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Rating Action:

Moody's changes Gabon's outlook to positive from stable; Caa1 ratings affirmed

14 Jun 2019

Paris, June 14, 2019 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Gabon to positive from stable and affirmed its long-term local and foreign-currency issuer and senior unsecured debt ratings at Caa1.

The key drivers of the change in outlook to positive from stable are early signs of easing liquidity pressure as fiscal consolidation continues and early indications of improving capacity by the government to manage its liquidity and debt payments. This has been reflected in a full clearance of government arrears on external debt as of April 2019. Moody's now sees a lower probability of renewed accumulation of arrears on debt.

Gabon's Caa1 ratings remain constrained by liquidity risks given limited financing options and very low institutional strength that point to possible future stress on the government's capacity to service its debt.

Gabon's local-currency and foreign-currency bond and deposit ceilings remain all unchanged at B1.

RATINGS RATIONALE

RATIONALE FOR THE POSITIVE OUTLOOK

EARLY SIGNS OF EASING LIQUIDITY PRESSURE

Moody's expects that the Government of Gabon will continue to pursue fiscal consolidation started in 2017, contributing to easing currently tight liquidity.

Gabon's main fiscal anchor as part of an IMF programme -- revenue net of oil proceeds less spending net of capital transfer -- has improved to a deficit of 6% of non-oil GDP in 2018, from 10% in 2017 and 11% in 2016.

Structural fiscal reforms will support fiscal consolidation in the medium term. Moody's expects that the government will continue to scale back the wage bill by maintaining the hiring freeze implemented in 2018 and the non-revalorisation of wages. On the revenue side, measures to improve tax collection such as the removal of discretionary tax exemptions are starting to yield results with non-oil tax revenue up by 39% as of March 2019 compared to March 2018. By contrast, oil revenue is not contributing to fiscal improvements, rising only 1.6% in 2018.

With ongoing fiscal consolidation, Moody's projects government debt (which excludes arrears to goods and service providers) to fall to around 54% of GDP by 2020, from its peak of 64% of GDP reached at year-end 2016.

Narrowing government funding needs as a result of the ongoing fiscal consolidation, coupled with official sector support until 2020, especially from the IMF and the World Bank, will likely progressively ease liquidity pressures.

Evidence of easing liquidity pressures comes from the clearance of arrears on Gabon's government's external debt as of April 2019. These arrears (including on loans from official partners) peaked at 3% of GDP in the third quarter of 2017. Clearance occurred more than a year after the end-2017 target initially set in July 2017 under the IMF programme due to the government's weak treasury management, as well as to postponed loan disbursements by some official lenders, including the World Bank.

IMPROVEMENTS IN LIQUIDITY AND DEBT PAYMENTS MANAGEMENT

The government has taken corrective measures to address the structural issue of treasury and debt payments management in Gabon. Combined, these initiatives lower the risk that the government will accumulate arrears on debt once again in future.

As part of these measures, the government has consolidated almost all its deposits into a single treasury account held at the central bank, offering it a consolidated view over its treasury position. The government has already transferred deposits held at the public bank (Caisse de Dépots) and most deposits held in commercial banks.

The authorities also placed the government's debt management unit under the oversight of both the Budget and Economic ministries in May, before the two ministries were merged in the just-announced reshuffle. Previously, debt and treasury were managed separately with the Ministry of Economy hosting the debt management unit but the Budget ministry remaining in charge of enacting all payments, including debt payments. The new arrangement will allow for better coordination of decisions on debt and treasury management.

RATIONALE FOR THE AFFIRMATION AT Caa1

LIMITED FINANCING OPTIONS AND WEAK INSTITUTIONAL STRENGTH MEAN LIQUIDITY RISKS REMAIN PRESENT

Gabon's Caa1 ratings remain constrained by liquidity strains given limited financing options and very low institutional strength that point to possible future stress on the government's capacity to service its debt. There are several debts maturing in 2019, representing approximately 6% of GDP.

For both domestic (within the Economic and Monetary Union of Central Africa) and external funding, the government's options are constrained. Moreover, IMF disbursements are likely to be delayed once again in 2019 given that the government breached the criterion of non-accumulation of arrears on external debt in the first quarter of 2019.

Furthermore, while the government has successfully cleared external debt arrears, this has come at the expense of lower total government deposits, which fell from 5% of GDP at end of 2017 to 4% at end of 2018 and 2% as of March 2019, thereby reducing cash buffers.

In addition, the persisting problem of arrears to domestic goods and service providers indicates continued pressures and management challenges relating to liquidity. In mid-2018 the government agreed on a schedule to pay back around $0.6 billion of arrears it had recognised over a six-year period, but has not fully adhered to its committed repayment schedule, with some recent delays. Moreover, an independent audit of a broader set of arrears relating to the 2015-17 period is also under way.

More broadly, Gabon's credit profile is constrained by its economic, foreign exchange and fiscal reliance on the oil sector as well as socio-economic disparities and persistent political risk. Credit supports include relatively high wealth and a developing non-oil sector, as well as its membership to the Economic and Monetary Union of Central Africa which in principle provides the government with more time to mitigate external pressure.

FACTORS THAT COULD LEAD TO AN UPGRADE

Moody's would likely upgrade the rating if the government built a track-record of staying current on its debt payments while pursuing efforts to reduce arrears to goods and services providers and broadly balance its budget. This would denote sustained improvements in liquidity and fiscal management as well as improving institutional strength.

FACTORS THAT COULD LEAD TO A DOWNGRADE

Moody's would likely stabilize the outlook, or even downgrade the rating in case of marked negative pressures, if the early signs of improvement in liquidity and debt management proved to be short-lived, for instance if the government accumulated new arrears on external debt or failed to maintain its fiscal consolidation path. In this scenario, liquidity pressures would fail to ease and could even intensify.

GDP per capita (PPP basis, US$): 18,496 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 0.8% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 6.3% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -1.2% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -1.9% (2018 Actual) (also known as External Balance)

External debt/GDP: 42.1% (2018 Actual)

Level of economic development: Very Low level of economic resilience

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

On 12 June 2019, a rating committee was called to discuss the rating of the Government of Gabon. The main points raised during the discussion were: improving fiscal or financial strength, including its debt profile, and susceptibility to event risks.

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 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.

Lucie Villa
VP - Senior Credit Officer
Sovereign Risk Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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