Cameroon affirmed on expected rebound

Cameroon’s long-term foreign-currency issuer default rating (IDR) has been kept at B with a stable outlook by Fitch Ratings on expected economic rebound.

The country’s rating also reflects a moderate debt levels and expectations of fiscal consolidation  – in addition to the economic rebound after the coronavirus disease 2019 (COVID-19) shock.

This rating is balanced against low governance and development indicators and security challenges in the Anglophone and Northern regions which are affecting credit metrics.

Fitch expects GDP growth of 3.6% in 2021 and a return to the pre-crisis trend of close to 4% in 2022 and 2023 after a slowdown in 2020 at 0.5%.

Growth will be driven by the strengthening of export-oriented industries including agriculture and forestry driven by the global economic rebound.

The gradual decline in oil production, accounting for 5% of GDP, will be offset by the dynamism in non-oil sectors.

A longer or more severe pandemic shock globally, tighter monetary policy and slow progress on vaccination locally could hit growth.

Cameroon’s public finances recorded only a mild deterioration due to the crisis shock, owing to a contained fiscal response and financing constraints that acted as a break on spending.

Expenditure related to COVID-19 was 0.7% of GDP in 2020 and 0.5% in 2021 and is likely to remain similar in 2022 with larger planned purchases of vaccines. Meanwhile revenues were impacted by tax relief related to the crisis.

Fitch forecasts the fiscal deficit on a cash basis will widen to 3.8% of GDP from 3.6% in 2020. The phasing-out of crisis-related relief measures and a recovery in tax receipts will bring the deficit down to 2.9% of GDP in 2022 and 2.7% in 2023.

The government has more optimistic projections, but Fitch expects delays in removing long-standing tax exemptions.

Fitch assumes the government would cut capital expenditure if revenues fell short of expectation in order to continue gradual deficit reduction.

Fitch expects Cameroon to meet its financing needs in 2022 and 2023, 5.3% of GDP through external project loans and domestic financing along with official creditor budget support loans.

Cameroon signed a three-year arrangement with the IMF under the extended credit facility and the extended fund facility.

The programme will provide funds of 0.3% of GDP in 2022 and 2023, which will catalyse additional official creditor support. Fitch assumes that the programme will be broadly on track over our forecast period to end of 2023.

In July 2021, Cameroon issued a new Eurobond with the proceeds used for a partial buy-back of the initial Eurobond and to finance development projects.

This reduces roll-over risk, given the initial Eurobond originally would have required principal repayments of 0.6 % of GDP per year between 2023 and 2025.

External debt maturities after the operation will amount to 2.0% of GDP in 2022 and 2023.

Fitch projects general government debt to peak at 46% of GDP in 2022, from 45% of GDP in 2020, which remains low compared with 70.3% of GDP forecast for the B category median in 2023.

Its debt ratio includes the debt of the public refinery SONARA, 3% of GDP in 2020. The authorities reached an agreement with nine banks for the repayment of 1.1% of GDP of SONARA’s debt over 10 years.

Negotiations over the debt owed to traders are on-going and could lead to an agreement in 2022. SOE debt not included in our debt metrics are estimated at 8% of GDP in 2020 by the IMF.

External liquidity risks are contained, although longer-term regional vulnerabilities persist. Fitch forecasts the current account deficit to narrow to 3.2% of GDP in 2021 from 3.6% of GDP in 2020.

This is as agricultural exports increase, boosted by the recovery of Cameroon’s trading partners.

The current account deficit will then slightly increase to 3.4% of GDP in 2022 and 3.5% in 2023 as imports to support development projects rise. The bulk of external funding needs will be funded by government borrowing.

In November 2021, the regional central bank (BEAC) tightened its monetary policy stance by increasing two of its four policy rates by 25 basis points, the auction rate to 3.5% and the marginal loan rate to 5.25%.

Fitch expects the central bank’s monetary policy to progressively tighten with the aim of stemming monetary growth to avoid pressure on the exchange rate peg to the euro.

Access to CEMAC’s pooled stock of international reserves and to the convertibility guarantee provided by France mitigate external liquidity and short-term devaluation risks.

CEMAC’s pooled reserves stood at about $8 billion or 3.4 months of forecast imports as of end-August 2021, up 12% since end of 2020. This was on the back of the IMF special drawing rights allocation and official creditor disbursements to member countries.

Fitch would downgrade the rating if there was emergence of fiscal and external financing pressures. For example, resulting from a failure to narrow the fiscal deficit or a failure to secure official creditor support.

The rating agency would also downgrade the rating if there was heightened political instability that significantly affects public finances or the economy.

Fitch would upgrade the rating if there was a reduction in the budget deficit and the government debt to GDP ratio. This would particularly occur if supported by improved management of public finances and a widening of the tax base.

The rating agency would also upgrade the rating if there was an improvement in the business climate and diversification of the economy.

An improvement in governance indicators reflecting an easing of political and security risks would also lead to an upgrade.

This comes after Cameroon’s long and short-term foreign and local currency sovereign credit ratings were affirmed at B-/B, by S&P Global Ratings, earlier in 2021.

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