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 the Communaute Economique et Monetaire d’Afrique Centrale (CEMAC) .

Fitch has assigned Cameroon’s USD-denominated bonds maturing in November 2025 a rating of ‘B’, in line with the Long-term foreign currency IDR. The issue rating is sensitive to any changes in Cameroon’s Long-term foreign currency IDR.

KEY RATING DRIVERS

Cameroon’s ‘B’ ratings are constrained by low income per capita and structural weaknesses, including governance and political risks, while drawing support from macroeconomic stability and membership of the franc zone of the CEMAC. This assures currency convertibility and reduces foreign exchange liquidity risks.

Cameroon has continued to deliver robust growth with Fitch expecting real GDP to grow by around 5.5% over 2015 to 2017. Large public investments, including in electricity provision and basic infrastructure (roads, communications networks, ports, dams, and housing) will benefit the economy, alleviating some of the structural bottlenecks that weigh on growth potential.

The diversified economy has proven more resilient to shocks than its oil-producing peers. Oil accounts for less than 10% of GDP, but while oil production is currently rising, it is not a medium-term growth driver. Current investment and exploration, notably in the offshore Kribi/Campo oilfield, could indicate further potential growth in oil production.

Recurring and growing twin deficits and limited local market financing capacity are projected by Fitch to result in an increase in external non-concessional borrowing, weakening Cameroon’s relatively favourable external sector and public finance profiles vs. the ‘B’ median peer category. Fitch forecasts a rise in net external debt-to-GDP to 18.3% in 2015 and 30% by 2017 from 7% in 2014 (vs. a peer median of 18%).

Public finances are deteriorating, mainly due to a rise in government spending (partly reflecting an increase in investment and security spending) and a declining share of oil revenues (assuming a peak in production in 2015). A number of planned reform measures could improve the collection of non-oil revenue. Fitch projects a budget deficit at around 5.5% of GDP this year, rising to around 7.5% of GDP by 2017.

Earlier this year, an investment plan equivalent to 5.5% of GDP was put in place to boost growth by targeting new investments. The project pipeline includes infrastructure investments that are expected to have positive economic benefits. However, in Fitch’s opinion, the rationale for adding new projects (given delays in executing existing ones) is unclear.

The low government debt starting point of 22% of GDP in 2014 (less than half the ‘B’ rated peer median) affords Cameroon breathing space. Even with the projected rapid increase, by 2017 a debt-to-GDP ratio of almost 40% will still fare well relative to 52% projected for the peer median. However, given the rapid pace of debt accumulation, Cameroon’s rating strength relative to peers could quickly erode.

With the local market not deep enough to absorb the state’s large and growing financing needs, the government is increasingly reliant on borrowing from China (representing 68% of bilateral debt as of 2Q15) and issued its debut Eurobond in November. The USD750m bond was lower in size than previously expected by the market, and issued at a yield of 9.75% (relative to an external debt effective interest rate of 2.2% in 2014).

A potential shift in the debt profile, from low-cost and concessional to higher-cost at market terms, would weaken financing flexibility and debt sustainability. According to Fitch’s estimates, interest expenditure will more than double by 2017, although remaining low relative to some regional peers. Interest payments as a percentage of revenues are projected by Fitch to rise to 5.8% by 2017 from 2.4% in 2014 (vs. a ‘B’ median of 7.4%).

Fitch views public finance management as a key weakness, even compared with the ‘B’ rating category. Government arrears remain high and continue to artificially fund the deficit, raising the risk of further fiscal slippage or the accumulation of contingent liabilities. Part of the proceeds of the Eurobond issue will repay a bridge loan taken out by the government to repay arrears to state-owned oil company Sonara.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch’s assessment that while downside risks to the rating have increased, the upside and downside risks to the rating are broadly balanced.

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

– Further large budget slippages, which accelerate the accumulation of public debt.

– 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.

– 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.

The main 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.

– An increase in hydrocarbons production related to new discoveries coming on-stream, generating an additional source of income and reversing the trajectory of depleting oil reserves.

KEY ASSUMPTIONS

– Fitch does not expect the conflict with the Boko Haram terrorist group to be resolved soon, but at the same time it does not expect the tensions to escalate significantly. Security issues linked to the activity of the Boko Haram terrorist group remain confined to the north of the country.

– Fitch assumes that the eventual succession to President Biya, aged 82, will not result in a material escalation of instability.

– 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 USD60 per barrel in 2016, and USD70 per barrel in 2017.