Burundi’s Political Crisis Is Credit Negative

Bujumbura, Burundi (Capital Markets in Africa):-Last Friday, the United Nations High Commissioner for Refugees said that more than 105,000 people had fled Burundi (unrated) to neighbouring countries to escape political violence after three weeks of demonstrations and a failed coup last Wednesday. The worsening political situation in Burundi threatens to disrupt economic activity and administrative stability, weaken the political will and capacity to implement much-needed structural reform, and jeopardise multilateral and bilateral donor support. Additionally, the crisis has the potential to reignite longstanding ethnic hostilities between Hutus and Tutsis and further destabilize the East African region, a salient reminder of broader political event risk across the continent.

While President Pierre Nkurunziza was in Tanzania meeting with other East African leaders, Army Chief of Staff Major General Godefroid Niyombare last Wednesday declared a coup following three weeks of increasingly violent demonstrations prompted by Mr. Nkurunziza’s announcement that he would defy the constitution and seek a third term in power. Burundi’s constitution allows a president to be elected twice, for a total of 10 years in power. Mr. Nkurunziza and supporters of his Hutu-dominated ruling party have argued that he was only directly elected by the people once, in 2010, after being elected by Parliament in 2005 at the end of a 12-year civil war. While Major General Niyombare later in the week conceded that the coup had failed and Mr. Nkurunziza returned to Burundi, rival soldiers continued to battle for control of the capital Bujumbura into the weekend with the Presidential elections originally scheduled for 26 June seemingly certain to be postponed.

The events of the past three weeks and increased uncertainty regarding the capacity of Burundi’s administrative apparatus threaten the country’s international support. Burundi benefitted from debt relief late in the past decade that lowered total government debt to around 30.5% of GDP in 2014 from around 170% in 2004, according to the International Monetary Fund (IMF). However, a very low revenue base makes Burundi highly dependent on grant financing and concessional loans from multilateral and bilateral donors to finance critical infrastructure investment, persistent fiscal deficits (albeit relatively modest at 3% of GDP in 2014) and large current account deficits that ballooned to around 20% of GDP in the past two years amid weak coffee prices and increased imports of capital goods.

The IMF estimates grant financing in 2014 totalled BIF621.6 billion ($400 million), or about 49% of total government revenue. Even a partial or temporary suspension of that support would immediately create fiscal pressure. GDP per capita was a mere $336 in 2014, according to the IMF, and growth is hampered by poor infrastructure and insufficient energy provision.

Burundi also scores far worse than its neighbours governance indicators, a key input for our assessment of its institutional strength. Burundi has the worst business-climate indicators in East Africa: it was ranked 152nd out of 189 countries in the World Bank’s 2015 Doing Business Report, albeit significantly better than in 2011, when it ranked third from the bottom among all surveyed countries.

Burundi’s ingredients for social unrest, which constrain sovereign credit quality, are present in a number of other Sub-Saharan African countries: longstanding presidential incumbents without political succession plans, an absence of strong political institutions, restive militaries, ethnic tensions and a young and economically disenfranchised population.

Late last year, political turmoil in Burkina Faso (unrated) erupted when President Blaise Compaore attempted to change the constitution to extend his 27-year rule: he was subsequently forced to resign in October 2014 amid mass protests that turned violent and deadly. Among other Sub-Saharan Africa countries, constitutional term limits were repealed in Gabon (Ba3 stable) in 2003, in Uganda (B1 stable) in 2005, and in Cameroon (unrated) in 2008. And longstanding African leaders who have said that they intend to seek re-election beyond constitutional term limits include Thomas Boni Yayi of Benin (unrated), Denis Sassou Nguesso of the Republic of the Congo (Ba3 stable), Paul Kagame of Rwanda (unrated), and Joseph Kabila of the Democratic Republic of the Congo (B3 stable).

Source: Moody’s Credit Outlook, May 18 2015