Fitch Ratings has affirmed Congo's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'CCC'. Fitch has also revised Congo's Country Ceiling to 'B+' from 'BB-'.
Key Rating Drivers
Congo's ratings are supported by improved liquidity due to oil-related twin surpluses and a tighter policy framework under the new IMF programme. They are weighed down by strong implementation risks to the IMF programme, limited funding options, high albeit declining public debt, weak public financial management illustrated by two recent defaults, high dependence on the oil sector and low governance indicators.
Higher oil revenues and budget spending cuts contributed to twin budget and current account surpluses in 2018, following three years with large twin deficits. On a cash basis, the fiscal surplus reached 6.3% of GDP in 2018. It will narrow to around 4.5% in 2019 to 2021, owing to arrears repayment, lower oil prices under Fitch's baseline and declining oil production from 2021. Fiscal surpluses will cover around 40% of financing needs arising from debt repayments, which will amount to 11% of GDP on average over 2019-2021. After a peak at 6.7% in 2018, the current account surplus will narrow to around 5.5% in 2019 and 2020 and 2.5% in 2021, given lower oil export revenues.
Risks for public and external finances emanate from volatile oil prices and pressure on oil production, as oil accounted for 68% of fiscal receipts and 86% of exports in 2018. After peaking in 2019 and 2020 at 376 mbbl per day, oil production is projected to decline in 2021 to 368 mbbl per day, due to depleting oil fields. Two Congolese companies discovered a new on-shore field with reserves estimated at 359 mmbbl, which if confirmed could offset the declining production trend in the medium term. However, at this early stage, its potential remains uncertain.
After two years of negotiations, Congo signed a three-year IMF Extended Credit Facility (ECF) of USD448.6 million (4% of GDP). The programme will likely catalyse further official funding of USD905 million (8% of GDP) over three years. The ECF requirements on debt sustainability, fiscal consolidation and governance enhance policy credibility. The authorities have proven commitment to reform by implementing substantial fiscal consolidation measures in the 2018 and 2019 budgets as well as governance reforms to prepare for the programme.
In preparation for the programme, in April 2019 Congo reached an agreement with China to reschedule debt it owes to the Chinese public sector. Under the agreement, over the next three years Congo will repay one-third of the debt it owes to the Chinese public sector, which in total represents 21% of GDP. The maturity of the remaining Chinese debt stock was extended by 15 years. Coupled with another restructuring in 2018, this operation cut debt service requirements after 2023.
In order to reach the IMF programme target of reducing the present value (PV) of total external debt below the IMF target of 30% by 2023, and the PV of public debt below 35% of GDP in 2025 against a PV of 74.9% of GDP in 2019. Congo is seeking to renegotiate prepaid oil contracts (15% of GDP) with oil traders. The negotiations will likely result in a reduction of requirements on Congo to supply oil. On the domestic front, the government committed to re-structure arrears that represent 13% of GDP. The restructuring will be based on an audit of arrears accumulated over 2017-2018, which - prior to the audit - account for 60% of the total stock of arrears. The audit is due before the end of the year.
Implementation issues with the IMF programme could disrupt access to already narrow funding options. Financing from official creditors is conditional on compliance with the IMF programme and Congo's recent history of default limits access to international capital markets. A freeze of statutory advances from the Bank of Central African States (BEAC) in 2016 coupled with a shallow regional market and tighter liquidity conditions in the Central African Economic and Monetary Community (CEMAC) imply there are limited local currency funding options.
We expect a minor increase in government deposits and imputed external reserves. Central government deposits shrank from 29.2% of GDP in 2013 to 1.7% in 2018 following the fall in oil prices and will reach 4% of GDP in 2021 under our baseline scenario. Coverage of Congo's imputed reserves is expected to rise from 0.7 months of current account payments in 2018 to a still very low 1.3 months in 2021. However, membership of CEMAC reduces foreign exchange liquidity risks as it gives access to pooled reserves and to the convertibility guarantee of the French treasury.
Congo's gross general government debt (GGGD, including external and domestic arrears and oil trader contracts) will remain high. GGGD declined to 88% of GDP in 2018 from 117% in 2017, owing to an oil-related increase in nominal GDP and fiscal surpluses. We expect debt to decline further to 81% in 2019 essentially due to continued fiscal surpluses, and to reach 72% in 2020 and 67% in 2021 given debt restructuring and continued surpluses.
The materialisation of contingent liabilities remains a risk. Non-guaranteed state owned enterprises' debt is estimated at 10% of GDP by the IMF but the lack of transparency regarding their balance sheets brings uncertainty over its magnitude. An audit of arrears accumulated between 2014 and 2016 led to the rejection of 52% of claims (6% of GDP) due to irregularities, but suppliers could still challenge this through litigation. Risks also arise from the disputed claims of Commisimpex, estimated at 7.5% of GDP by the former supplier.
Poor public financial management weighs on the rating. This is illustrated by Congo's two defaults on its sole Eurobond, in 2016 and 2017, one of which was caused by poor public finance management and the other linked to litigation between Congo and Commisimpex. Deep-rooted institutional short-comings had also led to recourse to opaque financing.
GDP growth picked up in 2018 (1.6%) owing to higher oil production and prices, after the recession in 2017 (-1.8%). After peaking in 2019 to 5%, due to an increase in oil production, growth will slow to 1.5% in 2020 and 2021, due to lower oil production and sluggish non-oil growth that we project to rise to 2.5% in 2021 from 1% in 2019, given the government spending constraints.
Social and political tensions remain. Despite the peace agreement signed in 2017, security risks in the Pool region of Congo, which disrupted the train and road between the economic hub of Pointe Noire and the capital Brazzaville, could return. Risks of social unrest stem from arrears on payment of government wages in the health and education sectors. These could be further exacerbated by discontent with fiscal consolidation measures related to the IMF programme.
The downward revision of the Country Ceiling reflects risks for Congo's external financing flexibility, in a context of continued tight management of foreign exchange transactions at the regional level and implementation risks weighing on Congo's IMF programme.
