Gabon under higher liquidity pressures (Moody’s)

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Moody’s Investors Service has  downgraded the Government of Gabon’s issuer and senior unsecured debt ratings to Caa1 from B3 and changed the outlook to stable from negative.

The rating downgrade is underpinned by continuing government arrears to creditors and suppliers which point to heightened government liquidity pressures and denote institutional weaknesses. Persistant arrears also risk delaying critical financial support from the official sector, in turn exacerbating existing liquidity pressures.

The stable rating outlook at Caa1 reflects Moody’s assessment that the government’s challenging fiscal and liquidity positions with arrears likely to persist are balanced by likely continued IMF financial support as the government’s debt will remain sustainable according to the IMF’s framework.

Concurrently, Moody’s has lowered Gabon’s local currency and foreign currency long-term bond and deposit ceilings to B1 from Ba3.

Moody’s decision to downgrade Gabon’s ratings to Caa1 is driven by heightened government liquidity pressures and continued institutional weaknesses, as highlighted by the persistence of arrears despite the government’s commitments to clear its arrears to external creditors by the end of 2017 under the country’s IMF programme.

The government continues to run arrears to suppliers and creditors, including bilateral and multilateral lenders as well as foreign commercial banks. Arrears to creditors represented around 2% of GDP at end of March 2018, according to Moody’s estimates.

Heightened liquidity pressures stem from the government’s constrained funding options in the face of sizeable funding needs. The government’s management of debt payments and spending decisions illustrates the heightened liquidity pressure that it faces. As regards debt payments, while the government had cleared arrears to bilateral and multilateral lenders at year-end 2017, prior to the first review of the IMF under the three year $642 million Extended Fund Facility, it has more recently re-accumulated arrears to these creditors.

Regarding spending decisions, underperforming non-oil tax revenues in 2017 put pressure on the government’s fiscal position and led to significant cuts in public investment. The IMF programme had envisaged tax revenues at 11.5% of GDP in 2017, higher than the 9.7% actually achieved. In response, the government cut capital spending, in particular for externally financed investment projects. While, as a result, the deficit was lower than projected (2% of GDP compared with 4% programmed), the spending choices that the lower tax revenues triggered demonstrate significant liquidity constraints.

The accumulation of large arrears also reflects Gabon’s very low institutional strength and denotes in particular weakness in treasury management. In the context of tight liquidity, persisting government arrears to creditors also highlight the low prioritisation of some debt payments over other spending.

Moody’s expects that the government will take some fiscal consolidation measures but with limited actual impact in 2018, and that liquidity stress as well as ongoing arrears will likely continue. There is a negative feedback loop, whereby arrears by the government with its suppliers constrain economic activity, which in turn undermines tax collection, which hampers any clearance of arrears.

RATIONALE FOR THE STABLE OUTLOOK

The outlook has been changed to stable, reflecting balanced risks at the Caa1 rating level. Moody’s expects that the government’s fiscal and liquidity positions will remain challenging in 2018, preventing it from clearing arrears substantially. Should disbursements of financial support from the IMF and the rest of the international community, programmed at around 3% of GDP in 2018 and 2% in 2019, be delayed — possibly because Gabon does not meet the targeted clearance of arrears to external creditors – alternative financing options would likely come at a significant cost given a shallow regional capital market.

However, Moody’s expects that IMF financial and technical support, while possibly delayed, will remain in place and government debt will likely continue to be deemed sustainable by the IMF. Based on Moody’s projections for nominal GDP growth and the budget balance, government debt will be broadly stable, around 60% of GDP.

FACTORS THAT COULD CHANGE THE RATING UP

The ratings would likely come under upward pressure should the government’s refinancing risks diminish, involving the full and lasting clearance of arrears to creditors, and the government build a track record of sustained fiscal consolidation and enhanced debt and liquidity management under the IMF programme.

FACTORS THAT COULD CHANGE THE RATING DOWN

The ratings would likely come under downward pressure if government liquidity pressures heightened further, raising the risks that the government does not meet its debt payment obligations to bondholders. This could result from increasingly constrained financing sources due to a suspension of the IMF programme or loss in investor confidence for instance. In this environment, the government debt dynamics would also worsen compared with Moody’s current expectations.

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