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Rating Action:

Moody's changes the Democratic Republic of the Congo's outlook to negative; rating affirmed at B3

08 Dec 2017

New York, December 08, 2017 -- Moody's Investors Service has today changed the rating outlook to negative from stable and affirmed the B3 long-term issuer rating of the Government of the Democratic Republic of the Congo (DRC).

The negative outlook recognizes the significant increase in macroeconomic volatility and external pressures amid an increasingly polarised domestic political scene, with downside risks to the economy, to the country's external position, and to international financial support. Macroeconomic volatility is likely to remain elevated until the presidential elections currently planned for late-2018.

The B3 rating remains supported by the government's low and affordable external debt, as well as the rebound in both commodity prices and mining activities in the country that should provide some support to the overall economy, budgetary revenues, and the level of FX reserves in the next 12 to 18 months. The rating remains constrained by low wealth levels and chronic institutional weaknesses.

The long-term local-currency bond and deposit ceilings remain unchanged at B3. The long-term foreign-currency bond and deposit ceilings remain unchanged at B3 and Caa1, respectively.

RATINGS RATIONALE

RATIONALE FOR THE NEGATIVE OUTLOOK

INCREASING MACROECONOMIC VOLATILITY AMID AN INCREASINGLY POLARIZED DOMESTIC POLITICAL SCENE, WHICH IS LIKELY TO REMAIN ELEVATED UNTIL THE ORGANIZATION OF PRESIDENTIAL ELECTIONS

The increased polarization of the country's domestic political scene is proving detrimental to the economy, international support, and the country's credit profile. The relationship between the ruling Alliance of the Presidential Majority party and the opposition has been increasingly uneasy, following the postponement of the presidential elections since December 2016, the death of the historical opposition leader, Etienne Tshisekedi, in February 2017, and later the collapse of the fragile existing agreement between the two sides on the future organization of the elections. The DRC Supreme Court has indicated that Mr. Kabila will remain president until the population census is complete and the elections are held, fuelling political and social discord.

Under strong pressure from the international community, the Democratic Republic of the Congo has scheduled elections for 23 December 2018, offering a tenuous path to end the political crisis. However, the opposition rejects the new electoral calendar and continues to call for a transition of power as soon as possible, fuelling instability. While Moody's doesn't anticipate a further escalation into a more confrontational scenario now that an election date has been announced and given the opposition remains fragmented, the current degree of political uncertainty threatens to further negatively affect the economy as large foreign investments are likely to be delayed until the elections. The exchange rate remains vulnerable to further deterioration in the political situation.

Since June 2016, the authorities have been unsuccessful in securing financial support from the international community in a context of increased political uncertainty, macroeconomic instability and rising external pressures after two years of decline in commodity prices. Prices of copper -- DRC's largest commodity -- decreased by 12% in 2014 and by 20% in 2015. Official foreign exchange reserves reached a low of $660 million (2.6 weeks of imports) in July 2017 compared to $1.4 billion in 2015. The negative outlook reflects the risk of reversal of the nascent stabilisation in the exchange rate and modest rebound in the growth rate, should increased political instability or a diminished visibility concerning the elections lead to further delays in international community support.

In the absence of financial support, the government relied on advances from the Central Bank (0.1% of GDP) to fund a portion of the deficit after having exhausted most of its existing financial buffers including deposits in the banking system, stoking inflation that peaked at 54% in 2017 and undermining the exchange rate that depreciated further. The Congolese franc depreciated by 70%, from CDF925 per dollar in June 2016 to CDF1575 per dollar at the end of October 2017.

Through additional expenditure restrictions, the government has managed to maintain the exchange rate over the last four months and inflation has stabilized slightly above 40%. Moody's does not expect inflation to rapidly decline; inflation is going to remain elevated in the next two years at 38% and 25% in 2018 and 2019, respectively. Moreover, there is potential for a more confrontational political landscape involving a resurgence of violence and increased polarization, which would further discourage international support and foreign direct investment, with the exchange rate and the economy further negatively affected.

RATIONALE FOR THE AFFIRMATION AT B3

REBOUND IN COMMODITY PRICES AND MINING ACTIVITIES SHOULD PROVIDE SOME SUPPORT TO THE ECONOMY, WHILE DEBT REMAINS LOW AND AFFORDABLE

The B3 rating reflects Moody's expectation that the rebound in both mining activities in the country and commodity prices will gradually support the economy, the budget, and the level of FX reserves. The production of the main commodities in DRC -- copper and cobalt -- increased by slightly more than 20% in the first half of 2017 as compared to the equivalent period in 2016. The prices of both commodities have also rebounded in the last twelve months. Mineral exports account for more than 80% of total exports and are the main FX receipts for the country.

On the back of higher commodity prices and production, Moody's forecasts a lower current account deficit in 2018 (-0.1% of GDP), in part due to imports being constrained by the depreciation of the local currency. Foreign direct investments, which fell to a low of 2.2% of GDP in 2016 from an average of 4.1% of GDP over 2013-15, are expected to gradually recover in the absence of an escalation in political risk. While real GDP growth is likely to reach only 2.6% in 2017 -- a year negatively affected by the political uncertainty surrounding the elections -- Moody's expects real GDP to gradually increase to 3% in 2018, which remains low by historical standards.

DRC's credit profile is also supported by a low level of government external debt that is almost exclusively made of concessional debt without any large payment due over the coming years. General government debt remains affordable with interest-to-revenues reaching 3.2% in 2016 as a result of very low interest payments (0.7% of GDP). This number compares favorably to the median of B3-rated peers at 10.4%. Nevertheless, the rating remains constrained by low wealth levels and chronic institutional weaknesses.

WHAT COULD CHANGE THE RATING UP

Given the negative outlook, an upgrade in the near term is highly unlikely. A de-escalation in political risk that has weighed on the economy could lead to stabilisation of the outlook. Over the medium term, positive ratings pressure could develop in the event of (1) foreign investment in the mining sector, leading to much stronger commodity revenues in the budget; (2) an increase in foreign-exchange reserves and fiscal buffers to smooth any negative impact of external shocks on the economy; (3) further material strengthening of the institutions, the weakness of which remains a long-term constraint on creditworthiness; (4) accelerated fiscal reforms, including state-owned enterprises; and (5) continued capital expenditure to finance the renovation of the country's infrastructure, particularly with respect to power generation and its transport network.

WHAT COULD CHANGE THE RATING DOWN

Downward pressure on the rating could arise from factors that include (1) a rise in instability fuelled either by a resurgence of conflict in the east and/or further deterioration in the political situation that discourages financial support from the international community and foreign direct investment; (2) a large deterioration of the government's fiscal balance that leads to further macroeconomic imbalance and volatility beyond Moody's forecasts; and (3) a sustained decline in the prices of the main commodities exported by the DRC, heightening the potential for a balance of payments crisis.

GDP per capita (PPP basis, US$): 773 (2016, actual) (also known as Per Capita Income)

Real GDP growth (% change): 2.6 (2017, estimate) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 50 (2017, estimate)

Gen. Gov. Financial Balance/GDP: 0.1 (2017, estimate) (also known as Fiscal Balance)

Current Account Balance/GDP: -3 (2017, estimate) (also known as External Balance)

External debt/GDP: 9.0 (2017, estimate)

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 05 December 2017, a rating committee was called to discuss the rating of the Government of the Democratic Republic of the Congo. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength / framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. 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.

The Local Market analyst for this rating is Aurelien Mali, +971 (423) 795-37.

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
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

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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

No Related Data.
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