Fitch Downgrades Gabon Ratings to Junk
Fitch Ratings has downgraded Gabon’s Long-Term Foreign-Currency (LT FC) Issuer Default Rating (IDR) to ‘CCC’ from ‘CCC+, reflecting the country’s heightened liquidity strain, tight local debt market while arrears constrained its official external financing muscle.,
In the rating note, Fitch noted that Gabon has limited regional debt market access; a dearth of large official creditor financing and high external amortisations have resulted in severe strains on domestic and external government liquidity and rising arrears to suppliers and official creditors.
Appetite for government debt on the CEMAC regional debt market weakened substantially, particularly in the second half of 2024, although Gabon raised nearly 2% of GDP net of amortisations, helped by a syndicated subscription by Gabonese banks to a Gabonese bond in July 2024.
Analysts noted that the market tightness was exacerbated by missed payments and what Fitch classified as a distressed debt exchange by the Republic of Congo (CCC+), another CEMAC member.
Liquidity pressures are apparent in the recent accumulation of arrears, Fitch said. Between January and November 2024, the authorities’ arrears to official creditors – mostly to bilateral lenders, but also a small amount to multilaterals, including the World Bank- increased by 0.9% of GDP.
Analysts are of the view that these external arrears have undermined access to significant new official sector financing. Domestic arrears to suppliers also rose – Fitch analysts estimate new domestic arrears to suppliers at close to 1.5% of GDP in 2024.
“We expect the authorities to request an IMF programme during 2025, but the IMF is not expected to open negotiations before the presidential elections, currently planned for April 2025.
“Our base case assumes that an IMF agreement, including an initial disbursement, will be in place in 2025, providing some external funding, but risks to this scenario are high as a programme would likely require drastic and unpopular policy changes in a still volatile political environment following the regime transition in mid-2023”, Fitch stated.
Gabon faces external debt maturities of 3.7% of GDP in 2025 and 2.3% in 2026. Domestic amortisation will stand at 5.3% of GDP in 2025 and 6.3% in 2026. Gabon’s ‘CCC’ IDRs also reflect the following KRDs:
According to the rating note, Gabon’s ratings reflect higher GDP per capita than peers, counterbalanced by the high reliance on volatile hydrocarbon revenue and persistent public finance management deficiencies.
The country’s fiscal stance has loosened significantly since the regime change in August 2023, driven by the new leadership’s focus on social demands for greater government spending.
This has manifested in hiring more civil servants, which analysts assume will increase the wage bill by 7% per year in both 2024 and 2025. In addition, Fitch analysts estimate that capital spending increased by 40% in 2024.
“We expect the budget balance to turn to a deficit of 0.2% of GDP in 2024 on a cash basis, from a surplus of 2.5% in 2023 when spending increases were moderate and revenue growth was strong.
“Also, in 2024, the government accumulated significant payment arrears, and we estimate the deficit, on a commitment basis, is 1.7% of GDP versus a 1.8% surplus in 2023. We estimate that the non-oil primary balance to non-oil GDP deteriorated to 13.7% of GDP in 2024 from 10.3% in 2023 and 8.5% in 2021”, Fitch said.
Fitch base case is that an IMF programme will be put in place in 2025, analysts expect gains from fiscal moderation to be limited. Non-oil revenue gains and renewed spending controls will be offset by lower oil revenue and social spending pressures.
Recent strong public sector hiring will have its full-year impact in 2025. Interest costs will continue to rise along with the nominal value of debt, and we project only a small drop in subsidies. “We expect capital spending to be pared back due to funding constraints, but to underpin only a small contraction in spending”.
Fitch analysts project tax revenue to continue to rise, helped, in particular, by the introduction of mandatory digital invoicing, but gains will be more than offset by lower oil revenue due to weaker oil prices (USD70/barrel in 2025 and USD65/barrel in 2026).
“We project budget deficits of 1.2% of GDP in 2025 and 1.5% in 2026 on a cash basis, and 2.4% and 2.2%, respectively, before accounting for the accumulation of new arrears”.
Analysts estimate debt fell to 67% in 2024 from 71% in 2023, on external debt repayments and strong nominal GDP growth, but expect a renewed rise in 2025 (71%) and 2026 (72%) due to lower nominal oil GDP and wider budget deficits.
In November 2024, the government used proceeds of regional debt issuance to buy back USD290 million of a Eurobond coming due in June 2025, with USD315 million remaining.
Gabon has a poor record of public finance management, but the authorities have a credible record of prioritising Eurobond debt service even in challenging times, including under the transitional government in 2024. In our view, the upcoming maturity is manageable, although it may contribute to a further accumulation of arrears.
CEMAC pooled foreign-exchange (FX) reserves were 4.4 months of the region’s imports in September 2024. As a CEMAC member, Gabon has access to these reserves, but the regional central bank is cautious to manage the use of its reserves to protect the peg to the euro, which remains critical to macro-financial stability. #Fitch Downgrades Gabon Ratings to Junk Interbank Rates Slow as Remita, FAAC Credits Boost Liquidity
