High Default Risk: Fitch Downgrades Gabon to ‘CCC+’
Fitch Ratings has downgraded Gabon’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC+’ from ‘B-‘, denoting a very high level of default risk relative to other issuers.
The global ratings agency explained that downgrade of Gabon’s creditworthiness reflects the country’s rising risk to its debt repayment, deteriorated public finance, expansionary fiscal spending, high financing need with limited funding options.
The downgrade to ‘CCC+’ reflects rising risks to debt repayment capacity, Fitch stated, adding that risks to Gabon’s ability to mobilize sufficient financing stem from weak financing flexibility, including tight financing conditions in the regional bond market, and higher expenditure planned by the transitional government.
Handling these liquidity pressures will be difficult in the context of large financing needs, including the USD605 million Eurobond repayment in 2025, the rating note explained.
It said Gabon has always prioritized the service of its Eurobonds, but it continues to accumulate external arrears on debt to official creditors, estimated at XAF165 billion at the end of May 2024.
Fitch stated that the country’s budget balance (cash basis) moved from a surplus of 1.1% of GDP in 2022 to an estimated deficit of 1.8% in 2023 – against a surplus of 2.0% reported by the authorities for 1H-2023.
The rating noted stated that government debt for 2023 is now estimated at 70.4% of GDP, compared with our previous estimate of 56.0% and above the 70% of GDP regional ceiling.
However, Fitch said the upward revision reflects the inclusion of supplier arrears and other liabilities under the government’s efforts to improve transparency.
Weak data quality and potential underreporting of spending remain a concern, given past weaknesses in public financial management and uncertainty about the new administration’s ability to make improvements.
“We project public debt to rise to around 79% of GDP in 2026, reflecting higher budget deficits and moderate GDP growth. We project Gabon’s fiscal deficit will widen to 3.9% of GDP in 2024”.
The 2024 budget foresees limited revenue raising measures, except continued improvements in tax administration, including digitalisation.
The government has made several spending announcements to address Gabon’s significant social and infrastructure needs. It plans to expand recruitment in the public sector, clear pensions arrears and add new tax exemptions, without a concrete fiscal adjustment plan.
“We expect the fiscal deficit to increase to 5.3% of GDP in 2025 and 5.8% in 2026, as oil revenues are expected to decrease due to declining oil prices and production from 2025. Elections scheduled in 2025 could make fiscal consolidation measures (including the removal of tax exemptions) less likely”.
The cost and timing of announced initiatives such as setting up a national airline and a development bank remain unknown, although the authorities anticipate no budgetary impact. However, financing constraints could lead to underspending. In addition, the record of extra-budgetary spending adds uncertainties to the fiscal trajectory.
Gabon has large financing needs in 2025 and 2026, averaging 13.2% of GDP, including the Eurobond repayment.
Financing flexibility is limited, given the elevated cost of international market issuance and tight financing conditions in the regional bond market. Furthermore, the government does not foresee any budget support from official creditors in the medium term.
As prospects for a refinancing operation are still uncertain, Fitch estimated that Gabon could face a financing gap in 2025 that could potentially be closed by a drawdown of government deposits, estimated at 2.8% of GDP in January 2024.
However, these deposits have not prevented the past accumulation of debt arrears. Alternatively, the government could turn to funding negotiated with commercial banks or further accumulation of non-Eurobond external arrears, although this could impact access to project financing from official creditors.
Political risks, related to the military coup in August 2023, have receded, with the formation of the transitional government, progress on the implementation of the transitional agenda and the plan to hold elections in August 2025.
The government has organised a national dialogue and plans a referendum at end-2024 to approve a new constitution. However, social tensions could crystallise around the elections owing to high social expectations and Gabon’s record of weak institutional capacity, leading to renewed political instability.
Gabon’s ‘CCC+’ IDRs balance higher GDP per capita than peers against a dependence on oil revenues – 50% of total revenue in 2022 and 2023- and a weak public finance management record.
After decelerating to 2.4% in 2023, analysts project growth will increase to 2.8% in 2024 as mining and wood industries recover and oil production increases.
“We project growth to average 2.6% in 2025-2026, driven by non-oil sectors including infrastructure projects, development of iron production and growth in timber and manganese industries”.
Oil production is projected to decline from 2025, Fitch said in the rating note. Growth in non-oil activity remains constrained by transport infrastructure and the weak business environment.
Fitch analysts projected the current account surplus will reduce from an estimated 4.4% of GDP in 2023 to 3.6% in 2024 and 1.4% of GDP in 2026 as infrastructure projects will weigh on the import bill.
Oil receipts will decline from 2025 as oil prices moderate, but we expect non-oil exports will increase, notably with mining boosting export receipts.
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