Benin’s outlook has been uplifted to positive from stable by Fitch Ratings. This is on the expectation that the country will return to strong growth as the impact of the coronavirus disease 2019 (COVID-19) fades and following the re-opening the border with Nigeria.
Fitch has also affirmed Benin’s long-term foreign-currency issuer default rating (IDR) at B, in part due to its improved financing flexibility.
The rating agency expects Benin to gradually reverse the temporary deterioration in public finances and stabilise government debt at well below the forecast B median over the next few years.
Fitch expects the re-opening of the border, shut by Nigeria between August 2019 and December 2020 to allow bilateral trade flows to recover in 2021.
However, the impact is likely to be moderate as quarterly official trade data signals that the 800 kilo meter border probably remained partially porous during part of the closure.
Official imports, around 40% of which are smuggled to Nigeria, started to recover in the second quarter of 2020 and reached around 80% of pre-closure levels by quarter three.
On-going discussions between both governments reflect an easing of relations and limit the risk of a renewed closure in the near term, although it remains a tail risk.
The Beninese economy has shown relative resilience to the double shock stemming from the pandemic and the border closure.
Gross domestic product (GDP) growth is estimated at 2.3% in 2020 from 6.9% in 2019, well above the B median of -4.5% in 2020.
Fitch expects growth to recover to 5.6% in 2021 and return to pre-pandemic-shock levels at 6.2% in 2022, driven by a rebound in trade, transport, agriculture and construction.
The rating agency’s forecast assumes a slow recovery in Nigeria, 1.5% GDP growth in 2021 – a gradual easing of local coronavirus-related disruptions and improved global prospects.
The downside risk stems from uncertainty about the duration and severity of the pandemic in Benin, where vaccine prospects remain unclear and in key trading partners. This could weigh on the recovery.
Fitch expects Benin’s macroeconomic policy credibility to remain robust in the medium term.
The rating agency expects Benin to renew its medium-term programme with the International Monetary Fund (IMF), which expired in mid-2020, after the election in April 2021.
Fitch expects the general government (GG) deficit to narrow to 4.7% of GDP in 2021 and 3.5% in 2022, from 5.1% in 2020.
Gradual progress on fiscal consolidation and stronger medium-term growth will result in GG debt stabilising at around 48% of GDP over the projection period. This is after increasing to 46% in 2020 and from 41% in 2019, remaining well below the forecast B median of 70% in 2022.
Fitch expects government deposits to decline to 8% of GDP in 2022 from 10% in 2020, after three years of steady increase.
Guaranteed debt and state owned enterprises (SOE) debt together represent less than 1% of GDP in 2020, while the government has not yet signed any public-private-partnership agreements.
Benin issued two Eurobonds earlier in 2021, with the largest one sized at approximately $849.2 million (€700 million), with an 11-year tenor, carrying a 4.88% coupon, maturing in 2032.
The other bond is a €300 million note, with a 31-year tenor, carrying a 6.88% coupon, maturing in 2051.
Benin has issued the two Eurobonds with longer maturities than its inaugural Eurobond in 2019, and still benefits from strong official creditor support.
Fitch estimates the fiscal financing needs at around 12% of GDP in 2021. Benin has no external market debt coming due before 2024 and the government used the proceeds of its recent issuance to buy back 65% of its first Eurobond.
The remaining proceeds of the Eurobonds, about €675 million will cover around 40% of funding needs in 2021.
Fitch expects Benin to finance the remaining funding needs with official creditor support and rolling-over maturing domestic debt.
The rating agency expects the current account deficit to widen to 4.2% in 2021 and 2022, from 4% in 2020 and 2019, including official estimates of informal flows.
Fitch expects Benin’s external borrowing to cover most of the gross external funding requirement, which are estimated at around 9% of GDP per year over 2021 to 2022.
Benin’s access to the region’s pooled reserves, worth $19.8 billion at end-August 2020 or 6.2 months of the region’s 2019 imports, limits external liquidity risks.
Net external debt will remain comparable with peers, increasing slightly to 34% of GDP in 2022 from 33% in 2020.
Fitch would consider upgrading Benin if there is further evidence of a recovery of trade flows with Nigeria in the context of the pandemic shock.
The rating agency may also upgrade Benin if there is continued fiscal consolidation and progress on fiscal revenue-enhancing reforms leading to a reduction in budget deficits.
Fitch would consider downgrading Benin if there is heightened external vulnerability to a prolonged or more severe pandemic shock.
Failure to stabilise debt to GDP over the medium term, may also lead to a downgrade of the rating, according to the rating agency.