengthening of the country's institutions, an acceleration of fiscal reforms, and increased capital expenditure to finance infrastructure improvements, particularly with respect to power generation and transport

Other positive factors would include if continued foreign investment in the mining sector were to lead to much stronger commodity revenues. An increase in foreign exchange reserves and fiscal buffers that offsets any negative impact of external shocks on the economy would also be supportive.

Downward pressure on the rating could arise from a renewed decline in the prices of the DRC's main commodity exports, heightening the potential for a balance of payments crisis.

Other negative factors would include a further drain on foreign exchange reserves, making the economy and the government more vulnerable to further external shocks, or a large deterioration in the government's fiscal balance that leads to large macroeconomic imbalances and volatility. Finally, a rise in instability from a resurgence of conflict in the east or a spike in political tensions would also put pressure on the sovereign rating.

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