Gabon | Prioritizing spend in an election year — Bank of America Merrill Lynch

Libreville, Gabon, Capital Markets in Africa —The Gabonese government is taking steps to mitigate the effect of lower oil prices (oil makes up 40% of revenues) by re-prioritizing its development plans. A supplementary budget is expected to be released in the summer, which will detail where spending can be cut with minimal social and growth impacts. The government is using US$30/bbl in the budget (compared to US$42 previously) and expects GDP growth of 3.2% and debt-to-GDP of 45-50% in 2016.

The government has already liberalized the fuel price, reducing the subsidy bill from CFA80bn a year to CFA23bn a year. It is working with the World Bank to explore ways to reduce the wage bill (which makes up 34% of spending) but will have to delay this until after the election. In addition, authorities are trying to review tax exemptions and increase tax efficiency to improve local revenue generation.

A moderation in government spending has had a knock-on effect on the fragile private sector, where government arrears remain a problem and NPLs have risen to nearly 10% (from 8% in 2014). There is a plan in place to address these arrears (which are as much as 9% of GDP), but they cannot be paid instantly. This is having a knock-on effect on the commercial banking sector, where some government banks are in (or close to) administration. Although the systemic risk is low given the small size of the banking sector, the financial sector is under stress.

The IMF had raised some issues concerning the late payment of debts. The government has put in place a new platform between the debt management office and the treasury to improve co-ordination. Although some delays on domestic financing are still possible, this will not affect interest payments on the Eurobond issue. Around US$160mn in Eurobond is maturing next year, for which the government already has the cash available in a sinking fund. It does not plan to issue another Eurobond this year or next.

The oil sector is a concern. There have been no large oil discoveries in recent years and companies have put exploration projects on hold, not just due to the low oil price, but also because of an unattractive regulatory and tax environment, and high operational costs. Production (at c.200k b/d) appears to have peaked and will likely be on a downward trend.

The elections are expected in late August of this year. Given the large incumbency advantage, President Bongo is expected to be re-elected. Protests could follow the election result as corruption allegations are typical. However, this time around, due to the economic slowdown and widespread job losses, the protests could be longer.