Cameroon | Boost from the AfDB through €500m guarantee

Yaounde, Cameroon, Capital Markets in Africa — Much of the discussion in Yaounde concerned the €500mn partial credit guarantee given to Cameroon by the AfDB. This agreement covers the government’s payment obligations in a cross-currency swap they had entered with commercial banks to ensure dollar availability to service the obligations of its US$750m Eurobond issued in November 2015.

From the AfDB press release, the guarantee appears to have been approved solely to limit exchange rate risk. Our understanding is that the government is obliged to pay euro to commercial banks in return for dollars, which are given directly to the paying agent for the Eurobond. The AfDB guarantee would cover these euro payments for the government (up to a maximum of two years) if temporary liquidity pressures mean they cannot make these euro payments to the banks. However, the authorities were keen to stress that this guarantee could technically extend to guarantee principal repayments too. In our view, this guarantee covers both default risk and exchange rate risk and hence is a positive perhaps unappreciated by the market.

The authorities expect GDP growth at 5-6% this year. Revenues will likely come under pressure due to lower oil prices, but the government is anticipating this, with oil revenues expected to make up 13.4% of 2016 revenues compared with 20% last year. They are trying to modernize the tax administration and introduce new investment laws to attract FDI and hence broaden the tax base. Despite revenues being under pressure, the government still has plans to increase expenditure, mostly on infrastructure and security. In terms of funding, the government has a clear preference for external debt.

Although no new Eurobond issuance is currently planned, the government expects to draw on previously signed agreements with bilateral and multilateral partners. Domestic financing is limited by shallow markets. However, the government is allowed to borrow 20% of the previous year’s revenues from the central bank – according to their calculations, they have nearly another CFA400bn (US$685mn) of financing from this source available. In addition to the AfDB guarantee, a sinking fund for external Eurobond payments now contains CFA20bn (US$34mn) with CFA5bn added each month.