Gabon | Fitch Revises Gabon’s Outlooks to Negative; Affirms at ‘B+

Libreville, Gabon, Capital Markets in Africa — Fitch Ratings has revised the Outlook on Gabon’s Long-term foreign and local currency Issuer Default Ratings (IDR) to Negative from Stable and affirmed the IDRs at ‘B+’. The issue ratings on Gabon’s senior unsecured foreign currency bonds have also been affirmed at ‘B+’. The Short-Term IDR has been affirmed at ‘B’. Fitch has also affirmed the Country Ceiling for the Communaute Economique et Monetaire d’Afrique Centrale (CEMAC) and for Gabon at ‘BBB-‘.

KEY RATING DRIVERS 
The revision of Gabon’s Outlooks reflects the following key rating drivers and their relative weights:
MEDIUM
Lower oil prices are adversely affecting Gabon’s economy, public finances and external position. Fitch has revised its oil prices to USD35 per barrel in 2016 and USD45 per barrel in 2017, from USD60 and USD70 in its previous rating review in November 2015. Gabon is highly dependent on the oil sector, despite efforts from the government to diversify the economy. Oil still represented 38% of GDP in 2014, while oil revenues were 44% of the government fiscal receipts and 79% of exported goods. 

We expect the fiscal deficit to widen to 3.8% of GDP in 2016 from 1.1% in 2015, when oil receipts almost halved. The government is taking action to limit the fiscal deterioration. It markedly cut capital spending by 30% in 2015 and largely reformed oil subsidies. However, the government’s fiscal flexibility is now limited as further cuts in capex are constrained by the hosting of the 2017 African Cup of Nation, and the outsized wage bill is unlikely to be reduced this year ahead of the August presidential election. The budget deficit should narrow somewhat in 2017 supported by recovering oil price.

A lower than expected oil price is the main risk to the fiscal outlook. Insufficient adjustments to prolonged weak energy prices could further erode fiscal buffers and pose financing challenges. Fitch expects the government to draw down its deposits at the regional central bank by 30% in 2016 (to 4.7% of GDP) after a decline of 12% in 2015 (from 6.4% of GDP). Gabon had used CFA340bn of the CFA453bn statutory advances ceiling granted by the central bank as of November 2015. 

The official stock of domestic arrears to suppliers was CFA201bn (2.4% of GDP) at February 2016, despite some net repayments in 2015. Limited financing flexibility could force the government to accumulate domestic arrears and further put pressure on economic growth and on the banking sector, through its exposures to contractors executing public projects. 

Non-performing loans in the banking sector increased to 9.6% of total loans at end-2015, compared with 8.1% a year ago, and net domestic credit decreased by 4.5% in 2015. Three public troubled banks have been placed under provisional administration and are expected to deliver resolution plans in the coming months, while the Banque Gabonaise de Developpement (BGD), which is 52%-owned by the state, missed a payment in September 2014 on a private senior debt obligation issued in the regional market and has since been in default. 

General government debt more than doubled from 20% of GDP at end-2012 to 43% of GDP at end-2015. Fitch forecasts it to rise further to about 50% of GDP at end-2016, broadly in line with the ‘B’ median of 54%. In addition, almost 60% of the country’s public debt is non-euro foreign-currency denominated, which makes it vulnerable to an exchange rate shock.

Gabon’s current account balance turned into deficit in 2015 after almost two decades of surplus. Falling oil receipts will worsen the deficit to an expected 5.6% of GDP in 2016, which we believe will be less than financed by foreign direct investments, and external borrowing, implying a further depletion of foreign reserves. Gross international foreign reserves declined by USD370m in 2015 and we expect it to fall by a further USD260m in 2016. 
The affirmation of Gabon’s IDRs at ‘B+’ also reflects the following key rating drivers:

Gabon’s ‘B+’ ratings reflects a high GDP per capita relative to peers and a stable macroeconomic environment, supported by membership of the franc zone of the CEMAC. The monetary arrangement assures currency convertibility and reduces foreign exchange liquidity risks. The ratings are also constrained by weak data quality, low levels of human development and governance indicators and a weak business climate. 

Real GDP growth proved resilient at 4% in 2015 mainly due to a one-off impulse in oil production. However, it is set to slow down this year at 3.2%, as domestic demand is being hampered by a large cut in public capital expenditure and sluggish activity in the oil sector. Economic growth should rebound in 2017 at 4.3%, as oil prices recover, effects of large agribusiness projects unfold and public and private investments resume. 
Presidential elections will take place in 2016. Gabon has long benefited from a stable domestic political climate, but several episodes of social unrest have taken place since early 2015. These events illustrate the growing tensions ahead of the general elections and the potential for further social and political instability to arise.

The affirmation of CEMAC Country Ceiling at ‘BBB-‘ reflects the following key rating drivers:
Foreign-exchange (FX) reserves at the regional central bank are close to 80% of the monetary base thanks to past oil-related FX inflows in CEMAC, although they are now declining. If needed, the French Treasury has committed to providing external liquidity through an unlimited overdraft on the central bank’s account. Controls and delays on capital transfers between the sub-regions and the rest of the world are a key factor of the seven-notch difference between the Country Ceiling of the franc zone and the sovereign rating of the ultimate guarantor, France. 

RATING SENSITIVITIES
Future developments that could individually, or collectively, result in a downgrade include:
– Further deterioration in the fiscal balance and increase in general government debt to GDP ratio. 
– Rising current account deficit and net external indebtedness.
– Further depletion of fiscal buffers and international reserves or heightened signs of financing pressures.
– Political instability, particularly if it were to have an adverse impact on economic policy making.
Future developments that could individually, or collectively, result in the Outlook being revised to Stable include:
– Reduction in the budget deficit consistent with a stabilisation of the general government debt to GDP ratio.
– Higher deposits at the central bank and building up of the stabilisation fund, which would improve the sovereign’s resilience to oil price volatility.
– Successful diversification of the economy and fiscal revenues away from oil.

KEY ASSUMPTIONS
Fitch assumes a gradual reduction in Gabonese oil output over the medium to long term.
Fitch assumes that oil price (Brent) will average USD35 per barrel in 2016, USD45 per barrel in 2017.
Fitch assumes no break-up of the CEMAC monetary zone in the foreseeable future.