Fitch Ratings has revised the Outlook on the Republic of Congo's Long-term foreign and local currency Issuer Default Ratings (IDR) to Negative from Stable and affirmed the IDRs at 'B+'. The issue ratings on the Republic of Congo's senior unsecured foreign and local currency bonds have also been affirmed at 'B+'. Fitch has affirmed the Republic of Congo's Short-term IDR at 'B' and the Country Ceiling at 'BBB-', in line with the Country Ceiling for the Communaute Economique et Monetaire de l'Afrique Centrale (CEMAC).
KEY RATING DRIVERS
The revision of the Outlook reflects the following key rating drivers and their relative weights:
MEDIUM
Sustained lower oil prices have highlighted the Republic of Congo's vulnerability to oil price shocks, and will result in a more pronounced deterioration in the fiscal and external accounts and weaker economic growth than we previously expected. The authorities are putting policies in place to limit further macroeconomic damage, but potential fiscal slippage to planned fiscal adjustment and oil price volatility will remain significant sources of risk in the short term.
Fitch has significantly revised its fiscal projections for 2015, with the general government deficit set to widen to around 8% of GDP due to lower oil income (which in 2010-14 accounted for 75% of total revenue). Congo's limited financing options mean that the country will remain reliant on statutory advances from the regional central bank and repatriation of deposits held in China. We expect deposits in China to fall substantially this year, reducing fiscal flexibility. Although the stock of public debt will remain broadly stable in 2015, a sharp contraction in nominal GDP growth will push the debt/GDP ratio to close to 48%, from a low of 21% in 2010.
GDP growth is set to decelerate rapidly in 2015, hindered by a temporary slump in oil production, a sharp fall in public investment and struggling exports. These factors will outweigh the positive performance of the agriculture, communications, transport and other services sectors, which continue to benefit from private investment and improved infrastructure. Fitch now expects GDP growth to fall to 2.5% this year (compared with 5.4% at our previous review), the lowest rate in eight years. GDP per capita at USD market exchange rates will contract by around one-third, falling well below the 'B' median.
The current account deficit is set to widen sharply to 12.8% of GDP in 2015, more than double the 2014 deficit, as a result of falling oil exports. A more pronounced deterioration will be mitigated by a fall in imports, reflecting lower public investment, and the weakening of the CFA franc against the US dollar. Although the country will continue to benefit from strong foreign direct investment inflows into the hydrocarbon sector (there is a pipeline of projects valued at over USD10bn), this will be insufficient to prevent a gradual decline in foreign reserves over the medium term. Nevertheless, Fitch expects FX coverage to remain around five months of CXP in 2016-17.
The Republic of Congo's 'B+' IDRs also reflect the following key rating drivers:
Medium-term economic prospects remain positive, underpinned by a projected increase in oil production. Despite uncertainty regarding commodity prices, international oil companies continue to put in place an ambitious investment plan for ongoing offshore developments, which should help boost output to over 320,000 barrels per day in 2017 (from 240,000 b/d in 2015). Efforts to diversify the economy and develop transport and energy infrastructure will sustain momentum in the non-oil sector, even as investment in some capital-intensive projects (particularly in mining) fail to materialise.
Fitch believes that the Republic of Congo has some flexibility to withstand further fiscal pressure from low oil prices. This reflects both the authorities' willingness and ability to cut public investment (60% of the budget was earmarked for capital expenditure in 2010-14), as well as still strong fiscal buffers relative to peers. Deposits at the regional central bank stood at around 18% of GDP in mid-2015. Assuming that nominal GDP gains momentum and the fiscal deficit starts to narrow after 2015 (helped in part by measures to raise tax compliance), public debt/GDP should fall below 40% by 2017 although downside risks remain.
Although its position will deteriorate gradually over the medium term, the Republic of Congo remains a net external creditor and sovereign net foreign assets are forecast at 4% of GDP in 2015. Moreover, Franc-zone membership continues to ensure a supportive macro and external environment, including a stable currency and low inflation. The monetary arrangement is backed by the French guarantee on currency convertibility, thereby effectively reducing balance of payments risks.
Fitch views the country's weak institutional framework (including public finance management) and very weak business environment as key constraints on the ratings, as they accentuate the risks stemming from changes in commodity prices. Despite a rise in social spending in recent years, human development indicators are much weaker than for peers. There has been very limited progress in improving data quality and timeliness, hampering fiscal and economic management.
RATING SENSITIVITIES
The main factors that could lead to a downgrade are:
-A failure to consolidate the fiscal accounts, renewed accumulation of arrears and a worsening of public and external debt dynamics.
-A faster than projected depletion of the country's fiscal and external buffers.
-Delays in raising oil production or a rapid contraction in foreign direct investment.
The current rating Outlook is Negative. Consequently, Fitch does not currently anticipate development with a material likelihood of leading to an upgrade. However, the following factors could lead to positive rating action:
-Improved prospects for fiscal consolidation and reduction in the current account deficit.
-Improving public finance management and achieving progress in reducing external and domestic arrears.
-Effectively tackling structural weaknesses, including improving the business environment to achieve economic diversification and expand the revenue base.
KEY ASSUMPTIONS
Fitch has prepared its fiscal, macro and external projections based on an average Brent oil prices of USD55/b in 2015, before rising moderately to USD60/b in 2016 and USD70 in 2017.
Fitch assumes that there will be a constitutional referendum that will allow President Denis Sassou N'Guesso to run again in 2016. Although the elections will fuel some uncertainty, the agency expects Mr Sassou N'Guesso to win a new term.
Fitch assumes no break-up of the CEMAC monetary zone in the foreseeable future.
