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Rating Action:

Moody's assigns first-time Ba3 rating to the Republic of Gabon; outlook stable

 The document has been translated in other languages

12 Dec 2014

London, 12 December 2014 -- Moody's Investors Service has today assigned first-time local and foreign-currency issuer ratings of Ba3 to the government of the Republic of Gabon. The outlook on the ratings is stable.

The key credit strengths underpinning the Ba3 rating of the Republic of Gabon include (1) robust growth prospect, (2) strong government balance sheet, and (3) reduced external vulnerability afforded by its membership of the CFA franc zone. These are balanced by credit constraints that include (1) the high reliance on the oil sector for growth, revenues and exports, (2) low economic governance indicators and (3) socio-economic disparities.

The stable outlook reflects Moody's expectation of a relatively stable macroeconomic environment and that the government will maintain a low debt level, despite increased spending and lower oil production revenues in coming years.

RATINGS RATIONALE

-- MODERATE ECONOMIC STRENGTH, DESPITE RELATIVELY HIGH RELIANCE ON VOLATILE OIL SECTOR

The first driver underlying Moody's assignment of the Ba3 ratings is the moderate economic strength of the Republic of Gabon which balances its relatively high wealth and healthy growth prospect against the economy's small size and relatively high reliance on the oil sector. While GDP per capita exceeds $20,000 on a purchasing power parity basis, nominal GDP of $19 billion positions the Gabonese economy in the 24th percentile of sovereigns within Moody's rated universe.

The oil sector contributes around 43% of GDP and represents around 85% of the country's exports, albeit this reliance is on par with other Ba-rated oil and gas producers such as Suriname (Ba3, stable), the Republic of Congo (Ba3, stable) or Angola (Ba2, stable). The Republic of Gabon's oil production has fluctuated since it started in the 60s, but output has been trending down since 2010 - daily production averaged 237,000 barrels lately versus 245,000 in 2012.

Despite its high per capita income the Republic of Gabon's human development indicators are lower than levels typically observed in middle-income countries. According to Moody's, unequal income distribution is preventing more inclusive socio-economic dynamics that would otherwise support economic stability. While the government's policy programme, described in the 'Plan Stratégique Gabon Emergent 2025', targets these challenges through initiatives that aim to diversify the economy, strengthen public finances and make growth more inclusive, the extent to which the policies will bring the intended results (time-wise and scope-wise) remains uncertain.

At the same time, Moody's considers the country's growth outlook as robust, despite the expectation that annual oil production will likely continue to decrease. The rating agency's expectation that other abundant natural resources will increasingly be exploited supports this view. For instance, manganese production, a mineral primarily used in metallurgic processes, has favourable prospects because almost no substitute for it exists and only few countries possess exploitable reserves of this mineral. In Moody's view, the country's healthy growth outlook is also supported by the government's plan to diversify the economy via, among other initiatives, the upgrading of the country's infrastructure.

-- VERY LOW INSTITUTIONAL STRENGTH, THOUGH MITIGATED SOMEWHAT BY TRACK RECORD OF PRUDENT MONETARY POLICY

The second key driver of the Ba3 rating is Moody's assessment of the Republic of Gabon's weak institutional strength, as reflected in weak governance indicators. To some extent, this is mitigated by the Republic of Gabon's track record of prudent monetary policy as the country is a member of the Communauté Financière Africaine (CFA) zone.

According to indicators published by international organizations such as the World Bank and Transparency International, the Republic of Gabon scores low to very low in terms of economic and public governance and ease of doing business. In addition, Moody's notes that statistical information is particularly scarce, limiting the transparency of the institutional setting, as is the availability of timely data to support decision-making, factors that both contribute to Moody's assessment of the country's very low institutional strength.

However, Moody's believes that these governance weaknesses are partly offset by the relatively prudent monetary policy framework which has been effective at maintaining relative price stability. As a member of the CFA franc, the Republic of Gabon's monetary and exchange-rate policies are set at the supranational level by the Bank of Central African States (Banque des Etats de l'Afrique Centrale, BEAC). As such, the Republic of Gabon's currency benefits from relative price stability and contained risk of a balance of payment crisis as a result of the following principles: (1) the CFA franc is fixed against the euro; (2) the French treasury guarantees the convertibility of the CFA franc; (3) there is a requirement to pool all currency reserves.

-- VERY HIGH FISCAL STRENGTH UNDERPINNED BY STRONG GOVERNMENT BALANCE SHEET

The third key driver of the rating is the Republic of Gabon's very high fiscal strength. This assessment is primarily based on the low government debt burden, with interest payments representing 5.6% of government revenue while the stock of debt was close to 28% of GDP in 2014. The latter is both a result of a market based Paris Club debt buyback operation in 2007, and the accumulation of fiscal surpluses. The Republic of Gabon's debt burden is low compared to Ba3 rated peers: the median debt-to-GDP ratio for this rating category was 34.5% in 2013, while interest payments as a proportion of revenue was 6.7% for this rating cohort median. While government debt is mostly external and foreign currency-denominated, the risk that the debt service burden rises because of a weakening CFA is limited because of the currency arrangement and the fact that a substantial share of the government's revenue is derived from oil. These US dollar-denominated oil revenues act as a natural hedge against adverse currency movements.

Moody's anticipates that government debt will remain low even though it is set to increase, primarily in order to finance the government's large capital expenditures, but also due to other factors constraining the Republic of Gabon's fiscal performance. For example, strengthening the social safety net in line with the President's call on the government to implement the "Social Pact", as well as the continued erosion of oil-related revenues.

Moody's notes that despite the government's reserves equivalent to 10% of GDP, the IMF considers the country's fiscal savings do not sufficiently hedge the susceptibility of the government's revenue and fiscal position to severe commodity price shocks. Indeed, more than half of the government's revenues are derived from the oil sector (between 50% and 60% depending on the year), making the sovereign's fiscal health highly reliant on the sector.

-- POLITICAL DYNAMICS POSE MODERATE EVENT RISK

The fourth key driver underpinning the Ba3 rating is the moderate event risk posed by the political environment. The political landscape balances, on the one hand, the country's relative political stability with, on the other hand, the difficult reconciliation of political, economic, financial and social imperatives as well as the low perceived voice and accountability according to the World Bank. All these characteristics, however, are not unique to the country in a region where political risk typically represents a constraint on sovereign creditworthiness.

The absence of political pluralism -- reflecting the dominance of one party during the past few decades and the opposition's reduced presence in the political landscape in the aftermath of the 2009 presidential election -- translates into a low perception of voice and accountability.

Moreover, political event risk further stems from the challenging balance between meeting socio-economic, environmental and ethnic expectations while preserving the country's political and macroeconomic stability in a context of high income inequality and decreasing government revenues derived from oil production.

Other potential sources of event risk -- such as from the banking sector, external vulnerabilities of the economy, or government liquidity -- are assessed to be low or very low. The Republic of Gabon's membership of the CFA franc zone as well as the level of reserves of the BEAC shield the Gabonese economy and the government's liquidity position from external shocks.

WHAT COULD MOVE THE RATING UP/DOWN

As institutional weakness is the republic's key credit constraint, positive pressures on the rating would be the result of improvements in the institutional setting, particularly related to private and public governance or to the business environment. Successful implementation of measures and reforms that diversify the economy's productive base and improve income inequality would also be credit positive.

Sovereign credit quality would come under downward pressure if the government's fiscal position deteriorates substantially or quicker than anticipated, or if tensions in the socio-political environment intensify.

COUNTRY CEILINGS

As part of the assignment of sovereign ratings for the Republic of Gabon, Moody's has today also set the following ceilings for domestically based issuers of corporate and structured ratings:

Foreign-currency bond ceiling: Baa3

Foreign-currency deposit ceiling: Baa3

Local-currency country risk bond and deposit ceilings: Baa3

The local-currency country ceilings of Baa3 reflect the maximum credit rating achievable in local currency for a debt issuer domiciled, or a deposit in a bank, in the Republic of Gabon. The ceilings on foreign-currency bonds and bank deposits capture foreign-currency transfer and convertibility risks.

GDP per capita (PPP basis, US$): 20,520 (2013 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 5.6% (2013 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 3.3% (2013 Actual)

Gen. Gov. Financial Balance/GDP: 1.6% (2013 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 3.6% (2013 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: Moderate level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 04 December 2014, a rating committee was called to discuss the rating of the Gabon, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, the issuer's institutional strength/ framework, the issuer's fiscal or financial strength, including its debt profile, and the issuer's susceptibility to event risks.

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Lucie Villa
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Alastair Wilson
MD-Global Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns first-time Ba3 rating to the Republic of Gabon; outlook stable
No Related Data.
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