Moody’s changes outlook on Gabon’s rating to stable from positive, affirms Caa1 rating

GABON (Capital Markets in Africa): Moody’s Investors Service (“Moody’s”) has today affirmed the Government of Gabon’s Caa1 long-term issuer ratings and changed the outlook to stable from positive. The rating on Gabon’s foreign currency senior unsecured debt has also been affirmed at Caa1.

The key driver for the outlook change to stable is Gabon’s more limited institutional improvements than previously seemed possible, combined with rising liquidity pressures from the coronavirus crisis and associated oil price correction. The government’s history of accumulating arrears on and off through oil price cycles now looks increasingly likely to continue for the foreseeable future. In turn, this issue could challenge Gabon’s negotiations over the renewal of its financing programme with the IMF and delay the credit support the government derives from it through the provision of a fiscal policy anchor and a catalyzer of funding sources. Overall, Gabon’s governance strength and liquidity risk remain broadly aligned with a Caa1 rating, without material positive prospects.

The affirmation of the Caa1 rating captures Gabon’s credit challenges, including institutional weaknesses, public finances vulnerable to the volatility in oil prices, and, as a result, some liquidity pressures, all of which signal a non-negligible risk of default. However, Gabon’s government debt burden, at an expected 70% of GDP by the end of 2020, does not indicate severe solvency issues – suggesting that, should there be a default, losses to investors would likely be small. Moreover, Moody’s expectation is that the IMF programme, while challenging to agree on, will ultimately be renewed, supporting the rating.

Gabon’s foreign and domestic currency bond and deposit ceilings are unchanged and remain at B1.

The rationale for the change in outlook to stable from positive
The key reason for changing the outlook to stable from positive reflects Moody’s view that previous early signs of improvements in governance, especially as regards Gabon’s payments management, are unlikely to be resilient to the current shock; and that liquidity pressure will not improve to the extent envisaged when changing the outlook to positive on the Caa1 rating in June 2019.

Gabon has implemented measures to improve the management of debt service since 2018 after it recorded large arrears to external creditors. These measures include the consolidation of all government deposits into a single treasury account held at the central bank, the dual oversight of the debt management unit by the Budget and Economic Ministries. The clearance of arrears to external creditors was a condition under its IMF programme, which Gabon satisfied by April 2019.

However, the measures introduced so far are unlikely to prevent the accumulation of new arrears on debt service at times of increased liquidity stress like now, nor do they improve the management of arrears to domestic goods and services providers. While the government has organized the independent audit of its domestic arrears towards providers, it has since launched its own Task Force to review all the outstanding claims and has put on hold any clearance until the Task Force delivers its conclusions.

In the meantime, should Gabon re-accumulate arrears to external creditors, negotiations over the renewal of its financing programme with the IMF (Extended Fund Facility), which ended on June 2020, will be more difficult and likely protracted. In that scenario, the anchor to the government’s fiscal consolidation that the programme provides and the broader access to funding it brings, including by boosting international investors’ confidence, will take time to materialize.

The rationale for the affirmation of Gabon’s Caa1 rating
The affirmation of the Caa1 rating reflects several credit challenges, including institutional weaknesses, the vulnerability of public finances to volatility in oil prices and, as a result, some liquidity pressures. Combined, these factors signal a non-negligible risk of default under Moody’s definition.

Gabon’s reliance on oil remains high as the oil sector contributes to nearly 40% of its government revenue and a third of its nominal GDP. Its fiscal and liquidity situation fluctuate alongside oil prices absent any stabilisers. At times of liquidity stress, the government can suddenly run arrears on debt service, as observed in the aftermath of the 2016 oil price shock.

However, while liquidity pressures and weak management underpin Gabon’s credit profile, insolvency risks are more limited given contained primary fiscal deficits and a relatively affordable cost of debt, suggesting that should there be a default, losses to investors would likely be small and consistent with a Caa1 rating. Moody’s projects that government debt will reach 70% of GDP by end of 2020 and will stabilise thereafter before reversing to its 2019 level by 2024. Debt affordability remains moderate with interest payments consuming 17% of government revenue in 2020, up from 12% in 2019.

Moody’s expects that the programme with the IMF will be renewed even though agreeing on the conditions and receiving the disbursements will likely be a lengthy process. The IMF last assessed Gabon’s debt as “sustainable”, indicating that a debt restructuring imposed as a condition for a programme is unlikely.

Finally, while the government’s refinancing wall remains a challenge, with $1.4 billion in Eurobond principal payments due over December 2022-December 2025, the government has a track-record of international market access including during periods of market turmoil when support from the IMF provides a policy anchor, such as in 2017 in the aftermath of the previous oil price shock.

Environmental, social, governance considerations
Gabon is exposed to environmental risks, in particular carbon transition risk, given the sovereign’s reliance on hydrocarbons as a source of revenue. A sustained fall in global demand for hydrocarbons that weighs on oil prices would severely hit Gabon’s fiscal strength, raising risks to debt sustainability. Volatile oil prices also contribute at times to sudden liquidity pressures that are difficult to manage. Gabon is moderately exposed to climate change risks. Its location exposes it to more frequent and severe droughts that can have a material negative impact on the agricultural sector which employs 24% of the country’s population.

Social risks are also part of Gabon’s credit profile: high-income disparity, notwithstanding relatively high-income levels compared to peers, and low voice and accountability contribute to social and political risk.

Gabon’s weak governance, reflected in low Worldwide Governance Indicators scores for instance, severely weighs on its credit profile. Control of corruption and public financial management represent particular challenges and poor public governance is a key driver of today’s rating action.

GDP per capita (PPP basis, US$): 16,273 (2019 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.8% (2019 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1% (2019 Actual)
Gen. Gov. Financial Balance/GDP: 2.2% (2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.3% (2019 Actual) (also known as External Balance)
External debt/GDP: [not available]
Economic resiliency: b3
Default history: No default events (on bonds or loans) have been recorded since 1983.

On 01 December 2020, a rating committee was called to discuss the rating of Gabon, Government of. The main points raised during the discussion were: The issuer’s institutions and governance strength, have materially decreased

Factors that could lead to an upgrade or downgrade of the ratings 
Positive rating pressure would likely relate to material improvements by the government in its treasury management that enhance its capacity to stay current of debt service, especially through oil price cycles. An elimination, even if phased, of arrears to domestic goods and services providers that is likely to persist and a budget back to close to balance for the foreseeable future would also support a positive rating action.

The rating would come under downward pressure if the likelihood of a default on private sector creditors increased, with losses likely to be in excess of what the current Caa1 rating already captures. This could happen if the government were increasingly unlikely to be able to refinance its outstanding Eurobonds, for instance in the absence of an IMF programme, and/or because of another oil price shock. Over the long term, any shock or policy that would put the debt burden on a sustained upward trajectory would likely lead to a rating downgrade too.