Fitch Ratings has revised the Outlook on Cameroon’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at ‘B’.
KEY RATING DRIVERS
The revision of the Outlook reflects that the pandemic shock caused only a mild deterioration in public finances, which Fitch expects will be reversed, and confidence that the government will secure sufficient funding in the medium term, limiting debt service and refinancing risks.
Cameroon’s public finances have proven relatively resilient to the pandemic shock and we expect the deficit to be on a downward path over the medium term. The fiscal deficit on a cash basis widened in 2020 to 4.5% of GDP from 3.0% in 2019, owing to an only mild hit to tax collection and limited expenditure increases in response to the coronavirus shock (1.3% of GDP), given financing constraints. The phasing-out of pandemic-related spending and a recovery in tax receipts will bring the deficit down to 3.5% of GDP in 2021 and 3.0% in 2022. We assume the government would cut capital expenditure if revenues fell beyond the authorities’ forecast.
Near- and medium-term financing risks have lowered, in our view. We expect Cameroon to meet around 80% of its fiscal financing needs in 2021 (7.4% of GDP) through external project loans and domestic financing. The extension of the Debt Service Suspension Initiative (DSSI) to 1H21 will provide minor relief of 0.4% of GDP, although this will be higher if the authorities extend it for the whole year. Cameroon is likely to renew its Extended Credit Facility with the IMF before the end of 2Q21, which should catalyse additional official creditor support to fully cover funding needs in 2021 and ease funding conditions over the medium term.
At present, Cameroon is not planning to request a debt treatment under the G20’s Common Framework. It may issue another Eurobond to buy back a part of its 2025 Eurobond (USD750 million; 9.5%), due to be repaid in three instalments over 2023-2025. This would smooth the repayment schedule, although the annual amortisation over the period is small at 0.6% of GDP. We expect Cameroon will be able to roll-over domestic debt coming due in 2021 (2.7% of GDP) and interest payments on the Eurobond in 2021 and 2022, are small at 0.2% of GDP.
Cameroon’s ‘B’ ratings balance low GDP per capita and weak governance indicators against moderate government debt and low inflation supported by membership of the Central African Economic and Monetary Community (CEMAC).
We project general government debt to increase to 44% of GDP in 2022, from 42% of GDP in 2019, well below the current ‘B’ median forecast of 71% of GDP for 2022. Fitch’s debt ratio includes the debt of the public refinery SONARA (3% of GDP in 2020) as the government serviced this in 2020, although there is no explicit state guarantee. There has been some progress in on-going restructuring negotiations over SONARA’s debt, which could lead to an agreement before the end of the year but further delays are possible. Other SOE debt is estimated at 4.2% of GDP in 2020, although this official figure could understate its magnitude.
We expect real GDP growth to rebound to 4.3% in 2021 and 3.7% in 2022, after showing relative resilience to the pandemic shock with a 1.5% contraction in 2020 (‘B’ median of -4.2%). The recovery will be driven by higher demand for Cameroon’s agricultural exports and increased activity in the manufacturing and services sectors, but will remain moderate given persisting financing constraints, credit retrenchments and slow progress on vaccination. A slight decline in oil production in 2022 will adversely affect the growth outlook, although at 5% of GDP the sector is not a key driver. A longer or more severe pandemic shock would hit growth.
External liquidity risks are limited. Fitch forecasts the current account deficit to narrow to 4.4% of GDP in 2021 and 4.1% in 2022 from 5.2% of GDP in 2020, as agricultural and oil exports increase. The bulk of external funding needs will be funded by government borrowing. Access to CEMAC’s pooled stock of international reserves (USD7.4 billion end-January 2021) and to the convertibility guarantee provided by France somewhat mitigates external liquidity and short-term devaluation risks.
ESG – Governance: Cameroon has an ESG Relevance Score 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. These scores reflect the high weight that World Bank Governance Indicators (WBGI) has in our proprietary Sovereign Rating Model. Cameroon has a low WBGI ranking at the 14th percentile, reflecting institutional weakness, political instability as well as on-going security issues in the Anglophone regions and the far-North, for which we do not expect a near-term resolution. Deeply entrenched political divisions could also compound the risk of a disorderly transition of power from the 88-year-old president, Paul Biya.