Cote d’Ivoire boosted by governance

Cote d’Ivoire’s long-term foreign-currency issuer default rating (IDR) has been affirmed at B+ by Fitch Ratings, with the rating agency stating confidence in the government’s commitment to fiscal discipline.

The outlook has also been kept at stable, on the expectation of Cote d’Ivoire’s government’s continued commitment to fiscal prudence and reforms.

Fitch expects Cote d’Ivoire’s general government (GG) debt to stabilise well below the current B and BB medians over the medium term. This is despite a temporary hit to public finances and economic growth from the coronavirus diseases 2019 (COVID-19) pandemic.

Cote d’Ivoire’s increased budget spending of around 1.5% of gross domestic product (GDP) in 2020 will partially cushion the impact of the COVID-19 crisis on domestic demand.

This is also on the back of the resilience of the international prices of cocoa, Cote d’Ivoire’s main tradeable commodity which accounts for around 40% of exports.

Fitch expects GDP growth to drop to 2% in 2020, its lowest level in nine years, from 6.9% in 2019 and recover to 8.5% in 2021. Growth will average 5.3% in 2020 to 2021, which is above the current B and BB medians average of 1.5% and 1.1%.

The rating agency expects GG deficit to widen to 5.5% of GDP in 2020 from 2.3% in 2019. The growth rebound and phasing out of pandemic-related spending will drive a narrowing of the GG deficit to 3.3% of GDP in 2021.

Low fiscal revenues of 15% of GDP over the last three years constrain fiscal space amid continued spending pressures from social demands and infrastructure gaps.

The sharp growth slowdown and widening GG deficit will cause a rise in GG debt to 43.5% of GDP in 2020 from 38.6% in 2019. The agency expects GG debt to stabilise around 42% of GDP in the medium term, compared to forecasted B and BB medians of around 60%.

Foreign-currency (FC) debt accounted for 58% of GG debt at 2019 year-end. The government aims to contain risks from FC through hedging operations and privileging external financing in euro to which the West African CFA-franc (XOF) is pegged.

The country’s principal maturities coming due on external bilateral debt between May and December amount to 0.1% of GDP. This is in addition to 0.1% of GDP in interest payments over the full year.

This excludes the contrat de desendettement et de developpement (C2D) and programme de conversion de dette en projets de developpement (PCD) arrangements with France and Spain.

The government’s proactive debt management policy has smoothed the debt maturity profile and the country does not face significant principal repayment on external market debt before 2024.

State-owned enterprise (SOE) debt is relatively low, at around 3% of GDP, as of June 2019. Fitch is however concerned that the pandemic shock could trigger government financial assistance to some public entities such as Air Cote d’Ivoire, the state-owned transportation company.

A possible deterioration in bank asset quality from a weaker operating environment could raise the need for government support to the banking sector. The banking sector’s total assets account for 35% of GDP, with a high share of foreign bank ownership.

Fitch expects the current account deficit (CAD) to widen to 3.9% of GDP in 2020 from 2.7% in 2019 due to the contraction in exports, and narrow to 3.2% in 2021.

Foreign direct investments (FDI) and government borrowing from official creditors will cover over half of gross external funding needs of around 5% of GDP per year in 2020 to 2021.

The rating agency expects Cote d’Ivoire’s net external debt of 16% of GDP to rise to 19% at 2021 year-end.  This is expected to remain well below the B and BB medians of 32% and 26%.

West African Economic and Monetary Union’s (WAEMU) regional reserves amounted to $17.1 billion as of March 2020, equivalent to 5.3 months of the region’s 2019 imports.

The rating agency does not expect the COVID-19 crisis to trigger significant pressures on the XOF peg in the medium term.

Fitch may consider downgrading the rating if there is deterioration in political stability and aggravation of security incidents.

The rating agency may also consider downgrading the rating in the event of a rising debt trajectory and material slowdown of the GDP growth trend.

Fitch may consider upgrading the rating if there is evidence of durable reduction in political and security risks and continued adherence to fiscal prudence and progress on fiscal reforms.

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