Fitch Ratings has affirmed Cote d'Ivoire's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+' with a Positive Outlook.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
Cote d'Ivoire's 'B+' rating balances strong economic growth prospects and relatively low fiscal and external deficits and debt ratios against enduring political risks, low development indicators and comparatively high commodity dependence.
The Positive Outlook reflects our expectation that the authorities' continued adherence to fiscal prudence and reforms will gradually reverse the temporary deterioration in public finances from the coronavirus pandemic shock and stabilise government debt at well below the forecast 'B' and 'BB' medians. It also reflects our expectation that domestic political tensions will gradually ease and the Ivoirian economy will resume a strong growth path as the impact of the pandemic fades, while comparatively strong macroeconomic management will continue to prevent any significant imbalances.
Political tensions persist following the October presidential election, although a fully-fledged crisis and significant disruptions to the economy have been averted. Main opposition parties boycotted and attempted to block the holding of the election over disagreements with the government regarding the management of the electoral process and the constitutionality of president Alassane Ouattara's candidacy to a third term. The opposition has abandoned its plan to create a national transition council as an alternative government following the election, but continues to call for a new vote. It is yet to recognise the victory of President Ouattara, which has been validated by the Constitutional Council and recognised by the international community.
We expect ongoing discussions between government and opposition to gradually ease tensions in light of recent mutual concessions made by both sides in recent weeks. However, threats to stability persist as heightened polarisation could amplify ongoing security risks amid entrenched regional fault lines. The upcoming parliamentary elections, which are expected in 1H21 and the opposition's demands for electoral reform, the release of its arrested members and the unhindered return of some its leaders from overseas could constitute new flashpoints with the government. Cote d'Ivoire lacks any track record of peaceful transition in power since independence.
Our forecast for the general government (GG) deficit trajectory is consistent with the authorities' goal of narrowing the budget gap to 3% of GDP in 2023, gradually reversing the deterioration from the pandemic shock, in line with their track record of fiscal prudence since 2012. We project the GG deficit to widen to 5.9% of GDP in 2020 from 2.3% in 2019, still below the forecast 'B' median of 7.7%, and narrow to 4.8% of GDP in 2021 and 3.9% in 2022 as pandemic-related spending is gradually phased out, remaining smaller than the forecast 'B' medians of 7% and 4.8%, respectively.
Political dissension and the uncertainty surrounding the course of the health crisis pose downside risks to the outlook for public finances. Disagreements with chocolate multinationals over the implementation of the Living Income Differential revenue supplement for cocoa farmers, which was jointly agreed with Ghana, could also raise needs for a government subsidy of the guaranteed cocoa farm-gate price.
The government's fiscal consolidation plans are premised upon tax policy and administrative reforms measures to enhance its fiscal revenue, which compares unfavourably with rating peers, alongside continued spending restraint. It plans to gradually phase out tax credits, improve coverage of the informal sector, reform the land register and raise excise taxes. However, tax revenues have repeatedly fallen short of targets in recent years due to capacity challenges and commodity price shocks, while some fiscal reforms face social opposition. We expect the authorities to adjust capital spending to revenue collection to achieve their deficit targets.
Gradual progress on fiscal consolidation and growth revival will result in GG debt stabilising at around 46% of GDP in the medium term on our projections, well below the forecast 'B' and 'BB' medians. We forecast GG debt will rise to 43.2% of GDP in 2020 (forecast 'B' median: 64%) from 38.8% in 2019. Refinancing risks are moderate and the government's debt management policy has lengthened and smoothened the debt maturity profile. Foreign-currency debt accounted for 63% of total GG debt at end-2019 (current 'B'-median: 61%).
Cote d'Ivoire benefits from strong official creditor support underpinned by the government's satisfactory performance under its successive IMF arrangements. We expect a successor arrangement to Cote d'Ivoire's expiring 2016-2020 IMF programme to come through in late 2021 and project bilateral and multilateral loans to cover around half of the gross fiscal funding requirements in 2020-2022.
The government's participation in the G20's Debt Service Suspension Initiative (DSSI) in 2020 has resulted in only minor support of around 0.3% of GDP and does not reflect any liquidity challenges, in our view. The authorities expect additional support of similar magnitude in 2021 should they decide to participate in the extended initiative. They remain firmly committed to exclude any private creditor participation from any debt relief initiative.
Contingent liability risks are small. State-owned entreprise (SOE) debt is low, at 3.2% of GDP at end-2019 excluding on-lent liabilities, half of which is owned by the national electricity company CI-Energies. Government guarantees of SOE debt amounted to 2.3% of GDP mostly benefiting CI-Energies and the national refinery SIR. The pandemic shock could raise needs for budget support to some affected SOEs such as Air Cote d'Ivoire. Budget subsidies to SOEs were around 0.2% of GDP per year in 2018 and 2019.
The hit to the Ivoirian economy from the pandemic shock has been much milder than for comparable economies, reflecting Cote d'Ivoire's low reliance on tourism and remittances, its relatively low openness to trade and the resilience of the prices of cocoa, its main tradeable commodity, which accounts for 40% of exports.
The acute deterioration in the global environment and supply-side disruptions from the pandemic affecting a broad range of sectors will still cause a sharp slowdown in GDP growth to 1.5% in 2020 from 6.2% in 2019, but much higher than the forecast 'B' and 'BB' medians of a 4.8% and 4.5% GDP contraction. A forecast 8% fall in cocoa crop production reflecting the sector's natural cycle and environment protection measures will also weigh on growth.
The outlook for Cote d'Ivoire's economic activity remains robust and we expect GDP growth to average 6.3% in 2021-2022, outpacing the forecast 'B' and BB' medians of 3.2% and 4.8%, respectively. The recovery will be driven by the resumption of infrastructure projects, an expansion in light manufacturing and services and strong crop production. The government is currently preparing a new national development plan (2021-2025 PND) which aims at improving the diversification of the economy, boosting domestic value-added content in commodity exports and addressing structural bottlenecks from infrastructures gaps and weaknesses in human capital.
Key external finance metrics compare favourably with rating peers. The current account deficit (CAD) will widen to 3% of GDP in 2020 (forecast 'B' median 5.5%) as the contraction in exports offsets the relief from the slump in oil prices and the slowdown in import intensive investment. We forecast the CAD to remain stable and smaller than forecast 'B' medians in 2021 and 2022 as both exports and imports recover in lockstep.
External liquidity needs are moderate and we forecast government borrowing from official creditors and FDI to cover most of gross external funding requirements, which we estimate at 5% of GDP per year in 2020-2022. Net external debt was around 17% of GDP in 2019 and will remain stable at well below the forecast 'B' and 'BB' medians in the medium term. The regional reserves of the West African Economic and Monetary Union amounted to USD19.8 billion at end-August, equivalent to 6.2 months of the region's 2019 imports.
ESG - Governance: Cote d'Ivoire has an ESG Relevance Score (RS) 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. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Cote d'Ivoire has an overall WBGI ranking at the 32nd percentile while the current 'B' median is at the 37th percentile, mostly reflecting a low score on the 'Political Stability' pillar of the WBGI due to an absence of track record of peaceful political transitions in power and a history of civil unrest around presidential elections.