Cameroon affirmed on liquidity

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Cameroon’s long and short-term foreign and local currency sovereign credit ratings have been kept at B-/B, by S&P Global Ratings, on expectations that the country will secure sufficient funding to mitigate its fiscal deficits.

S&P has also maintained Cameroon’s outlook at stable, on an expected stronger balance of payments performance on fiscal consolidation efforts aided by an IMF arrangement. This is as the country navigates macroeconomic risks associated with the coronavirus disease 2019 (COVID-19) crisis, volatile terms of trade, and a fragile security situation.

The rating agency expects that the recent approval of the three-year IMF program will help Cameroon meet its external financing needs and anchor fiscal consolidation efforts.

In addition, the partial refinancing of Cameroon’s 2015 Eurobond in July 2021 will smooth out the country’s external debt service in 2023 and 2024.

Nevertheless, the COVID-19 crisis, volatile global commodity prices, and a still-challenging security environment cloud Cameroon’s economic growth, balance of payment, and fiscal outlooks.

Cameroon’s rating reflects the country’s low-income levels as well as persistent twin fiscal and current account deficits (CADs). These generate sizable external financing needs and add to an already large external debt stock.

Moreover, security threats stemming from the Anglophone crisis in the western regions continue to pose a risk to the stability and effectiveness of institutions.

However, Cameroon’s limited economic, budgetary, and external fallout from the crisis, proven access to the international bond market, and engagement with the IMF support the ratings.

Post-crisis economic prospects appear to be strong. Natural gas production and new mining projects should support output in extractive industries.

Meanwhile, services should continue being an important growth factor, in line with the development of information and communication technologies and financial services.

The government’s large infrastructure projects, part and parcel of its new SND30 development strategy, could also lift productivity bottlenecks and spur economic growth if implemented.

The government has penciled in annual capital expenditure representing on average 5.8% of GDP in 2021 and 2024.

Cameroon’s economy proved resilient in 2020, with real output growing by 0.5%, whereas a deep contraction was anticipated at the start of the crisis.

The recovery could support the government’s fiscal consolidation measures, and it is expected that deficit will gradually narrow to 1.9% of GDP by 2024. This will limit debt accumulation and help curtail external imbalances.

Nevertheless, risks to this scenario persist, primarily pertaining to weaker revenue mobilization efforts or political challenges to cost-containment measures.

S&P believes the three-year, $690 million program approved by the IMF in July 2021 will ease external financing needs and provide a policy anchor. This is also expected for Cameroon’s membership of the Central African Economic and Monetary Community (CEMAC).

The recent general allocation of Special Drawing Rights (SDRs) by the IMF also brought a welcome injection of reserve assets not only to the country, but also to the five other CEMAC members. This bolstered the community’s overall foreign exchange reserves.

In July 2021, the partial repurchase of the $750 million Eurobond allowed Cameroon to extend the average maturity of its external debt. At the same time, it smoothed out its external commercial debt service schedule for 2023 and 2025.

S&P expects Cameroon’s economy to expand by 3.4% in 2021. The recovery in the country’s most important trade partners, notably China and Europe, has been relatively strong, fueling external demand for commodity exports.

Nevertheless, the slow rollout of the COVID-19 vaccination program could dampen economic performance, especially if a new wave of infection emerges.

According to Johns Hopkins University, only 0.32% of the population is fully vaccinated as of 1 October 2021. Authorities are working with the African Union to boost their sourcing of doses to take that share to 30% in the coming months.

S&P anticipates growth to accelerate to an average 4.4% per year in 2022 and 2024. The government’s priority investment program for the period will represent an important part of that growth trajectory.

This will be done by addressing key productivity bottlenecks, chiefly the supply of electricity and the quality of transport infrastructure between production centers.

Several new hydropower projects are in the pipeline, in particular the 420-megawatt dam being built in Nachtigal, in the centre region.

S&P also expects new investment in Kribi to enhance the standing of the deep-sea port as a regional logistics hub.

The country’s new development strategy (SND30) emphasizes industrial development, which the government will seek to achieve through import substitution and targeted sectoral support.

Cameroon intends to spend approximately $330 million (XAF180 billion), or 0.7% of 2021 GDP over four years, as part of its post-crisis recovery plan. This will be to help build local agroindustrial supply chains.

S&P also anticipates that extractive industries will continue contributing to growth. The new Sanaga-2 offshore platform will contribute to supporting gas production in the coming years.

The rating agency further expects the mining sector to be a growth driver and attract foreign direct investment (FDI), given Cameroon’s large mineral resources. The Minim-Martap bauxite mine could start operations in 2022.

IMF’s new program includes several reforms intended to improve governance, transparency, and the business environment.

The government notably intends to facilitate the resolution of tax disputes through a deposit and consignment fund.

A review of investment incentive schemes introduced in 2013 could also be in the cards, to increase their efficiency and boost competition.

In S&P’s view, steadfast implementation of these reforms could lift growth potential, but it expects Cameroon’s challenging business environment will continue to constrain economic performance.

Faster economic growth will boost government revenue over the outlook horizon. At the same time, authorities will seek to limit operating expenditure growth, in particular through more rigorous control of the state’s wage bill.

This should free up resources for Cameroon’s investment and recovery agenda. S&P expects capital expenditure will average XAF1.44 trillion a year in 2021 and 2024, about 5% of GDP. This is on top of recovery spending averaging XAF140 billion a year.

S&P forecasts the government will manage to post gradually declining deficits, trending towards 1.9% of GDP in 2024, compared with 3.5% in 2020.

Public finances were heavily affected by the COVID-19 crisis in 2020. However, revenue proved more resilient than expected, owing to a smaller economic fallout, recovering oil prices, and postponements and delays in externally financed investment projects.

Beyond immediate consolidation measures, S&P expects Cameroon will gradually introduce structural fiscal reforms, in line with commitments under new arrangements with the IMF.

The government plans to modernise its tax and customs administration, notably by digitalising procedures and enhancing the integration between various ministries’ platforms to combat fraud.

Authorities could also cautiously streamline tax expenditure. Valued Added Tax (VAT) cuts alone represented about XAF400 billion, 1.7% of GDP in 2019, and typically benefit wealthy households more.

Cameroon is endeavoring to encompass more of its large informal sector in its tax rolls, notably by requiring tax registration at points of contacts with public companies.

In S&P’s view, however, these efforts to structurally widen the tax base will require bolstering administrative capacity and will only bear fruit over the medium-to-long term.

Meanwhile, risks of fiscal slippages, not least linked to spending executed through exceptional budgetary procedures, will linger over the outlook horizon.

Declining deficits will help broadly stabilise Cameroon’s net general government debt as a share of GDP at around a moderate 38% in the medium term.

S&P expects that the country will gradually draw on its large stock of contracted but undisbursed external project loans, which represent about XAF3,170 billion or 13% of GDP at end of July 2021. This is as the country also benefits from concessional lending from international financial institutions.

The approval of the new program with the IMF in July 2021, a positive step, resulted in a $177 million, 0.4% of GDP disbursement. This is also expected to bring in an additional $513 million over the next three years, provided that each of the semi-annual reviews are completed.

This engagement with the IMF could also catalyse additional donor support. This includes from the World Bank and African Development Bank, while setting ceilings on the disbursement of non-concessional external loans.

Reflecting these ceilings, S&P expects that authorities will continue to rely on issuing treasury bonds and bills on the regional monetary market to meet fiscal needs.

Over 70% of the government’s debt is external and in foreign currency. However, the partial repurchase operation of the 9.5%, $750 million Eurobond from 2015 will significantly lower commercial debt maturities falling within our forecast horizon.

On 30 June 2021, Cameroon issued a €685 million Eurobond, with a 12-year maturity and 5.95% coupon, which will come due in three installments from 2030 and 2032. It used some proceeds to repurchase about 80% of the 2015 Eurobond.

As a result, principal repayments under this security will represent around 1% of foreign exchange reserves per year in 2023 and 2025, instead of about 5% as per the original schedule. The more favorable coupon will also lead to interest payment savings within our forecast horizon.

S&P does not factor the debt of state-owned enterprises (SOEs) into its estimate of general government debt. This is because it believes that they retain the capacity to stay current on their commercial debt obligations despite their low profitability.

At the end of 2020, SOEs debt totaled XAF951 billion, about 9.2% of total public debt or 4% of GDP, of which only 3% benefited from an explicit guarantee from the country.

The national refinery, SONARA, makes up the lion’s share of this debt, just under XAF695 billion, and is the government’s most important contingent liability outside the banking sector.

Two-and-a-half years after a fire destroyed the company’s facilities, SONARA still operates as a fuel importer for the domestic market, with a guaranteed 80% market share.

A levy of about XAF48 per imported liter is being set aside in an escrow account at BEAC, the central bank, to fund its debt service.

The company recently decided to rebuild its facilities, equipped with a hydrocracker, a more advanced technology than the one from before the fire. This will ultimately allow it to refine Cameroon’s own heavy crude oil.

Engineering studies are ongoing to determine the precise technical options and the operation’s costs.

However, authorities are planning this investment around a tentative cost of XAF500 billion, which  S&P understands a public-private partnership could finance. Efforts to restructure the company’s debt are continuing; so far, an agreement has been reached with domestic banks.

On the external side, S&P expects Cameroon’s terms of trade to improve in 2021, on rising commodity prices.

Indeed, five key commodities, oil, gas, cocoa, cotton, and wood make up 80% of exports, with oil and gas alone accounting for 50%. This should partly mitigate the strong rebound in imports volumes, which reflect pent-up consumer demand and resuming public investment projects.

Tensions in the maritime shipping sector could widen Cameroon’s service deficit, leading to a CAD of 3.8% of GDP, up from 3.7% in 2020.

In 2022 and 2024, the country’s external imbalances should be curtailed by the consolidation of public finances. The government’s import-substitution and export-boosting strategies may also have positive effects.

However, these would only be gradual and will be contingent on stronger domestic supply chains. Moreover, S&P forecasts that easing oil and gas prices in 2022 and 2024 will partly counter these trends.

Oil production is also expected to decline somewhat in 2023 and 2024, to 21.1 million barrels per year, 58000 per day, from 26 million barrels, 71000. However, this should be mitigated by a concomitant rise in gas production.

Beyond the outlook horizon, Cameroon’s national oil and gas company, the SNH, plans to start to monetize the offshore Yoyo-Yolanda gas field, jointly developed with Equatorial Guinea.

S&P also expects stronger net FDI within the forecast horizon as investment projects resume after a difficult crisis year.

Owing to the 2015 Eurobond’s refinancing, external debt service will put less pressure on Cameroon’s buffers than anticipated. However, debt repayments delayed in 2020 and 2021 as part of the G20’s debt service suspension initiative will start coming due again in 2022 and 2023.

S&P believes that the monetary arrangement of CEMAC mitigates most risks related to substantial exchange-rate volatility that could sharply increase the external debt service burden.

In S&P’s opinion, the French treasury’s guarantee of convertibility, at XAF655.957 per euro since 1994, when it was last devalued, represents a buffer against shocks affecting the whole monetary zone.

The six-member states’ foreign exchange reserves are pooled at the regional level at the Bank of Central African States, providing a buffer against country-specific balance-of-payments shocks.

The IMF’s August 2021 general allocation of SDRs will benefit not only Cameroon, which received SDR 264.5 million, about $377 million. But it will also benefit the five other member states, about $1.08 billion, bolstering the zone’s external stability.

S&P would consider raising the ratings if Cameroon’s fiscal policies support declining government deficits, external financing needs ease, or external leverage decreases beyond our expectations.

Alternatively, the rating agency could raise the ratings if the country’s security threats recede durably.

S&P could lower the ratings if external imbalances and fiscal deficits increase beyond its expectations, leading to a sustained decline in foreign exchange reserves. This would also cast doubt on Cameroon’s ability to service its debt.

This comes after Cameroon’s outlook was upgraded to stable from negative by Fitch Ratings, earlier in 2021. This was on the expectation that the country would secure sufficient medium-term funding to mitigate its financing risks.

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