Moody’s Changes Cameroon’s Outlook To Negative, Affirms B2 Rating

YAOUNDE (Capital Markets in Africa) – Moody’s Investors Service (“Moody’s”) has changed the outlook on the Government of Cameroon’s issuer local and foreign currency ratings to negative from stable and affirmed the B2 ratings.

The decision to change the outlook to negative reflects a rising likelihood that Cameroon’s fiscal strength will continue to weaken due to persistent spending pressures to fund its infrastructure investment program to support growth. Recent fiscal overruns and weak financial health of a number of state-owned enterprises (SOEs) have contributed to a rapidly increasing debt ratio, albeit from a low level, and higher than targeted recourse to external financing. Meanwhile, intensifying political unrest in the Anglophone regions and spending pressures in the run-up to the presidential and parliamentary elections in October 2018 increase the risk of further fiscal slippage. The materialization of contingent liabilities in the SOE sector or delays in IMF disbursements during the course of the 3-year program in the case of persistent fiscal deficit or funding deviations from the program targets would heighten government liquidity risk.

Moody’s decision to affirm the rating at B2 balances the economy’s diversification, which has helped to contain the impact of the oil price shock in comparison with fellow Central African Economic and Monetary Union (CEMAC) member countries, and a highly affordable debt stock, with a weak institutional framework, low revenue generation capacity and an increasing reliance on external borrowings to fund the public infrastructure investment program.

The foreign-currency and the local-currency bond and deposit ceilings remain unchanged at Ba2.

Fiscal Strength continues to weaken amid persistent spending and rising debt stock
At 4.3% of GDP, Cameroon’s 2017 deficit was higher than budgeted and higher than the 3.1% targeted in the three-year $683.5 million Extended Credit Facility (ECF) approved in June 2017. According to the IMF, the fiscal overruns were due to a significant pick-up in spending at the end of last year in the lead-up to the presidential and parliamentary elections scheduled for October 2018, in addition to larger-than-expected investment spending related to Cameroon’s hosting of the Africa Cup of Nations tournament in 2019.

Moody’s expects a slower pace of fiscal consolidation in 2018 and 2019 compared to the fiscal deficit targets agreed in the ECF at 2.3% and 1.9% of GDP, respectively. As a result, Moody’s forecasts a continuous gradual increase in the debt ratio to over 38% of GDP by 2021, compared with the ECF assumptions that the debt ratio would peak at around the current level, and up markedly from the post-debt relief level of 11.7% of GDP in 2008. While the debt-to-GDP ratio remains below the median of B-rated peers, Cameroon’s weak revenue generation capacity has resulted in a rising debt-to-revenue burden now on par with B-rated and regional peers.

Additional spending pressures could arise from the tensions between separatist forces in the Northwest and Southwest regions and the government, which are likely to intensify in the run-up to the October parliamentary and presidential elections.

Persistent fiscal overruns and materialization of contingent liability would exacerbate liquidity risks
The government’s mounting funding pressures have led to a breach of one of the key targets of the 3-year ECF, breaking the ceiling on new non-concessional borrowing. The large stock of contracted but undisbursed debt, which amounted to 24.7% of GDP in September 2017, and which is tied to infrastructure projects that are not yet at the implementation stage, points to potential further increases in non-concessional borrowing in order to complete the government’s key infrastructure projects in the port, energy and transportation sectors. The undisbursed debt stock has been underwritten by China, by multilateral institutions and by other bilateral and commercial lenders. Significant and lasting deviations from the fiscal or borrowing targets agreed under the IMF program would erode fiscal strength and increase the risks of delays in IMF disbursements during the course of the program, which could heighten government liquidity risks.

In addition, the risks associated with a materialization of contingent liabilities stemming from SOEs has increased. According to the IMF, aggregate liabilities of SOEs have increased to over 17% of GDP in 2016 from 4% of GDP in 2015, driven by a significant rise in debt of the state-owned oil refinery, SONARA (unrated). The composition of SOEs debt shows a large short-term debt component at about 6% of GDP which is concentrated among four enterprises, of which three run operating losses. Even though explicit guarantees from the government on behalf of SOE debts are small, Moody’s expects the government to support the financial survival of the strategically important SOEs.

Rationale for the B2 rating affirmation
Cameroon’s credit profile is supported by the economy’s relatively high degree of diversification, which has helped to contain the impact of the oil price shock, especially in comparison to regional peers and fellow CEMAC member countries. Natural gas production from a new liquefied natural gas (LNG) offshore terminal will partly offset a decline in oil production and underpins Moody’s growth forecast of around 4% in 2018 and an average of 4.5% in 2019-2022 . The expected completion of significant infrastructure investment projects in the port, energy and transport sectors further underpins the economy’s non-oil growth potential.

Cameroon’s debt stock also remains highly affordable with an interest-to-revenue ratio at around 4-5%, lower than many B-rated sovereigns.

Cameroon’s credit challenges include weak institutional strength as shown in the country’s rankings in the Worldwide Governance Indicators, particularly in the areas of control of corruption and government effectiveness.

On the external side, despite a currently low regional foreign exchange reserve pool among CEMAC member countries, balance of payments risks remain contained by the country’s membership in the CFA Franc zone, where the peg to the euro benefits from a convertibility guarantee from the French Treasury.

What could change the rating up?
The negative outlook signals that an upgrade is unlikely.

The outlook would likely be stabilized if the fiscal consolidation and financial governance reforms are implemented, broadly in line with the IMF program, which would provide greater confidence regarding a stabilization and eventual sustained reversal of the debt trajectory.

A resolution to the political crisis in Anglophone regions that safeguards the affected regions’ economic resilience would also be credit positive.

At the Central African regional level, a bolstering of CEMAC’s pooled foreign exchange reserve coverage of imports would support liquidity conditions at the regional level and thereby increase the likelihood of a stabilization of the outlook.

What could change the rating down?
A further significant deviation from the fiscal or borrowing targets agreed under the IMF program would raise pressures on fiscal strength and increase risks of IMF disbursements being delayed, which could heighten government liquidity risks.

A significant run-up of arrears or more generally further evidence of very weak government and public sector debt management effectiveness could point to weaker institutional strength than Moody’s currently assesses, which could be consistent with a lower rating level.

In addition, a further escalation of political unrest in Anglophone regions in the aftermath of the elections in October 2018, evident in an intensification of negative spillovers on economic activity and on exports, would increase the probability of a downgrade.