Cameroon lifted on funding ease

Cameroon’s outlook has been upgraded to stable from negative by Fitch Ratings on expectation that the country will secure sufficient medium term funding to mitigate its financing risks.

Fitch has also affirmed Cameroon’s long-term foreign-currency issuer default rating (IDR) at B, as the coronavirus disease 2020 (COVID-19) crisis caused only a mild deterioration in public finances.

Cameroon’s public finances have proven relatively resilient to the crisis shock and Fitch expects 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 gross domestic product (GDP), from 3% in 2019, owing to an only mild hit to tax collection. This was also a result of limited expenditure increases in response to the COVID-19 crisis, 1.3% of GDP, given financing constraints.

The phasing-out of crisis-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.

Fitch expects 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) in 2021 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 International Monetary Fund (IMF) before the end of the second quarter of 2021.

This 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.

Cameroon may issue another Eurobond to buy back a part of its $750 million Eurobond, with a coupon of 9.5%, due to be repaid in three instalments over 2023 to 2025.

This would smooth the repayment schedule, although the annual amortisation over the period is small at 0.6% of GDP.

Fitch expects 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. This is supported by membership to the Central African Economic and Monetary Community (CEMAC).

Fitch projects 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% for 2022.

Fitch’s debt ratio includes the debt of state owned enterprise (SOE) SONARA, an oil and gas provider, 3% of GDP in 2020 as the government serviced this in 2020. However there is no explicit state guarantee.

Other SOE debt is estimated at 4.2% of GDP in 2020, although this official figure could understate its magnitude.

Fitch expects real GDP growth to rebound to 4.3% in 2021 and 3.7% in 2022, after showing relative resilience to the crisis shock with a 1.5% contraction in 2020. This is against the B median of -4.2%.

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 crisis shock would hit growth.

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 of $7.4 billion end-January 2021 and to the convertibility guarantee provided by France somewhat mitigates external liquidity and short-term devaluation risks.

Fitch would consider upgrading Cameroon’s rating if there is a reduction in the budget deficit and the government debt-to-GDP ratio.

The rating agency may also upgrade Cameroon’s rating if there is an implementation of reforms leading to an improvement in the business climate and diversification of the economy.

Fitch would consider lowering the rating if there is an emergence of fiscal and external financing pressures and heightened political instability that significantly affect public finances or the economy.

This comes after Fitch affirmed Cameroon’s outlook at negative, as the country struggled with financing risks exacerbated by the COVID-19 crisis.

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