African markets

Fitch upgrades Gabon to ‘B-‘; Stable outlook

Fitch Ratings has upgraded Gabon’s Long-Term Foreign Currency (LTFC) Issuer Default Rating (IDR) to “B-” from “CCC”. The outlook is stable.

A full list of rating actions is provided below.

Main rating factors

The upgrade reflects a recent easing of liquidity pressures due to higher oil prices and a new IMF program. It also reflects our expectation of an improvement in Gabon’s underlying fiscal position due to a rebound in non-oil revenue, a reduction in pandemic-related spending and a restraint in other current spending.

The rating also takes into account Gabon’s high GDP per capita relative to its peers, longer-term uncertainties regarding oil production capacity, recurring difficulties in obtaining external financing and poor management of public finances.

Fitch expects the fiscal deficit on a cash basis to widen to 3.3% of GDP in 2021 from 2.5% in 2020, reflecting the impact that lower oil production will have on fiscal revenues, a moderate increase in capital spending, and the budgeted pandemic. expenditure of 0.7% of GDP. We expect non-oil revenue to recover this year as external demand recovers and the easing of pandemic-related restrictions improves domestic activity. With the full recovery of economic activity and the reduction in expenditure related to Covid 19, we expect the budget deficit to narrow to 1.4% in 2022 and 0.7% in 2023, below our forecast for the “B” median of 7.4%.

We expect oil production to contract 14% and average 185,000 barrels per day in 2021, following a modest contraction of 1.2% in 2020. This reflects partial compliance with OPEC cuts , of which Gabon is a member, and high production levels at the start of the year. 2020. We expect production to gradually recover to 210,000 barrels per day by 2023, but the expected moderation in Brent oil prices to USD 53/bbl by 2023 will lead to a continued reduction in oil revenues.

We note uncertainties about the potential level of oil production in Gabon. Many of its deposits are aging with diminishing returns and most of the reserves are located deep offshore or in mangroves with high breakeven prices compared to international competitors. Investment has been hampered by uncertainties about the ability of oil operators to continue to hold foreign currency accounts abroad. Gabon’s 12th oil tender round opened in 2018 and suffered multiple delays, despite the revision of the oil law in 2019.

Fitch estimates Gabon’s total financing needs at 14% of GDP in 2021 and 7% in 2022. Our estimates include the expected early amortization of the country’s Eurobond maturing in 2022-2024 via new issuance , part of the proceeds of which will be used for budgetary financing. The regional central bank’s bond purchase program, which ends in August 2021, and other measures to support bank liquidity have had a temporary positive impact on the government’s ability to raise funds in the market. regional, and net domestic financing will cover nearly 40% of the deficit in 2021. We expect net domestic financing to be negative from 2022.

Fitch estimates fiscal financing from external sources, after the Eurobond refinancing, at around 4% of GDP in 2021 and 5% in 2022. This will include IMF disbursements and official project loans. The successful execution of the planned refinancing would soften the country’s repayment profile and reduce medium-term liquidity risks. Gabon concluded a new $553 million extended financing facility with the IMF in July 2021, providing almost 2% of GDP in financing over the period 2021-2023, which should serve as a catalyst for additional public support.

We believe the IMF program will continue to focus on tax mobilization, including the removal of tax exemptions, and governance and transparency reforms. Gabon’s performance under the previous IMF program with similar objectives was mixed, but many key reforms are now being implemented upstream and will not coincide with the next presidential election in 2023. Nevertheless, delays in achieving program objectives would introduce risks to Gabon’s financing pathway. and could lead to further liquidity strains given the country’s low cash reserves. The financing circuit also remains very vulnerable to fluctuations in oil revenues.

The pandemic, oil price shocks and the inability to obtain certain planned financing from official creditors have led to a weakening of Gabon’s liquidity position. The country was unable to obtain several budget support loans expected in 2020, which exposed weaknesses in public finance management and limited the sovereign’s financing flexibility. Tighter liquidity conditions led to a temporary accumulation of external debt arrears in 2020, although they were cleared from August 2021. This also led to a reprofiling of Gabon’s Afreximbank loan, the second in so many years. The central bank’s bond-buying program provided some relief with additional liquidity in the shallow regional debt market, and the authorities raised about 2% of GDP from the regional central bank.

Fitch forecasts that gross public debt will fall to 74.4% of GDP in 2021, from 77.4% in 2020. Our base case assumption of modest budget deficits and improving macroeconomic conditions indicates that public debt will fall to 73, 8% by the end of 2022, slightly above the “B” median of 70.5%. A working group assesses the validity of XAF 440 billion (4.6% of GDP) of domestic arrears to suppliers, which could lead to a slight downward revision of our debt figures. Fitch considers Gabon’s sovereign debt burden to be sustainable, with risks to debt repayment capacity reflecting the liquidity and public financial management issues described above.

About 37% of Gabon’s total public debt burden is on concessional terms, below the 2019 category “B” median of 69%, and reflects the country’s upper-middle-income status. About 24% of its debt is in the form of Eurobonds and a small portion of commercial loans. The central bank holds about 9% of Gabon’s debt, including 7% in the form of long-term advances that Gabon has the option of repaying and 2% in government bonds. The rest is domestic debt in the form of bank loans and issues on the regional market.

We expect GDP to contract 0.3% in 2021, following a 1.8% plunge in 2020. The forecast assumes lower oil production, offset by our expectation of a 2.7% rebound in the non-oil sector. Over the medium term, we expect non-oil growth to reach around 3.5%, below our overall growth forecast for the “B” median of around 5% in 2022. Gabon will continue its strategy of economic diversification, largely focused on countries with low value added sectors including mining, agribusiness and forestry in addition to services. We also believe that growth will be supported by continued public investment in infrastructure and through public-private partnerships, particularly in the energy and transport sectors with the Transgabonnaise highway.

We project the current account deficit to moderate to 4% of GDP by 2023, from 6% in 2020, reflecting the dynamics of oil prices and production, as well as a gradual diversification of export earnings from the country. CEMAC’s pooled international reserves stood at $7.8 billion at end-2020 (3.1 months of regional import cover), which we expect will improve moderately over the next three years with a continued flow of concessional financing in the region and the IMF special drawing. allocation of rights in August 2021.

ESG – Governance:

Gabon has an ESG Relevance Score (SR) 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 rulers. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Gabon has a low WBGI ranking at the 23rd percentile, relatively low rights to participate in the political process, weak institutional capacity, uneven enforcement of the rule of law, and high levels of corruption.