Gabon | Moody’s places Gabon’s Ba3 ratings on review for downgrade

Libreville, Gabon, Capital Markets in Africa — Moody’s Investors Service has today placed the Republic of Gabon’s Ba3 government bond and issuer ratings on review for downgrade.

The purpose of Moody’s ratings review is to assess the extent of the impact of the further sharp fall in oil prices, which Moody’s expects to remain low for several years, on the Republic of Gabon’s government balance sheet in the coming years. As part of the review, Moody’s will in particular assess the government’s financing strategy in the years to come and the impact it has for the country’s liquidity risk. The review for downgrade will also assess the credit support offered by the Republic of Gabon’s membership of the franc Zone, a monetary union whose currency is pegged against the euro with a guarantee from France’s fiscal authority, during this period of depressed oil prices.

Moody’s expects to complete the review within two months.

RATINGS RATIONALE 
RATIONALE FOR INITIATING A REVIEW FOR DOWNGRADE OF GABON’S Ba3 RATINGS 
The Republic of Gabon is highly dependent on hydrocarbons to finance government expenditure. Oil and gas exports account for over 65% of total exports and roughly 32% of GDP in 2014 according to the United Nations Conference on Trade and Development (UNCTAD). It also provided around 32% of consolidated government revenues in 2015.

Between September 2014 and September 2015, the oil price roughly halved. Since then, it has fallen a further 40%. Moody’s recently revised its oil price assumptions for Brent to US$33 per barrel in 2016 and US$38 per barrel in 2017, rising only slowly thereafter to US$48 by 2019.

The structural shock to the oil market is weakening the Republic of Gabon’s government balance sheet and therefore its credit profile. Between 2013 and 2015, revenue as a percentage of GDP declined by 4.5 and the fiscal position deteriorated from a surplus of 1.8% of GDP in 2013 to a deficit of 2.2% in 2015. During the same period, the country’s current account balance relative to GDP moved from a surplus of 10.6% of GDP to an estimated deficit of 5%. Assuming no policy response and other factors being equal, the expected depressed oil prices over the coming years would imply a further reduction of 3 percentage points of GDP in government revenues and a further rise of 12 percentage points in the Republic of Gabon’s gross debt burden (by 2018). That would shift Moody’s assessment of the strength of the government’s balance sheet — a key support for the government of the Republic of Gabon rating in the past — to Moderate from Moderate (+).

The roughly 10% depreciation in the exchange rate against the US dollar since the start of 2015 has to some extent contained the impact of the price shock on the government’s revenues. Inflation has also been limited thanks to the Republic of Gabon’s membership of the franc Zone. Due to the terms of trade shock, the Republic of Gabon has run down its foreign exchange reserves from US$2.3 billion to US$1.9 billion, reducing its external buffers against future shocks. The foreign exchange reserves of the monetary union (the CEMAC) held by the central bank (BEAC) have also been under pressure because five of the six member countries in the union are oil exporters.

Since oil prices started falling, the government of the Republic of Gabon has relied on borrowing to meet its funding requirements, thereby preserving its fiscal reserves in the form of deposits at the central bank and in a sinking fund. However, the reserves remain modest at an estimated 8% of GDP in 2015.

However, the government has stated its intention to undertake a range of plans to contain the deterioration in the fiscal position and mitigate the impact on its credit standing, including cuts to expenditure, tax reforms which broaden the tax base and measures to diversify the economic base of the country. For instance, as part of the 2016 budget, the Republic of Gabon has broadened the PIT base of civil servants’ bonus payments, modernized the VAT system, and is planning on stabilizing the wage bill at its 2015 estimated level. In January 2016, the government also liberalized the regulation of fuel prices, which resulted in a reduction of subsidies by about 1% of GDP. With a budget based on a US$42 dollar oil price (equivalent to around US$45 for Brent), Moody’s expects that the government will likely put forward further fiscal consolidation measures.

During the review, Moody’s will assess the government’s ability to mitigate the impact of the lower oil price on the Republic of Gabon’s credit standing. Specifically, Moody’s will assess the clarity, scope and ambition of the government’s plans relative to the scale of the task, the time required for them to bear fruit, and the reliance that can therefore be placed on them to sustain the Republic of Gabon’s credit strength. As part of the review, Moody’s will in particular assess the government’s financing strategy in the coming years and the impact it has on the Gabonese government’s liquidity risk. It will also assess the credit support offered by the Republic of Gabon’s membership of the franc Zone during this period of depressed oil prices.

Moody’s expects to conclude its review within two months.

WHAT COULD RESULT IN A DOWNGRADE 
Moody’s would downgrade the Republic of Gabon’s Ba3 ratings if the review were to conclude that the government’s plans are unlikely to be adequate to sustain the government balance sheet’s strength. The most likely outcome of the review in that instance would be a one-notch downgrade. However, given the extent of the impact of the oil-price shock on the Republic of Gabon, a downgrade of more than one notch is possible.

Signs of an emerging fiscal or balance-of-payments crisis would also exert downward pressure on the rating of the government of the Republic of Gabon. Those signs might include a further sustained fall in the price of oil, sustained capital outflows and pressure on the exchange rate and foreign-currency assets, as well as a marked worsening in the fiscal balance for which no clear reversal was in sight. That said, given the Republic of Gabon’s membership of the franc Zone, the risk of a balance-of-payments crisis is more limited than it is for other oil exporter countries that do not benefit from such an arrangement. A deterioration in the domestic or regional political environment, resulting in fiscal slippages, would also be highly credit negative.

WHAT COULD STABILIZE THE RATINGS AT THE CURRENT LEVEL 
Although currently less likely, Moody’s would maintain and confirm the Republic of Gabon’s current Ba3 ratings if the review for downgrade were to conclude that there is a clear and credible policy response, which offers the prospect of containing the deterioration in the fiscal balance and government balance sheet induced by the fall in oil prices. The emergence of such conclusive policy responses will be a function of both the institutional strength of the country as well as its policy flexibility.