Tuesday 04, July 2017 by Matthew Amlôt

Moody's downgrades Gabon's rating to B3, outlook negative

Moody's Investors Service has today downgraded the long-term issuer and senior unsecured debt ratings of the government of Gabon to B3 from B1 and maintained the negative outlook.

Concurrently, Moody's has lowered the government of Gabon's local currency as well as foreign currency bond and deposit ceilings to Ba3 from Ba1. The rating downgrade drove the change in ceilings.

The key drivers behind the downgrade to B3 are:

1) Deteriorating public finances due to persistently low oil prices and limited policy adjustment capacity

2) Acute government liquidity pressures, as exhibited by the accumulation of arrears

The negative outlook reflects uncertainties regarding the government's strategy to refinance maturing debt and fund its deficit despite support from official creditors, which remains conditional.

DETERIORATING PUBLIC FINANCES

The oil price shock has led to a marked drop in Gabon's government revenue to 17 per cent of GDP in 2016 from 30 per cent in 2013. As revenues decreased, the government faced a difficult policy trade-off between cutting expenditure, especially capital spending, which peaked at seven per cent of GDP in 2014, and supporting its non-oil economy. While fiscal deficits have been relatively limited on a cash basis to about five per cent of GDP on average over 2015-16, this has been to the detriment of the government's accumulation of arrears. In turn, government arrears have affected non-oil economic activity, disrupting in particular cash-flows for goods and services providers to the government.

Gabon government debt has deteriorated too, rising to 55 per cent of GDP in 2016 from 33 per cent in 2014, excluding accumulated arrears but including five per cent of GDP in debt vis-a-vis the central bank (BEAC) of the Economic and Monetary Union of Central Africa (CEMAC). During that period, the government contracted private sector debt to cover some of its financing needs, with the issuance in June 2015 of 10-year $0.5 billion notes as well as debt issuances on the regional market of the CEMAC. Private sector debt -- Eurobonds, loans from commercial banks and domestic debt, excluding the debt owed to the BEAC -- represented an estimated 77 per cent of the total government debt at the end of 2016.

While fiscal deficits should narrow going forward as part of the macroeconomic framework agreed with the IMF under the recently approved Extended Fund Facility, the clearance of arrears will weigh on the government's cash balance, perpetuating the upward debt trajectory. Moody's projects the Gabon government debt level to reach 57 per cent of GDP in 2017.

ACUTE GOVERNMENT LIQUIDITY PRESSURES

The accumulation of arrears by the government is symptomatic of rising liquidity pressures -- i.e. the difficulty of the government to meet payments due to constrained financing sources. That said, the government of Gabon still had 2.6 per cent of GDP in fiscal reserves at end-2016. Going forward, persistently low oil prices, the necessity to clear arrears under an IMF programme in order to revive the non-oil economy, will weigh on government net financing needs which Moody's expects to peak at 12-15 per cent of GDP in 2017 or even higher should the government's fiscal consolidation does not meet its target.

Faced with such large financing needs as well as associated pressures on the balance of payments, the government of Gabon had to resort to an IMF programme that provides $642 million (4.6 per cent of GDP) in financing under the Extended Fund Facility (EFF). The EFF plays a catalysing role for other external financing from the official sector with the aim to close any financing gaps. That being said, disbursements will remain contingent upon the government of Gabon meeting the conditions set by the programme. Given the country's weak institutions, the implementation of the EFF faces execution risk.

NEGATIVE OUTLOOK

While the IMF programme will progressively help the government of Gabon in arresting the deterioration in public finances and closing financing gaps, downside risks remain regarding the government's strategy to refinance maturing debt and fund its deficit.

The capacity of the government to roll-over its domestic debt, which reached an estimated 12 per cent of GDP at the end of 2016, is constrained due to shallow regional markets in the CEMAC and the increased demand for financing emanating from the other CEMAC member countries as five, out of six, are net oil exporters concurrently facing various degrees of liquidity pressures. Offers on Gabon's Treasury Bill auctions has been particularly volatile lately and sometimes well below 100 per cent.

On the external side, while the IMF programme could boost foreign investors' confidence, supporting the government's capacity to roll-over its December 2017 Eurobond ($193 million or 1.4 per cent of GDP), the existence of arrears may dampen their appetite. In case the government of Gabon is unable to tap the markets, it could rely on its financial aid and its cash deposits at the BEAC, which reached 2.6 per cent of GDP at the end of 2016.

It remains uncertain, however, whether these financing options will be sufficient. Moreover, the precarious state of government buffers following the oil shock also increases uncertainty with regard to the government's medium-term strategy for refinancing debt payments ahead of principal payments that will average 2.5 per cent of GDP (estimate) annually from 2022 onwards.

GDP per capita (PPP basis, $): 19,056 (2016 Actual) (also known as Per Capita Income)

Real GDP growth ( per cent change): 2.5 per cent (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, per cent change Dec/Dec): 4.1 per cent (2016 Actual)

Gen. Gov. Financial Balance/GDP: -4.9 per cent (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -10.3 per cent (2016 Actual) (also known as External Balance)

External debt/GDP: 37.6 per cent (2016 Actual)

Level of economic development: Very Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 29 June 2017, a rating committee was called to discuss the rating of the government of Gabon. The main points raised during the discussion were: The issuer's institutional strength/framework, have decreased. The issuer's fiscal or financial strength, including its debt profile, has materially decreased.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

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