Côte d’Ivoire’s sovereign ratings upgrade to Ba3 from B1, outlook stable — Moody’s

Abidjan, Cote d’Ivoire, Capital Markets in Africa —  Moody’s Investors Service (Moody’s) has today upgraded the long-term ratings of Côte d’Ivoire to Ba3 from B1. The short-term issuer rating of NP was affirmed. The outlook on the long-term ratings has changed to stable from positive.

Côte d’Ivoire’s local currency country ceilings for bonds and deposits remain at Baa3, and its foreign currency country ceilings for bonds and deposits also remain Baa3/P-3.

Rating Rationale
The first driver of the upgrade is the consolidation of political stability. The recent and orderly re-election of President Ouattara for a second five-year mandate substantially dispels political uncertainty over the next five years. Efforts towards reconciliation will continue during his second mandate, further reducing political risk. While challenges to political stability could arise ahead of the next round of presidential elections in 2020, Moody’s believes that those risks are likely to be contained. Sources of such risk could include the division and weakness of the political opposition, uncertainty over the development of a new generation of political leaders, and if economic growth is not more inclusive in the future.

The second driver of the upgrade is Côte d’Ivoire’s positive track record in managing its public finances. First, the authorities have managed to maintain a low fiscal deficit, while significantly raising public capital expenditure from 2.5% of GDP in 2011 to an expected 7.9% in 2015. Over the same period, the fiscal deficit averaged -2.9% of GDP, close to the average for Ba3 rated sovereigns of -2.5%. Such fiscal discipline has been driven by a strong budget performance, supported by a favourable external environment, as well as by improved resource mobilization and better budget execution. Growth in fiscal revenue averaged 22.8% during this period. This explains in part why Côte d’Ivoire’s debt has only slightly increased to an expected 37.5% at the end of 2015 from 34.2% of GDP in 2012, at a time when many Sub-Saharan African peers have recorded significant increases in debt levels. The interest burden has decreased to 7.8% of revenue from 8.9% over the same period. This is close to the Ba3 peer median debt-to-GDP of 42.4% and interest payments to revenues of 5.6%. Over the next few years, we anticipate that the debt will hover between 40-45% of GDP.

This positive trend in the fiscal accounts has been — and is expected to be — supported by strong growth prospects. Between 2012-15 real GDP growth averaged 9.2%, making Côte d’Ivoire one of the three fastest growing countries in the world. During that period, Côte d’Ivoire’s external accounts have been relatively solid, with a current account deficit averaging 1% over 2012-15 (excluding grants) and a balance of payments that is structurally positive. Moody’s believes that the current period of strong economic growth, following 10 years of subdued growth amid political crisis, will continue under the second term of President Ouattara. Though this strong growth is attributable to a favourable external environment of supportive prices for Côte d’Ivoire’s main export commodities, we anticipate that growth will average around 8% annually over the medium term as the authorities accelerate implementation of the updated National Development Plan 2016-2020.

The third driver of Moody’s decision to upgrade Côte d’Ivoire’s government ratings is the improvement in the government’s institutional strength. The country has ranked among the 10 best reformers for two years in a row, according to the Doing Business Report of the World Bank Group, with its rank improving 30 places from 177 to 147 over 2013-15. This rapid progress reinforces the resolve of the reform minded staff within the current administration, in-line with our assessment of improved fiscal governance. Indeed, one of the key pillars of the president’s campaign was to improve institutions and consolidate peace and national cohesion. The improvement in the business climate helped private investment to increase to an expected 10.7% of GDP in 2015 from 5.6% in 2011. The authorities aim to reach a minimum of 15% of GDP in private investment by 2020.

Rationale for the Stable Outlook
The stable outlook represents our expectation of balanced upside and downside risks. Côte d’Ivoire’s debt burden, growth rate, institutional strength, and political risk have witnessed a positive trend in recent years. Over the next 12-18 months, however, Moody’s expects relative stability in the country’s debt metrics and level of political risk. Institutional strength, moreover, still has substantial room for further improvement.

What could change the rating up?
While further upward pressure on the rating is unlikely in the near-term, upward pressure could develop in the medium-term as a result of (1) continued structural reforms that support increases in private investment; (2) further material improvements in governance and competitiveness; and (3) a continuation of strong growth that leads to better credit fundamentals, especially concerning debt metrics.

What could change the rating down?
Downward pressure would be exerted on the rating in the event of (1) a reversal of structural reforms; (2) an inability to keep the fiscal deficit at a moderate level; or (3) the re-emergence of significant political and social tensions that would in turn hinder the country’s medium-term growth prospects.