Fitch Ratings | Fitch Ratings – Hong Kong – 29 Oct 2020: Fitch Ratings has affirmed Cameroon’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B’ with a Negative Outlook.
KEY RATING DRIVERS
Cameroon’s ‘B’ ratings balance low GDP per capita and weak governance indicators against moderate government debt and low inflation supported by membership of the Central African Economic and Monetary Community (CEMAC). The Negative Outlook reflects Fitch’s expectation that the impact of the pandemic will increase budget deficits and government debt, raising medium-term debt service and financing risks.
Fitch expects GDP to contract by 3.2% in 2020 after 3.7% growth in 2019. Plummeting demand for Cameroon’s key exports and disruptions due to containment measures, will hit the services, agricultural and manufacturing sectors while the fall in oil prices, which we forecast to average 41USD/barrel in 2020, will exacerbate the weak outlook for the hydrocarbon sector (5% of GDP). In line with improved global prospects, we project GDP growth to recover to 3.0% in 2021 and 3.3% in 2022, constrained by scarce financing and credit retrenchments.
We forecast the fiscal deficit on a cash basis to widen to 5.3% of GDP in 2020 from 4.3% in 2019. The deterioration is moderate, despite the strong hit to tax collection and oil revenues (16% of government revenues), as tight financing conditions will constrain the government’s pandemic-related spending and lead to expenditure cuts to contain the deficit while lower oil prices will generate savings related to administrated fuel prices.
Cameroon will meet its fiscal financing needs in 2020, estimated at 8.5% of GDP, through a mix of official creditor support, including the debt service suspension initiative (DSSI) of the G20 (0.5% of GDP; 26% of 2020 debt service), and domestic issuances. We expect the government to cut capital expenditure if financing needs increase beyond current estimates or if delayed official creditor disbursements exacerbated financing constraints.
Under our baseline, Cameroon’s return to fiscal consolidation will be gradual, with the fiscal deficit on a cash basis narrowing to 4.4% of GDP in 2021 and 4.1% of GDP in 2022. Persisting economic disruptions will slow down the return to pre-pandemic tax collection levels, while the continued decline in oil production will partly offset the effect of higher oil prices on oil receipts and coronavirus-related spending may continue to push up overall expenditure in 2021.
Given scarce financing options and uncertainty regarding future access to international capital markets, we expect Cameroon to renew its medium-term IMF programme in 2021. It should catalyse additional official creditor support, easing financing conditions over the medium term. We assume the authorities will request an extension of the DSSI in 2021, but it would only slightly alleviate financing needs (6.8% of GDP) even if it covers the whole year (0.4% of GDP).
Risks are tilted to the downside as a more prolonged or sharper economic downturn could lower fiscal revenues beyond our current forecast in 2021. In addition, the magnitude of official creditor support remains uncertain and there are implementation risks to the IMF programme, especially as Cameroon’s past performance has been mixed. However, Eurobond interest payments are small (0.2% of GDP per year) in 2021 and 2022.
The pandemic shock has weakened the medium-term fiscal outlook as Cameroon will face higher maturities. Bilateral and domestic debt service will increase in 2022 while the Eurobond (USD750 million) amortisation is coming due in three instalments over 2023-2025 (less than 1% of GDP per year). There is uncertainty over the amount saved in an escrow account to cushion principal repayments and the future appetite from international capital markets for refinancing.
We project general government debt to increase to 51% of GDP in 2022, from 42% of GDP in 2019, although it will remain below the current ‘B’ median forecast of 71% of GDP in 2022. Fitch’s debt ratio includes the debt of the public refinery SONARA (4.2% of GDP in 2020), which the government has serviced in 2020 although there is no explicit state guarantee. Contingent liabilities related to other SOE debt is estimated at 8.5% of GDP and public-private-partnerships at 5.4% of GDP.
Fitch forecasts the current account deficit to widen to 5.9% of GDP in 2020 from 4.4% in 2019, and to then narrow to 5.0% in 2021 and 4.5% in 2022, the bulk of which will be funded by government borrowing. Access to CEMAC’s pooled stock of international reserves (USD7.6 billion end-August 2020) and to the convertibility guarantee provided by France somewhat mitigates external liquidity and short-term devaluation risks. However, the Central African CFA Franc’s resilience in the medium term hinges on pursuit of fiscal consolidation across the monetary union.
Political instability weighs on the rating. Fitch does not expect a near-term peaceful resolution of the crisis in the Anglophone region as negotiations have made little progress thus far. The conflict, together with ongoing terrorist attacks in the far North, will continue to disrupt the economy and put pressure on security spending. Risks of social unrest ahead of the December regional elections are exacerbated by deeply entrenched political divisions, which could also compound the risk of a disorderly transition of power from the 87-year-old president, Paul Biya.
Risks arising from the banking sector are mitigated by its small size (total assets of 27% of GDP in 2019). Asset quality is likely to further deteriorate due to the economic downturn and the sector’s exposure to the SONARA, whose financial difficulties have been exacerbated since a fire damaged its facilities in 2019. Weaknesses in the banking sector have weighed on credit growth this year, and credit retrenchments are likely to persist over the projection horizon.
ESG – Governance: Cameroon has an ESG Relevance Score of ‘5’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. These scores reflect the high weight that World Bank Governance Indicators (WBGI) has in our proprietary Sovereign Rating Model. Cameroon has a low WBGI ranking at the 14th percentile, reflecting institutional weakness, political instability and security tensions in the Anglophone regions and the Far North.
The main factors that could, individually or collectively, lead to negative rating action/downgrade:
– Public and External Finances: Increasing fiscal and external financing stress, for example as a result of a failure to reduce the fiscal deficit or developments that jeopardise access to financing
-Structural Features: Heightened political instability that significantly affects public finances or the economy.
The main factors that could, individually or collectively, lead to positive rating action/upgrade:
– Public and External Finances: Confidence that sufficient fiscal and external financing can be secured to mitigate the risks posed by an increase in government debt maturities
– Public Finances: Putting general government debt/GDP on a downward trajectory over the medium term, through a credible post-coronavirus-shock fiscal consolidation or enhanced growth prospects.
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch’s proprietary SRM assigns Cameroon a score equivalent to a rating of ‘CCC+’ on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:
Structural Features: +2 notches to adjust for the negative impact on the SRM of Cameroon’s take-up of the DSSI, which prompted a reset of the ‘years since default or restructuring event’ variable (which can pertain both to official and commercial debt). In this case we judged that the effect on the model output exaggerated the signal of a reduced capacity and willingness to service debt to private-sector creditors.
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579].
Fitch projects global Brent prices to average USD41/barrel in 2020, USD45/barrel in 2021 and USD55/barrel in 2022, in line with the baseline assumption set out in our Global Economic Outlook in September 2020.
SOURCES OF INFORMATION
The principal sources of information used in the analysis are described in the Applicable Criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Cameroon has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.
Cameroon has an ESG Relevance Score of 5 for Rule of Law, Institutional and Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in the SRM and are therefore highly relevant to the rating and a key rating driver with a high weight.
Cameroon has an ESG Relevance Score of 4 for Human Rights and Political Freedom as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver.
Cameroon has an ESG Relevance Score of 4 for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver, as for all sovereigns.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.The full list of rating actions is as follows:
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Additional information is available on www.fitchratings.com
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Country Ceiling Model, v1.7.1 (1)
- Debt Dynamics Model, v1.2.0 (1)
- Macro-Prudential Indicator Model, v1.5.0 (1)
- Sovereign Rating Model, v3.12.1 (1)