Fitch Ratings – Hong Kong – 12 Apr 2021: Fitch Ratings has revised the Outlook on Cameroon’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at ‘B’.
KEY RATING DRIVERS
The revision of the Outlook reflects that the pandemic shock caused only a mild deterioration in public finances, which Fitch expects will be reversed, and confidence that the government will secure sufficient funding in the medium term, limiting debt service and refinancing risks.
Cameroon’s public finances have proven relatively resilient to the pandemic shock and we expect the deficit to be on a downward path over the medium term. The fiscal deficit on a cash basis widened in 2020 to 4.5% of GDP from 3.0% in 2019, owing to an only mild hit to tax collection and limited expenditure increases in response to the coronavirus shock (1.3% of GDP), given financing constraints. The phasing-out of pandemic-related spending and a recovery in tax receipts will bring the deficit down to 3.5% of GDP in 2021 and 3.0% in 2022. We assume the government would cut capital expenditure if revenues fell beyond the authorities’ forecast.
Near- and medium-term financing risks have lowered, in our view. We expect Cameroon to meet around 80% of its fiscal financing needs in 2021 (7.4% of GDP) through external project loans and domestic financing. The extension of the Debt Service Suspension Initiative (DSSI) to 1H21 will provide minor relief of 0.4% of GDP, although this will be higher if the authorities extend it for the whole year. Cameroon is likely to renew its Extended Credit Facility with the IMF before the end of 2Q21, which should catalyse additional official creditor support to fully cover funding needs in 2021 and ease funding conditions over the medium term.
At present, Cameroon is not planning to request a debt treatment under the G20’s Common Framework. It may issue another Eurobond to buy back a part of its 2025 Eurobond (USD750 million; 9.5%), due to be repaid in three instalments over 2023-2025. This would smooth the repayment schedule, although the annual amortisation over the period is small at 0.6% of GDP. We expect Cameroon will be able to roll-over domestic debt coming due in 2021 (2.7% of GDP) and interest payments on the Eurobond in 2021 and 2022, are small at 0.2% of GDP.
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).
We project general government debt to increase to 44% of GDP in 2022, from 42% of GDP in 2019, well below the current ‘B’ median forecast of 71% of GDP for 2022. Fitch’s debt ratio includes the debt of the public refinery SONARA (3% of GDP in 2020) as the government serviced this in 2020, although there is no explicit state guarantee. There has been some progress in on-going restructuring negotiations over SONARA’s debt, which could lead to an agreement before the end of the year but further delays are possible. Other SOE debt is estimated at 4.2% of GDP in 2020, although this official figure could understate its magnitude.
We expect real GDP growth to rebound to 4.3% in 2021 and 3.7% in 2022, after showing relative resilience to the pandemic shock with a 1.5% contraction in 2020 (‘B’ median of -4.2%). The recovery will be driven by higher demand for Cameroon’s agricultural exports and increased activity in the manufacturing and services sectors, but will remain moderate given persisting financing constraints, credit retrenchments and slow progress on vaccination. A slight decline in oil production in 2022 will adversely affect the growth outlook, although at 5% of GDP the sector is not a key driver. A longer or more severe pandemic shock would hit growth.
External liquidity risks are limited. Fitch forecasts the current account deficit to narrow to 4.4% of GDP in 2021 and 4.1% in 2022 from 5.2% of GDP in 2020, as agricultural and oil exports increase. The bulk of external funding needs will be funded by government borrowing. Access to CEMAC’s pooled stock of international reserves (USD7.4 billion end-January 2021) and to the convertibility guarantee provided by France somewhat mitigates external liquidity and short-term devaluation risks.
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 as well as on-going security issues in the Anglophone regions and the far-North, for which we do not expect a near-term resolution. Deeply entrenched political divisions could also compound the risk of a disorderly transition of power from the 88-year-old president, Paul Biya.
The main factors that could, individually or collectively, lead to positive rating action/upgrade:
– Public Finances: A reduction in the budget deficit and the government debt/GDP ratio, particularly if supported by improved management of public finances.
– Macro: Implementation of reforms leading to an improvement in the business climate and diversification of the economy, that enhance medium-term growth prospects.
The main factors that could, individually or collectively, lead to negative rating action/downgrade:
– Public and External Finances: Emergence of fiscal and external financing pressures, for example resulting from a failure to secure official creditor support.
– Structural: Heightened political instability that significantly affects public finances or the economy.
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 USD58/barrel in 2021 and USD53/barrel in 2022, in line with the baseline assumption set out in our Global Economic Outlook in March 2021.
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, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.
||LC LT IDR||B||Affirmed||B|
||LC ST IDR||B||Affirmed||B|
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, v1.2.1 (1)
- Macro-Prudential Indicator Model, v1.5.0 (1)
- Sovereign Rating Model, v3.12.1 (1)
|Cameroon||EU Endorsed, UK Endorsed|