Moody’s Downgrades Gabon’s Ratings over Fiscal, Liquidity Risks
Moody’s Ratings has downgraded the Government of Gabon’s local and foreign-currency long-term issuer and foreign-currency senior unsecured debt ratings to Caa2 from Caa1 and changed the outlook to stable from negative.
The global rating agency said the downgrade to Caa2 reflects a marked deterioration in Gabon’s fiscal strength and heightened liquidity risks, driven by a weaker fiscal position than originally reported and an expansionary fiscal policy stance in the wake of the August 2023 military intervention.
New spending pressures have arisen in a number of areas, as the transitional government seeks to respond to pent-up social and investment demands, the rating note stated. Moody’s said larger government financing needs will exacerbate liquidity pressures against a backdrop of relatively constrained financing options, increasing the risk of losses to private sector creditors in the coming years.
The rating noted explained that the stable outlook reflects Moody’s view that upside and downside risks to Gabon’s credit profile are balanced at the Caa2 level. Also, Moody’s stated that the impetus given by the transitional government towards greater fiscal data transparency and the management of public finances could, if sustained, strengthen Gabon’s weak governance, a longstanding credit constraint.
On the downside, the global rating agency said fiscal and liquidity pressures could increase further in the absence of an eventual policy adjustment, further increasing the probability of default beyond what is consistent with a Caa2 rating. “Gabon’s local and foreign currency country ceilings were lowered to B2 and Caa1 from B1 and B3, respectively.
“The local currency country ceiling is three notches above the sovereign rating to reflect political risk for locally domiciled entities and transactions but also the country’s membership of the Central African Economic and Monetary Union (CEMAC), which mitigates the risks associated with Gabon’s institutional and governance challenges.”.
According to the rating note, the country’s foreign currency ceiling maintains a two-notch gap to the local currency ceiling. This reflects Gabon’s weak policy effectiveness and the CEMAC’s external vulnerability to periods of lower oil prices, while recognising reduced risks due to the French Treasury guarantee of the peg between the CFA franc and the euro.
Reason for downgrade
Moody’s Rating said recent fiscal data revisions going back to 2022 have revealed significant under-reporting of government spending in the run-up to the August 2023 election. The rating firm said this reflects corrected fiscal accounts after the new transitional government uncovered and brought onboard previously unrecorded extra-budgetary spending.
The latter was financed in large part through domestic arrears, which are estimated to have reached close to 12% of gross domestic product (GDP) in 2023, mainly in the form of float and arrears to suppliers. Efforts by the authorities to establish a full inventory of domestic arrears remain ongoing.
Moody’s said the revised data points to a weaker fiscal position. The debt burden – including T-bills, arrears and legal debt – reached an estimated 70.5% of GDP at the end of 2023—around 14 percentage points of GDP higher than Moody’s projected at the time of the last rating action in September 2023 under previously available fiscal data.
“Moreover, fiscal policy will remain expansionary, reflecting spending pressures in a number of areas as the transitional government seeks to respond to pent-up social and investment demands and popular expectations.
“The 2024 budget includes plans for a 12% nominal increase in the public sector wage bill, new transfers and subsidies outlays, and a 67% rise in public investment.
“Capacity and financing constraints in executing the envisaged additional spending are likely, and government revenue will continue to benefit from generally supportive oil prices and the intensification of previous efforts to strengthen non-oil revenue collection by limiting tax exemptions and improving tax and customs administrations.
“Still, Moody’s projects the budget deficit to widen sharply, reaching 3.6% of GDP this year and 5.1% of GDP in 2025 from an estimated 1.8% of GDP in 2023”.
The rating note reads that Gabon’s debt burden will reach close to 78% of GDP by the end of 2025 and continue to increase over the medium term in the absence of policy adjustments to its highest level in over two decades.
Beyond larger budgetary deficit financing needs, Moody’s stated that ongoing efforts by the authorities to clear arrears – including XAF123 billion in outstanding external debt arrears at the end of 2023, will also add to financing requirements.
Moody’s estimates gross financing requirements to be in the range of 13%–18% of GDP in 2024 and 2025.
Analysts noted that larger government financing needs will exacerbate liquidity pressures against a backdrop of relatively constrained financing options, resulting in a funding gap in Moody’s estimate and increasing the risk of losses to private sector creditors in the coming years.
A narrow financing base heightens refinancing risks ahead of a $605 million Eurobond amortisation in June 2025, according to the rating note. It also exacerbates the risk of a further accumulation of arrears to both external and domestic creditors, a recurrent credit challenge for Gabon, Moody’s stated.
Gabon’s has not been finding it easy to get financial support from the international community in the wake of the military intervention, forcing increased reliance on the shallow CEMAC regional capital market for financing.
The 2024 budget authorises a potential Eurobond issuance, and Gabon has a track record of international market access and refinancing operations, including during past periods of market turmoil when support from the IMF provided a policy anchor.
However, continued tight global financial conditions are likely to make market access challenging, and Moody’s does not factor in a new IMF programme into its baseline, after the previous arrangement effectively lapsed in 2022 with only two reviews completed.
Stable Outlook
The stable outlook reflects Moody’s view that upside and downside risks to Gabon’s credit profile are balanced at the Caa2 level, Moody’s said in in the rating note. On the upside, analysts explained that the impetus given by the transitional government towards greater fiscal data transparency.
This, alongside ongoing efforts towards the implementation of a Treasury Single Account and increased digitalisation, could, if sustained, correct longstanding public financial management weaknesses and strengthen Moody’s low assessment of Gabon’s institutions and governance strength, a material and longstanding credit constraint.
On the downside, fiscal and liquidity pressures could increase further in the absence of policy adjustments, further increasing the probability of default beyond what is consistent with a Caa2 rating. Moody’s said elevated social expectations and the ongoing political transition increase the risk of fiscal slippages and risk weighing on the government’s ability to embark on an eventual correction of the fiscal position and alleviate liquidity stress.
The absence of a medium-term budget framework limits visibility over the future fiscal trajectory, the global rating agency stated.
It also noted that that the ongoing revenue mobilisation efforts could surprise on the upside, as indicated by relatively strong tax and customs revenue outturns to date. However, Gabon’s fiscal reliance on the hydrocarbon sector – with around 40% to 50% of revenue drawn from oil on average since 2020 – exposes the sovereign to oil price volatility.
Policy initiatives announced outside of the 2024 budget could also have eventual material, but as yet uncertain, fiscal implications, the rating note added. These include the intended acquisition of Assala Energy – the second-largest oil company in Gabon – by the government oil company GOC, the creation of a national airline and a new national development bank, and the construction of a new administrative centre.
“The risk of sanctions has receded, and the authorities have adhered to date to a timeline for a transition to a civilian rule, outlining steps towards a presidential election to be indicatively held by August 2025.
“A referendum on the adoption of a new constitution would be held by the end of 2024, and a national dialogue concluded in April with a range of recommendations to redefine “the country’s institutions.
“Still, the dates of the transition remain subject to potential revision. Sustained progress towards a return to civilian rule is likely to remain a factor in regard to ensuring renewed support from multilateral and official creditors, key to limiting dependence on the CEMAC regional market for financing”, Moody’s said in the rating note. #Moody’s Downgrades Gabon’s Ratings over Fiscal, Liquidity Risks
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