Congo dampened by liquidity woes

The Government of Republic of Congo’s long-term issuer ratings have been affirmed at Caa2, by Moody’s Investors Service due to liquidity pressures.

Moody’s has also kept Congo’s outlook at stable due to its favourable debt structure.

As a highly reliant-oil exporter with very limited stabilisers, Congo’s fiscal and liquidity situation comes under severe stress in times of low oil prices.

The coronavirus disease 2019 (COVID-19) shock and associated drop in oil prices has exacerbated Congo’s fiscal and liquidity pressures.

The last two oil price shocks have left the country with a government debt ratio of 100% of gross domestic product (GDP), up from around 40% in 2014. These shocks have also depleted government’s reserves built from past budget surpluses.

Prospects for meaningful improvement in public finances are unlikely given Moody’s medium-term oil price range of $45 to $65 per barrel.

Government debt has been classified as in distress by the International Monetary Fund (IMF) since the country entered its programme with the IMF in 2019.

In response, the government has restructured its loans from China-based development financier Export-Import Bank of China.

The government and is also negotiating with Singapore-based logistics company Trafigura and Switzerland –based mining company Glencore.

Amid very weak public finances, limited funding options represent a structural constraint.

The government’s main funding source remains the official sector and, to close any funding gaps, it incurs arrears to various contractors or creditors.

However, official funding sources come with conditions and precisely the clearance of arrears, especially to official lenders, as well as fiscal consolidation, which Congo struggles to meet.

Meanwhile, Congo’s access to international markets is highly uncertain and the Central African Economic and Monetary Community (CEMAC) regional capital and credit markets remain shallow and crowded.

Weak public governance also remains a challenge which exacerbates fiscal and liquidity pressure and gives rise to the risk of inadvertent missed debt payments.

Market debt, consisting of a single Eurobond and regional bonds, has been left outside the scope of the restructuring plan and is likely to remain so. However, a temporary missed payment of market debt obligations remains a risk.

Low data transparency, risk of misreporting of financial liabilities and the government’s track record of missing debt payments underlie the weaknesses of the overall public finance framework.

Lack of data availability inhibits informed policy decisions, including the critical task of ensuring that there is sufficient funding to meet debt service obligations.

For instance, Congo misreported an arrangement between its national oil company Société Nationale des Pétroles du Congo and commodity trading companies that gave rise to a government debt.

The Congolese government also twice missed a Eurobond coupon payment – first in 2016 because of an administrative error. The other is in 2017 because of restraining notices issued on behalf of a former contractor, Commisimpex, a Congolese engineering company.

Congo’s stable outlook balances the government’s favourable debt structure and international support against its still-very weak public governance and liquidity profile which result in a non-negligible risk of defaults.

Most of the debt is owed to official creditors and with limited exposure to currency volatility amid the peg of the local currency to the euro.

Moody’s expects that the government will continue its efforts to meet its conditions under its IMF programme. However, Moody’s expects this will remain a lengthy process, potentially delaying disbursements under the IMF programme.

An important milestone under the IMF programme is the restructuring of its debt owed to commodity trading houses, which would offer the prospect of eventual improvement in debt sustainability.

Moreover, the government is also ostensibly struggling to bring down arrears to goods and services providers and official creditors due to liquidity pressures. This situation is likely to remain at least until the end of 2021.

The gradual rebound in oil prices will not be sufficient to bring the government debt on a more sustainable path.

Based on Moody’s projections, debt will likely remain above 90% of GDP through to 2024. Fiscal consolidation efforts have so far lacked traction as exhibited by the limited improvement in the non-oil primary balance or non-oil tax collection.

The rating agency would consider upgrading the rating if government liquidity pressures abate as a result of strengthening liquidity management capacities.

Moody’s would also consider upgrading Congo should public finances and resilience to oil prices variation start improving.

The rating agency would consider downgrading Congo if there are indications that the government’s commitment to servicing its outstanding market debt to private creditors is eroding.

This comes after Fitch Ratings affirmed the Republic of Congo’s long-term foreign-currency issuer default rating (IDR) at CCC due to liquidity pressures exacerbated by the fall in oil prices in 2020.

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