Fitch Ratings has revised the Outlook on Gabon’s Long-term foreign and local currency Issuer Default Ratings (IDR) to Negative from Stable and affirmed the IDRs at ‘BB-‘. The issue ratings on the Gabon’s senior unsecured foreign and local currency bonds have also been affirmed at ‘BB-‘. Fitch has affirmed Gabon’s Short-term IDR at ‘B’ and its Country Ceiling at ‘BBB-‘, in line with the Country Ceiling for Communaute Economique et Monetaire d’Afrique Centrale (CEMAC). KEY RATING DRIVERS The revision of the Outlook reflects the following key rating drivers and their relative weights: Medium Declines in Gabon’s oil production makes the sovereign more sensitive to oil price shocks. Lower oil revenues in 2015 will weigh on Gabon’s fiscal and external positions. Oil revenue represented more than 50% of total government revenue and about 80% of export earnings. Fitch expects the value of oil production to fall by about one-fifth in 2015 in US dollar terms, following a decline of nearly 10% in 2014. Because its reserves are depleting, Gabon cannot adjust its production to offset the impact of price shocks. In order to preserve its fiscal position, the government has scaled down its investment programme in 2014. Gabon’s fiscal breakeven oil price is significantly affected by capital expenditure, which represented nearly one-third of public spending in 2012-13. T
here is a risk that expenditure will not be reduced as quickly as planned by the government. Unlike some other oil exporters, Gabon has not built up a substantial oil fund, although deposits stand at nearly 10% of GDP, providing a cushion in the near term. The absence of significant fiscal buffers beyond this leaves the government with few options but to cut expenditure to mitigate the fall in oil revenue over the medium term. Fitch views public finance management as a weakness. Given the magnitude of the planned fiscal adjustment, the accumulation of arrears is a risk. Local capital markets are under-developed, limiting financing flexibility. Under its baseline (average oil price of USD83/b), Fitch expects gross public debt (28.9% in 2014) to remain stable over the forecast horizon, with a small increase in net public debt. The budget is expected to remain close to balance in the coming years, compared with large fiscal surpluses prior to 2010. However, these forecasts are sensitive to oil price/production developments and execution of fiscal tightening. Gabon’s current account surplus is expected to fall to 5% in 2014, from nearly 20% in 2012, and will fall to nearly 1% in 2015. Net external debt is still relatively low at only 11.7% of GDP, but is expected to rise above 16% of GDP by 2016. Although the decline in oil prices is likely to be somewhat mitigated by the depreciation of the CFA franc, which is pegged to the euro, foreign exchange reserves are expected to fall in 2014-16. The lack of economic diversification increases the impact on GDP of price or production shocks in the oil sector.
Non-oil growth is highly dependent on the government’s fiscal stimulus via the “Emerging Gabon” investment programme, which has been largely supported by high oil prices in previous years. The sharp reduction in capital expenditure will bring about a slowdown in GDP growth in 2015, but will also set back efforts to diversify the economy over the longer term. However, the economic impact of lower public investment will be mitigated by the fact that a large share of the inputs used for those investment projects are imported. Gabon’s ‘BB-‘ IDRs also reflect the following key rating drivers: If successful, the on-going exploration and discoveries in deep-sea will only materialise later in the decade. Furthermore, lower oil prices threaten the economic viability of those 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 could fall more rapidly over the medium term. The 2016 presidential elections are likely to prove more challenging than the 2009 round, as several relatively high profile opponents to incumbent President Ali Bongo have expressed their willingness to run. Accusations of wrongdoings could dent the legitimacy of the incumbent President, which could create some political instability. Gabon has a high GDP per capita of nearly USD10,000, more than double the ‘BB’ range median.
However, levels of human development are lower than its rated peers. 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. 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 main factors that could lead to a downgrade are: – A deterioration in fiscal balances and a worsening of public and external debt dynamics, for example caused by a more severe and sustained fall in oil prices or failure to adequately reduce spending to offset lost oil receipts. -Political instability ahead of the 2016 ballot. The current rating Outlook is Negative. Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to an upgrade.
However the following factors could lead to a positive rating action: -Improved prospects for fiscal and external account receipts. -Improvement in the sovereign balance sheet or in public finance management. – 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 USD101 per barrel (pb) in 2014, USD83pb in 2015, and USD90pb 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.