Fitch affirms Cameroon at 'B'; outlook stable

Fitch Ratings has affirmed Cameroon's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B'. The Outlooks are Stable. The Short-term foreign currency IDR has been affirmed at 'B'.

Fitch has also affirmed the Country Ceiling for Cameroon at 'BBB-', in line with the Country Ceiling for Communaute Economique et Monetaire d'Afrique Centrale (CEMAC) at 'BBB-'.

KEY RATING DRIVERS

The affirmation of Cameroon's sovereign ratings reflects the following key rating drivers: GDP growth was robust in 2014, and is expected to average above 5% over the coming years. Domestic demand, boosted by public investment, will remain the main driver.

The fall in oil prices will outweigh the projected increase in production, weighing on fiscal and external receipts. Manufacturing output is likely to benefit from the newly built Kribi power plant, although weak links to the broader economy will limit its spill-over effects.

The government is committed to continuing its ambitious investment programme, emphasising infrastructure development. Although some projects have suffered from execution issues, the programme is likely to resolve some infrastructure bottlenecks and support the development of the private sector.

However, GDP growth will remain constrained by a weak business environment and lack of skilled labour. The fiscal deficit widened sharply in 2014, to about 5.6% of GDP, and is expected to rise to above 6% in 2015-16.

Despite growth in non-oil tax collection in 2014, the decline in oil prices will weigh on public revenue, as about a quarter of public revenue is derived from oil. The non-oil tax base is narrow compared with rating peers, and the non-oil deficit will remain wide in the coming years.

The government's investment programme will continue to represent about 40% of government spending over the coming years, while lower oil prices will slightly lessen the fiscal impact of fuel subsidies. Fitch views public finance management as a major weakness.

Government arrears, notably to public companies, remain high and continue to artificially fund the deficit. This could put pressure on tax collection in 2015, as payments due to public enterprises are in many instances exchanged against tax cancellations.

Public debt is forecast to rise to above 30% of GDP by 2016, from about 20% in 2013. The government's investment programme will push public debt to nearly 40% of GDP by 2019, posing risks to fiscal sustainability.

A growing share of public debt is being financed by local issuance, but the market is unlikely to be deep enough to absorb the government's large fiscal demands in the short to medium term, threatening liquidity risks, execution risk and crowding out.

External debt will also grow and become less concessional, raising debt service costs and limiting financing flexibility. The current account deficit was above 4% of GDP in 2014 and is expected to grow to nearly 5% by 2016.

This is mainly due to investment-linked import growth and the decline in oil prices. Foreign exchange reserves stood at a comfortable level in 2014, but will continue their gradual decline.

Security issues are growing in the north of the country due to the activity of the Boko Haram terrorist group, based in neighbouring Nigeria. Although Boko Haram does not appear to have a territorial agenda in Cameroon, it is proving disruptive to tourism and dents business and investor confidence.

The eventual succession to President Biya, aged 82, is a source of political risk. The immediate transition issue has been resolved with the 2013 senatorial elections, as the President of the Senate will assume power in the transition period.

However, the succession to President Biya could break the balance of power between the different religious, ethnic and linguistic groups, in particular between the north (Muslim) and the south (Christian), in a context of rising insecurity in the north. Data quality is weak and constrains the ratings.

Fiscal and economic management is hampered by the weak quality and timeliness of balance of payment and fiscal data. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced.

The main risk factors that, individually or collectively, could trigger negative rating action are:

- Further large budget slippages or a loosening of the fiscal stance, which accelerates the accumulation of public debt.

- A slowdown in GDP growth that would worsen debt dynamics and widen the gap between GDP growth and per capita incomes compared with rating peers.

- A widening of the current account deficit, leading to growing external indebtedness.

- Political events triggered at the time of the succession to President Biya or an intensification of Boko Haram terrorist activity in the north of the country.

The main risk factors that, individually or collectively, could trigger positive rating action are:

- Genuine efforts by the government to improve the management of public finances, leading to a reduction in arrears to public enterprises and state suppliers, and an improvement in debt dynamics.

- Effective measures to improve the business climate and growth. KEY ASSUMPTIONS - Fitch assumes no break-up of the CEMAC monetary arrangement.

- Fitch's current assumption for Cameroon's medium-term growth is 5.5%.

- Fitch assumes that the oil price (Brent) will be USD100 per barrel in 2014, USD83 per barrel in 2015, and USD90 per barrel in 2016.

- Fitch does not expect the tensions with Boko Haram to escalate to significantly disruptive levels.