Fitch Ratings has affirmed the Republic of Congo’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘B+’. The Outlooks are Stable. Fitch has also affirmed the Short-term foreign currency IDR at ‘B’ and the Country Ceiling for the Communaute Economique et Monetaire d’Afrique Centrale (CEMAC) and the Union Economique et Monetaire Ouest-Africaine (UEMOA) at ‘BBB-‘.
KEY RATING DRIVERS
The Republic of Congo’s ‘B+’ IDRs reflect the following key rating drivers:
The sovereign balance sheet has benefited from recent external debt relief and rapid build-up in deposits (19% of GDP in October 2013) thanks to high oil-related budget surpluses (14% of GDP on average since 2005). Fitch expects the budget surplus will be 9% of GDP in 2014 and 11% in 2015 (9% in 2013) as the rebound in oil output partly offsets lower oil prices (USD105 per barrel for the Brent in 2014 and USD100 in 2015 from USD109 in 2013). Government debt was 32% of GDP at end-2013 (versus 42% for the ‘B’ peers’ median). Fitch expects debt to decline in the medium term.
Non-oil GDP growth is rapid, as authorities are using oil receipts to finance large infrastructure projects including building roads to connect the country and preparing the 11th African games, which Congo will host in 2015. Fitch expects non-oil growth will remain above 7% in 2014 and 2015 after 8.2% in 2013 Services are growing fast (+8% in 2013) supported by public spending and bank credit to the private sector (+20% in 2013). From 2015, the start of iron mining is expected to add to growth. Given the government reliance on oil receipts (80% of revenues), the key risk is a lower than expected oil price.
Membership of CEMAC guarantees convertibility of the local currency into euros and is backed by the French Treasury. This is a long-established nominal anchor, which has delivered low and stable inflation.
There are public finance management (PFM) weaknesses. One-third of total government debt (11% of GDP) is made up of unsettled external debt claims (5% of GDP at-end 2013), mainly originating from unpaid suppliers in the 1990s, and domestic arrears (6% of GDP). PFM has improved recently with no new arrears since the Heavily Indebted Poor Country initiative completion in 2010, the recent graduation to the Extractive Industries Transparency Initiative compliant status, gradual repayment of domestic arrears and the expected implementation of a fiscal rule to promote the control of public spending.
A Congolese Sovereign Wealth Fund will be started in 2014. Fitch understands that initial transfer to the new Fonds Congolais d’Investissement will be USD1bn (7% of GDP) coming from the Congolese account at the Exim bank of China. Congo follows other African oil exporters (e.g. Nigeria, Angola, Gabon) that have recently started sovereign funds to invest abundant FX liquidity. At-end 2013, Congo’s official FX reserves were USD5.2bn (six months of current account payments). Fitch expects the current account surplus will average 5% of GDP over 2013-2015, further supporting FX inflows.
After a rebound from 2014, oil output is expected to reach a peak in 2017, at 140m barrels per annum (from 88m in 2013) primarily thanks to on-going investment by French oil company, Total (USD10bn over several years). However, beyond 2017 and in the absence of new investment or discovery, oil production is set to gradually decline, highlighting the need for diversification of the economy.
The rating is constrained by severe structural weaknesses. World Bank governance indicators are much weaker than for ‘B’ peers, reflecting the impact of the civil war at the end of the 1990s on the quality of institutions. Congo’s Ease of Doing Business rank (185 out of 189 countries in 2014) is particularly low but could improve following an expected update of the survey. The economy is highly dependent on oil (70% of GDP, 80% of government revenues, 85% of current account receipts). The low level of infrastructure constrains private sector development.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are currently well balanced.
The main factors that could lead to a positive rating action, individually or collectively, are:
– The resolution of unsettled external debt claims with bilateral and commercial creditors and the clearing of domestic arrears.
– Continuing high non-oil GDP growth and an improved business climate that would support economic diversification. The start of mining production could significantly add to growth, FX and fiscal receipts.
– Continued building of fiscal and external buffers thanks to budget surpluses. Regular investment into the new sovereign wealth fund in a transparent manner that would promote savings of oil receipts and strengthen fiscal buffers could benefit the rating.
The main factors that could lead to a negative rating action, individually or collectively, are:
-Excessive growth in current public spending, which would weaken the budget surplus and affect Congo’s ability to build fiscal buffers.
-Any threat to political stability, especially in the run up to the 2016 presidential election.
KEY ASSUMPTIONS
Fitch assumes that world GDP growth will gradually accelerate, to 3.2% by 2015 from 2.3% in
2013, supporting demand for Congo’s commodity exports.
Fitch assumes Brent oil prices will remain high, at USD100 per barrel by 2015 from USD108.8 in 2013.
Fitch assumes the monetary arrangement with France will keep supporting macroeconomic stability and the fixed parity of the CFA franc against the euro will remain unchanged.
Fitch assumes that there will be no change in the political regime in the coming years.
