Fitch Ratings has downgraded Gabon's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B+' from 'BB-'. The Outlook is Stable. The issue ratings on Gabon's senior unsecured foreign currency bonds have also been downgraded to 'B+' from 'BB-'. Fitch has affirmed Gabon's Short-term IDR at 'B'. Fitch has also affirmed the Country Ceiling for the Communaute Economique et Monetaire d'Afrique Centrale (CEMAC) and for Gabon at 'BBB-'.
KEY RATING DRIVERS
The downgrade of Gabon's Long-term IDRs reflects the following key rating drivers and their relative weights:
MEDIUM
Declines in Gabon's oil production increase the sovereign's and broader economy's sensitivity to oil price shocks. Because its onshore oil fields are maturing, and offshore exploration is at an early stage, Gabon cannot rely on its production to offset the impact of price shocks. Lower oil prices and an uncertain regulatory and fiscal environment will weigh on the on-going exploration in deep-sea, and therefore on medium-term, oil prospects. Diversification of the economy away from oil is slow, and is likely to be negatively impacted by the scaling-down of the public investment programme.
Fitch views public finance management as a weakness. This raises the risk of slippage to Gabon's planned fiscal consolidation, which relies on cuts to current and capital spending. Given the magnitude of the planned fiscal adjustment, further accumulation of arrears is likely. Fitch expects a fiscal deficit of about 3.5% in 2015, followed by further deficits in the coming years. However, these forecasts are sensitive to oil price/production developments and the implementation of fiscal tightening.
The absence of sufficient fiscal buffers limits the government's leeway. Unlike some other oil-exporting countries, Gabon has not built up a sizeable sovereign wealth fund, while deposits at the regional central bank are relatively low, at about 5% of GDP. Local capital markets are under-developed and limit financing flexibility, so that Gabon is expected to tap into international markets again this year. Under its baseline (average oil price of USD65/b in 2015 and USD75/b in 2016), Fitch expects gross public debt to reach about 34% of GDP in 2015 and to gradually grow over the forecast horizon but remain lower than rating peers.
Lower oil revenues in 2015-16 will weigh on Gabon's fiscal and external positions. Oil revenue represents more than 50% of total government revenue and about 80% of export earnings. Since the previous rating review, Fitch has revised down its oil forecast for 2015 and 2016. Gabon is expected to post a fiscal deficit of 3.5% and a current account deficit of about 3.7% in 2015, against a previous forecast of 0.4% fiscal deficit and 1.1% current account surplus. Net external debt is still relatively low at only 16.2% of GDP in 2015, but is expected to rise above 20% of GDP by 2016.
Gabon's 'B+' IDRs also reflect the following key rating drivers:
The on-going exploration of offshore oil fields, if successful, will only yield results later in the decade. Furthermore, lower oil prices threaten the economic viability of these fields, as the break-even price of exploiting fields in deep and very deep sea is high. In the absence of large fields coming on stream, oil production will fall more rapidly over the medium term.
The lack of economic diversification increases the impact of price or production shocks in the oil sector. Although 2014 growth performance remained robust for the year as a whole, non-oil growth is highly dependent on the government's investment programme. The downsizing of this programme will weigh on GDP growth in the short term, but will also delay the longer-term diversification of the economy away from oil. However, because of the high import-intensity of investment goods, the reduction in investment will also bring about a reduction in the import bill.
Gabon has long benefited from a stable domestic political climate, but the 2016 presidential elections are likely to prove more challenging than previous rounds. Although Fitch does not expect a significant souring of the political situation, the legitimacy of the incumbent President is being challenged by accusations of wrongdoings.
Gabon has a high GDP per capita of nearly USD10,000, more than double the 'B' range median. However, levels of human development are low and governance and the business climate are weak, according to indicators from the World Bank.
Franc-zone membership has ensured a supportive macro environment, including a stable currency and low inflation. The monetary arrangement is backed by high foreign reserves pooled at the central bank and the French guarantee on currency convertibility, thereby effectively reducing foreign-currency liquidity risks.
Data quality is weak and constrains the ratings. Fiscal and economic management is hampered by the weak quality and timeliness of balance of payment and fiscal data.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the ratings are currently well balanced. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change.
The main factors that, individually or collectively, could lead to negative rating action are:
- A further deterioration in fiscal balances and a worsening of public and external debt dynamics.
The main factors that could lead to positive rating action are:
- Improvement in the sovereign balance sheet or in public finance management, for instance via the build-up of fiscal reserves and the reduction in arrears.
- Successful diversification of the economy over the long term.
KEY ASSUMPTIONS
- Fitch assumes a gradual reduction in Gabonese oil output over the medium to long term.
- Fitch assumes that oil price (Brent) will be USD65 per barrel in 2015 and USD75 per barrel in 2016.
- Fitch assumes no break-up of the CEMAC monetary zone in the foreseeable future.
- The agency assumes broad political and social stability is maintained, including around the 2016 presidential elections.
