Fitch Upgrades Gabon Ratings as Uncertainties Ease

Fitch Ratings has affirmed Gabon’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-‘, and removed it from Rating Watch Negative (RWN) as political uncertainties in the country eased. Assigning the country outlook as stable, Fitch said in the rating note that removing the RWN on Gabon’s IDR reflects an improvement in key rating drivers and their relative weights.

According to Fitch Ratings note, the removal from RWN reflects easing of political uncertainties following the formation of a transitional government including people from the civil society, members of the opposition and the former Bongo administration. The regime has launched a plan to organise a national dialogue to draft a new constitution and electoral code to hold free and fair elections, scheduled for August 2025.

However, the global rating firm is of the view that the return to constitutional order could be delayed given the ambitious agenda short timeframe, and Gabon’s weak institutional capacity, according to the note. It is noted that up till now, no economic or financial sanctions were imposed on Gabon, which managed its Eurobond payments.

Although Gabon remained suspended from the Economic Community of Central African State, official creditors resumed relations with the country. As per Fitch note, the country’s ‘B-‘ IDR reflects higher GDP per capita than peers and improved fiscal metrics against political uncertainty, high oil dependence and a record of weak public finance management (PFM) that have resulted in continued accumulation of arrears on external debt.

The stable outlook reflects Fitch’s expectation that high oil prices and enhanced mobilisation of non-oil revenues will support Gabon’s fiscal position allowing debt/GDP to decline. Gabon’s cash surplus improved to an estimated 2.3% of GDP in 2023 from 1.1% in 2022. The 2024 Draft Finance Law (PLF24) foresees higher revenue (+15.7%) and higher expenditure (+17%) compared with the 2023 Finance Law.

Fitch forecasts the fiscal surplus to decline to 1% of GDP. In addition to high public investment, the ongoing political transition entails supplementary spending pressures in public wages, fuel subsidies and interest. The potential acquisition of Assala’s oil assets will put further pressure on public spending. This will be partly offset by high oil revenue, continued non-oil revenue mobilisation and tax exemption reduction.

“We project the budget surplus will continue to fall to 0.3% of GDP in 2025, as oil revenue declines due to lower oil prices and production. We expect capex to remain high to support infrastructure development.

“2025 election increases the risk of fiscal slippages, as the government could increase security spending and subsidies to maintain social stability. Moreover, the lack of a medium-term budget strategy further raises uncertainty for the fiscal trajectory”.

Gabon’s government oil revenue is expected to represent 38.8%, of total revenue in 2024 as output increases owing to high prices incentivising investments and the optimisation of mature fields. Oil revenue will continue to drive Gabon’s fiscal performance in the medium term, as the slow pace of tax expenditure reduction dampens the weight of non-oil sectors on budget revenue.

The transition government cleared XAF381.4 billion or 2.8% of GDP arrears between September and November 2023. However, it continued to accumulate external arrears, estimated at XAF99 billion (0.7%) at the end of the financial year 2023.

Fitch stated that the country’s weakness in cash management highlights persistent coordination difficulties between the treasury management and the debt office, thus, constraining the ratings.

In 2023, Gabon failed to receive disbursements from the IMF and received only part of the funding budgeted from the African Development Bank (AfDB) and the French Development Agency.

Issuances on the regional market reached XAF585 billion in 2023, more than planned, which made up part of the shortfall in external funding. Although the AfDB and the World Bank resumed cooperation with Gabon, the PLF24 does not include budget support from them. Gabon will rely more on the regional market, Fitch said.

Despite recurrent external debt arrears, Gabon has prioritised the service of its Eurobonds. In August 2023, Gabon completed a debt-for-nature swap operation, offering financing relief of USD95 million for the USD700 million Eurobond maturing in 2025 and USD405 million for the February and November 2031 notes.

The PLF24 plans an international issuance of 3.3% of GDP, to refinance the 2025 notes. However, access to international markets might be constrained. “Our baseline assumptions of budget surpluses and resilient growth point to government debt falling from 56.0% in 2023 to 52.2% of GDP in 2025. However, a large fall in oil prices could change the trajectory. We forecast a break-even oil price of about USD65/b in 2025”.

Meanwhile, Fitch projected a slowdown in real GDP growth to 2.3% after 3.0% in 2022. The rating note explained that the country’s oil production increased 3.7% but train derailments slowed non-oil sectors production and exports, notably manganese and timber.

“We forecast growth will remain resilient, at 2.5% and 2.8% in 2024 and 2025, respectively, supported by the temporary increase in oil output, the recovery of mining and forestry industries, as well as dynamism in construction”.

Gabon’s medium-term growth will depend on economic diversification, focusing on export-oriented non-oil sectors, Fitch said in the note. It explained that growth will also be driven by investment in infrastructure and the development of special economic zones.

Fitch Ratings believes that a slowdown in Gabon’s partners, notably China, commodity price volatility, and poor infrastructure networks are downside risks to growth. Uncertainties related to the political transition and 2025 elections could also affect growth.

Analysts estimate Gabon’s current account balance shifted from a surplus of 5.5% in 2022 to a deficit of 2.5% in 2023 owing to higher imports and reduced non-oil exports slowdown due to railway traffic stoppage.

“We project current account deficits averaging 4.7 % in 2024 and 2025, as infrastructure projects will weigh on the import bill. Although oil receipts will decline as oil prices moderate, we expect non-oil exports will recover”, Fitch Ratings said in its latest review.