Gabon’s IMF Deal to Ease Near-Term Debt Repayment Risks
An agreement with the International Monetary Fund, IMF, on a new Extended Fund Facility (EFF) should bolster Gabon’s ability to cover its external financing requirements and provide an anchor to policy, says Fitch Ratings in a statement.
In June, IMF staff and the Gabonese authorities reached a staff-level agreement on a three-year Program under the Extended Fund Facility (EFF) to anchor the government’s policy and reform efforts.
The funding agreement aimed at bolstering the country’s response to the COVID-19 pandemic and paving the way for strong, sustainable, and inclusive growth.
“The Gabonese economy was gradually recovering from the 2014 oil price shock when it was hit by the Covid-19 pandemic in early 2020. Decisive confinement measures have helped save lives, but the pandemic and the fall in oil prices have severely hit the economy, increasing unemployment and poverty.
“Real GDP contracted by an estimated 1.8 percent in 2020. With a weak economy and increased COVID-19 related spending, the fiscal deficit has widened, and public debt increased in 2020.
“Emergency financing from the IMF through the Rapid Financing Instrument (US$299.61 million) helped meet urgent balance of payment needs in 2020.
“Growth is expected to resume in 2021 but the pandemic has fragilized the economic outlook and generated sizable financing needs over the medium term”, IMF’s Boileau Loko, Mission Chief for Gabon said in a statement.
Until a new deal with multilateral lender, Gabon faces liquidity risks in the short term and debt sustainability has deteriorated, raising medium-term risks, the Ratings had warned in February.
Nonetheless, Fitch said execution risks remain, as demonstrated by the mixed record of reform implementation under the previous IMF programme.
The new agreement, which still needs to be approved by the IMF’s Executive Board, will span the next three years and reduce uncertainty about Gabon’s ability to access external funding.
Unusually – yet similarly to a recent announcement on a deal with Cameroon – the IMF did not disclose the size of the new facility.
Fitch assumes that it will be roughly similar to the previous arrangement, which ended in June 2020 and initially stood at about USD642 million, close to 4.2% of 2020 gross domestic products (GDP).
It forecasts broad compliance with IMF conditionality over the lifespan of the EFF, but Gabon’s performance under the previous IMF programme was mixed, highlighting execution risks.
Delays in meeting some targets relating to fiscal reforms and the accumulation of external arrears, affected disbursements under the previous programme. Early indications are that the conditionality attached to the new EFF will revolve around a further widening of the tax base, spending efficiency, and measures to reduce corruption.
“We estimate that gross fiscal funding needs will stand at 7.5% of GDP in 2021 and 8.1% in 2022. We project net new domestic financing to be at most 1% of GDP in 2021 and lower in 2022, given the banking sector’s level of exposure to the sovereign which is already high and the regional debt market’s limited absorption capacity”, Fitch said.
It see the nation’s gross external fiscal funding needs will stand at 3.8% of GDP in 2021 and 4.5% in 2022, a large portion of which will be covered by project loans.
IMF funding will probably not be sufficient to cover all of Gabon’s remaining external funding needs. The new programme could facilitate access to other bilateral and multilateral lending, but the country has a record of failing to obtain planned multilateral funding.
In 2020, Gabon was unable to obtain the disbursement of several budget support loans that were expected during the year, highlighting weaknesses in public financial management.
The government approved a revised 2021 budget shortly after the announcement of the new EFF. It includes measures to widen the tax base and eliminate more tax exemptions, in line with the IMF’s recommendations.
Tax revenues surged by 40% from 2017 to 2019 as a result of fiscal reforms, and Gabon posted a budget surplus of 0.8% of GDP in 2019.
The revised budget also includes a plan to issue a Eurobond of up to USD1 billion in 2021.
The ratings agency believes the proceeds are likely to be used primarily to refinance Eurobond maturities, saying it would alleviate the risk of associated liquidity stress.
“The outlook for the public finances has improved since we affirmed Gabon’s rating at ‘CCC’ in December 2020. We now expect the budget deficit to reach 2.1% in 2021 and 0.8% in 2022, against our earlier forecasts of 3.4% and 1.7%, respectively”, Fitch analysts concluded.
It said this is based on latest assumption of a Brent oil price of USD63 per barrel in 2021 and USD55 in 2022, and production levels of 185,000 barrels per day (bpd) in 2021 and 200,000 bpd in 2022.
The authorities project production of 205,000 bpd in 2021, but data for January-May suggest it will be difficult for Gabon to reach its target, even with an expected ramp-up in the second half of 2021.
Gabon’s IMF Deal to Ease Near-Term Debt Repayment Risks
