New York, June 18, 2019 -- Moody's Investors Service ("Moody's") has today
assigned first-time local and foreign currency issuer ratings of
B2 to the Government of Benin with a positive outlook. Moody's
also affirmed the senior unsecured foreign currency rating at B2.
The ratings were initiated by Moody's Investors Service and were not requested
by the rated entity.
The key drivers supporting the B2 rating are as follows:
1. "Low" economic strength due to the economy's
small size, reliance on subsistence agriculture that constrains
income levels, and the concentration of exports to one market,
Nigeria. The government's development agenda supports robust
medium-term growth prospects.
2. "Low" institutional strength, informed by
low scores in Worldwide Governance Indicators for government effectiveness,
rule of law and control of corruption, and poor fiscal management
and absence of effective checks and balances that led to a severe deterioration
of the government's balance sheet.
3. "Very Low" fiscal strength, with a relatively
high government debt burden although Moody's expects the debt burden
to decline as a result of the ongoing fiscal consolidation
4. "Moderate (-)" susceptibility to event risk
driven by liquidity risk albeit improving following the government's
fiscal consolidation and maturity re-profiling efforts.
The positive outlook reflects the prospect of continued fiscal consolidation
and stronger GDP growth through effective implementation of the 'Programme
d'Action du Gouvernement 2016-21' (PAG) that could
lead to a faster decline in the debt burden, borrowing needs and
liquidity risks than Moody's currently expects.
Concurrently, Moody's assigned local and foreign currency
deposit ceilings as well as local and foreign currency bond ceilings,
all at Ba2.
RATINGS RATIONALE
RATIONALE FOR THE B2 RATING
Low economic strength due to economic reliance on subsistence agriculture
and concentration of exports to Nigeria
The first driver supporting the decision to assign a B2 rating is the
economy's high vulnerability to shocks. Moody's expects
Benin's economic strength to remain low, despite growth-enhancing
reforms currently being implemented.
Hindering the sovereign's capacity to absorb shocks are Benin's
small economy, with GDP estimated at around $10.4
billion in 2018, relatively undiversified and reliant on low-productivity
agriculture, commercial activities and exports to one country,
Nigeria (B2 stable) which absorbs most of Benin's exports (66%
in 2017). Additionally, Benin is also characterized by low
income levels, with GDP per capita of $2,426 in PPP
terms in 2018, with 70% of the labor force employed in weather-reliant
agriculture. This explains why Benin's economic strength
and credit quality are susceptible to climate change.
The PAG, the government's development agenda, underpins
its efforts to overhaul the economy. Moody's expects that
the PAG will significantly bolster growth potential, although in
the foreseeable future Benin's structural economic vulnerabilities
will remain. The PAG aims to remove important bottlenecks to economic
growth and develop the country's infrastructure. Moody's
assumes that the plan will be partially implemented given its cost and
reliance on the participation of the private sector that remains uncertain.
In addition, institutional weaknesses will hamper the plan's
effectiveness. Nonetheless, Moody's expects that the
plan, if at least partially successful, will sustain robust
medium-term growth prospects and, by lessening exposure to
shocks to core sectors or export partners, lower volatility of growth.
Among the PAG reforms already implemented are the increased liberalization
of the labor market, the creation of a computerized land register,
and the outsourcing of the management of Cotonou's port to the Port
Authority of Antwerp. All of these help to improve the functioning
of the economy. In particular, with the Port of Cotonou,
an important asset of the economy, Benin could become a significant
commercial hub in West Africa as a gateway to serve the Nigerian market
and the landlocked countries to the north, which include Niger and
Burkina Faso.
Real GDP growth accelerated to 6.7% in 2018 and Moody's
expects it to remain at 6-7% in coming years as the plan
is further implemented. This will be supported by increased agricultural
production, sustained levels of investment above 25% of GDP,
and an acceleration in the services sector.
Low institutional strength reflecting low governance scores and poor fiscal
management in the past
Moody's assessment of Benin's institutional strength is informed
by its low scores in the Worldwide Governance Indicators. Benin
scores in the bottom quartile of Moody's rated sovereigns on government
effectiveness, rule of law and control of corruption, institutional
features that Moody's takes into account in its assessment of sovereigns'
credit quality. Poor fiscal management at the end of the mandate
of the previous administration in 2015-16, which led to a
severe deterioration of the government's balance sheet, points
to underlying institutional weaknesses including the absence of effective
checks and balances. However, the current administration's
measures aimed at fiscal consolidation and, with the IMF support,
strengthening the effectiveness and credibility of fiscal and other policymaking,
point to a potential improvement in Benin's institutional strength
assessment over time.
The country's membership of the West Africa Economic and Monetary
Union (WAEMU) supports macroeconomic stability through a stable exchange
rate that favors low and stable inflation (averaging 1.5%
since 2010). WAEMU membership also supports institutional improvements
as well as the deepening of regional markets. In addition,
the level of data transparency and reporting ensured by the WAEMU's
central bank, the BCEAO, supports Benin's institutional
strength.
Very low fiscal strength with a relatively high debt burden, that
is likely to decline with current fiscal consolidation efforts
The third driver underpinning the B2 rating is "Very Low"
fiscal strength reflecting the government's relatively high debt
burden, with debt estimated at 54.6% of GDP in 2018,
up from 30.5% of GDP in 2014. The sharp increase
in debt is the result of large expenditures ordered by the previous administration
just prior to the presidential election as well as counter-cyclical
fiscal policies to support the economy, implemented as soon as newly-elected
President Talon took office in April 2016.
However, the reduction in the fiscal deficit to 4.7%
in 2018 from 7.6% in 2015, and the commitment to return
to fiscal surplus in 2021 support an anticipated reversal in the debt
trajectory. While fiscal metrics are likely to move in that direction,
Moody's anticipates that the budget may return to surplus one or
two years later in 2022 or 2023. This is due to the fact that extra
spending pressure will come from security and defense expenditure,
as well as the need to fund large capital projects. Moody's
expects the debt-to-GDP ratio to be broadly unchanged this
year at 54% in 2019 and decline thereafter, moving close
to 50% in 2020.
"Moderate (-)" susceptibility to event risk,
mainly driven by declining liquidity risk.
The fourth driver underpinning Benin's B2 rating is "Moderate
(-)" susceptibility to event risk, driven by liquidity
risk. The government's financing needs have been sizeable
in recent years, in excess of 10% of GDP in 2017 and 2018.
Alongside fiscal consolidation, the government's efforts to
re-profile its domestic debt by lengthening its maturity including
through issuance of international debt and by increasing the share of
semi-concessional debt have resulted in material reductions in
annual borrowing requirements. Moody's anticipates gross
borrowing requirements will decline to around 8% of GDP in 2019
and further in 2020, reducing government liquidity risks.
However, despite recent successful international capital market
issuance, Benin's access to financing in times of sudden need
is not yet firmly established.
Additionally, Moody's assessment of political risk is "Low
(+)". Benin's political environment has been stable
since the introduction of the multi-party system in 1991 with six
presidential elections, all of them characterized by peaceful transitions
of power. However, the recent parliamentary elections during
which opposition parties where prevented from participating after the
introduction of a new electoral code, mean that opposition parties
are likely to use the street to express their opinion. Therefore
the risk of political instability has increased to some extent.
The banking system represents "Low (+)" risk to the sovereign:
there are no immediate contingent liabilities as a result of the sector's
small size. Finally, although Benin runs structural trade
deficits, its membership of the WAEMU supports the country's
external position, limiting external vulnerability risk.
RATIONALE FOR THE POSITIVE OUTLOOK
The positive outlook reflects upside risks to Benin's credit profile
that would result from faster and more sustained fiscal consolidation
and higher GDP growth than Moody's currently expect. Real
GDP growth has accelerated to an estimated 6.7% in 2018
from 4% in 2016 when the PAG started. The development agenda
underpins the government's efforts to overhaul the economy by removing
important bottlenecks to economic growth and developing infrastructure.
While in its baseline forecast Moody's expects the PAG to contribute
to strong growth, more effective implementation of the reforms would
sustain growth at higher rates and further increase Benin's economic
resilience over the medium term.
Moreover, through these reforms growth may become increasingly less
dependent on government spending, creating scope for faster fiscal
consolidation, a more rapid decline in the government's debt
burden and lower borrowing needs and liquidity risks than currently assumed
by the rating agency.
WHAT COULD CHANGE THE RATING UP:
Moody's will consider an upgrade of Benin's rating if i) the
ongoing implementation of the "Programme d'Action du Gouvernement"
(PAG) were to lead Moody's to conclude that high levels of economic
growth will be sustainable without recourse to fiscal stimulus,
pointing to a markedly faster decline in the government debt burden;
ii) a structural improvement in institutional strength, a long-term
constraint on Benin's rating.
WHAT COULD CHANGE THE RATING DOWN:
While a rating downgrade is unlikely at this point given the positive
outlook, Moody's would consider stabilizing Benin's
rating outlook if failure to sustain the reform effort, or an external
shock, were to lead Moody's to conclude that Benin's
government debt and, relatedly, the government's annual
borrowing requirement, will cause refinancing risks to rise.
Moody's will consider a downgrade if fiscal consolidation were to
reverse, leading to fiscal metrics more compatible with a lower
rating level. For example, as a result of a combination of
fiscal slippages, lower commodity prices, crystallization
of contingent liability risks and/or significant delays in the implementation
of the PAG as well as any reduced support from the donor community and
international financial institutions to implement the development agenda.
GDP per capita (PPP basis, US$): 2,426 (also
known as Per Capita Income)
Real GDP growth (% change): 6.7% (also known
as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.0%
Gen. Gov. Financial Balance/GDP: -4.7%
(also known as Fiscal Balance)
Current Account Balance/GDP: -8.4% (also known
as External Balance)
External debt/GDP: 26.3%
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 13th of June 2019, a rating committee was held to consider the
issuer's Economic Strength, Institutional Strength,
Fiscal Strength and Susceptibility to Event Risk, with a view to
assigning a first-time public issuer rating to the government of
Benin.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The local market analyst for this rating is Mali Aurelien , +971
(423) 795-37.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Elisa Parisi-Capone
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
