DRC downgraded on shock management concerns

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Democratic Republic of the Congo’s issuer rating has been downgraded from B3 to Caa1 by Moody’s, with the outlook changed to stable from negative, over the country’s shock absorption concerns.

Moody’s is concerned about the country’s policymaking institutions’ ability to respond to economic and political shocks. The DRC ranks towards the bottom of international rankings for governance and institutional strength, and its policymaking institutions have limited capacity to respond to such shocks and mitigate their effects.

Despite the countries improved gross domestic product (GDP) and a low debt burden – moderately severe shocks could raise the risk of default, according to the rating agency.

GDP growth has been on the back of rising production in the mining sector, with copper and cobalt being the two major commodities for DRC. In 2018, real GDP growth reached 5.8% of GDP, compared to population growth of 3.0%.The GDP per capital was under $800 in 2018 at purchasing power parity.

However, Moody’s is concerned about the country’s dependence on the mining sector — which accounts for close to 90% of total exports on average over the last three years. This means that both the economy and the public finances are extremely vulnerable to sustained falls in commodity prices.

Shock concerns are also around natural disasters such as widespread epidemics, that would likely have a similarly negative impact. In Moody’s view, although such events are not part of its base case assumptions, they should not be thought of as ‘tail’ events, having already occurred in the DRC and elsewhere in the region in recent years.

The high exposure to such events arises in part because of the very high level of poverty in the DRC and the very low quality of the infrastructure on which a large and dispersed population is reliant, Moody’s said. It also reflects the weakness of the DRC’s institutions.

Pressure on the currency and public finances has in the past led to significant macroeconomic instability. While foreign exchange reserves have risen, to $1.13 billion at the end of April 2019, they cover less than one month of imports and do not offer significant financial and policy room to respond to a shock.

Moody’s does however assert that with low and falling debt, the government has in principle considerable fiscal space with which to mitigate shocks. However, in practice, the government continues to manage its budget with a narrow range of options to reallocate expenditure or raise revenue in case of need.

Political risk remains high despite the peaceful transition of power from former president Joseph Kabila to president Félix Tshisekedi, notwithstanding the controversy surrounding the vote count, Moody’s added.

Political risk would have the greatest impact were it to undermine foreign investors’ and lenders’ willingness to maintain a presence in the country.

An economic or political shock that would put pressure on the currency and significantly raise the government’s debt burden, could worsen the rating.

On the upside, a normalisation of DRC’s relations with the international community could lead to significant and sustained financing at low costs – thereby lifting the economy’s prospects and shore up foreign exchange reserves.

The government’s ability to use favourable economic and commodity prices to rebuild its foreign exchange reserve and fiscal buffers would help in improving the country’s rating.