Fitch Ratings reviews CEMAC’s progress

Looking in more depth at the Central African Economic and Monetary Community (CEMAC), a report from Fitch Ratings suggests there will be no breakup of the currency zone or devaluation of the CFA franc against the euro, thanks to strengthening of its external buffers in 2017. But, Fitch warns, the region remains vulnerable to any renewed decline in oil prices, while fiscal adjustment to the commodity price shock is still challenging. A new oil price shock or further subdued growth would dampen fiscal receipts and hinder consolidation. Oil prices remained low in 2017 compared to historical averages, keeping growth in the zone weak at an estimated 0.5% according to the International Monetary Fund (IMF). This led to a strong underperformance of fiscal revenues. Fiscal adjustment could also be hampered by political bottlenecks, warns Fitch. Parliamentary and presidential elections are scheduled this year in Cameroon, against a background of social unrest in the country’s English-speaking region. In Gabon, parliamentary elections and a possible resumption of civil service strikes could lead to fiscal slippage and delay reform implementation, although political dialogue via the national consultation process in 2017 has bolstered support for the current economic programme, and recent constitutional reform appears to reinforce the power of the president to enact adjustment measures. In Congo, the crisis in the Pool region has taken a toll on economic activity. Fitch also views public finance management as weak. Cameroon has repeatedly had recourse to off-budget spending, notably through the national oil company, and ex-post budget appropriation. Gabon’s accumulated external and domestic arrears reflect liquidity pressures in the wake of rising financing needs and rapidly declining buffers. Congo’s poor data transparency was highlighted by the revelation of previously undisclosed liabilities in October 2017, which led the IMF to raise its estimate of general government debt to 110% of GDP, from 77%. The government has defaulted twice on its 2029 dollar notes, most recently in June 2017 when payments were temporarily frozen following legal action by a former contractor. The IMF estimates external financing needs at $7.2bn from 2017-2020 for the four CEMAC countries with IMF programmes, assuming expected fiscal adjustments are made. The IMF is set to cover 25% of these financing needs, but only part of the rest would be covered by other official-sector external creditors. Discussions on possible IMF financial support for Congo are conditional on measures to restore debt sustainability. Last October, Congo’s Finance Ministry said the government will “begin discussions with its primary lenders with the objective of refinancing or re-profiling its debt”, which may refer to rescheduling some loan maturities. Congo is also seeking to renegotiate debt owed to commodity traders. Some regional financial sector reforms have been postponed or amended to avoid exacerbating liquidity constraints, such as the increase in risk weights on sovereign securities. “The stabilisation of external buffers since mid-2017 underscores our assumption that there will be no breakup of the CEMAC monetary arrangement,” says Fitch, “and no devaluation of the CFA franc against the euro. “Nonetheless, the risks associated with the oil price shock and subsequent adjustment challenges are reflected in Fitch-rated CEMAC member countries’ deeply sub-investment-grade sovereign ratings.” Congo’s CC sovereign rating indicates a very high level of credit risk, consistent with the IMF’s view that public debt is unsustainable. The Fitch downgrade of Gabon to B last October reflected its sharp external and fiscal deterioration following the oil price shock, and the negative outlook reflects risks to the baseline scenario, including risks of non-compliance with the IMF programme. (On 6 April, Fitch affirmed Gabon’s long-term foreign currency issuer default rating at B with a negative outlook.) Cameroon’s B/Stable sovereign rating reflects resilient growth and the role of the IMF programme in easing liquidity constraints, against weak governance and rising public debt.

Fitch Ratings reviews CEMAC’s progress

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