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Rating Action:

Moody's confirms Cameroon's rating, outlook stable

07 Aug 2020

London, 07 August 2020 -- Moody's Investors Service ("Moody's") has today confirmed the B2 local and foreign long-term issuer ratings of the Government of Cameroon, with a stable outlook. This concludes the review for downgrade initiated on 27 May 2020.

The review for downgrade reflected Moody's assessment that the country's participation in the G20 Debt Service Suspension Initiative (DSSI) raised the risk that private sector creditors would incur losses. In the last few weeks, Moody's has considered the evidence of implementation of DSSI for a range of rated sovereigns, and statements by G20 officials. While Moody's continues to believe that the ongoing implementation of DSSI poses risks to private creditors, the decision to conclude the review and confirm the rating reflects Moody's assessment that, at this stage, for Cameroon, Moody's considers those risks are adequately reflected in the current B2 rating.

It remains unclear what influence is being applied to Cameroon and to other participating sovereigns to treat private creditors in a comparable manner to official sector creditors. However, a number of elements suggest that the probability of broad-ranging private sector involvement has diminished. These include the apparent absence of progress in discussions about how private sector involvement ('PSI') would be effected in DSSI in general; indications by the G20 that PSI would require the support of the borrowing government; the government of Cameroon's continued assertion that PSI is not contemplated; and evidence of some debt payments being made to private sector creditors under a DSSI regime.

The risks that remain relate to the possibility that in particular cases DSSI is implemented with private sector creditors also being drawn in to provide debt service relief and incurring losses in doing so. Should the probability of losses to private sector creditors increase as implementation of DSSI for Cameroon becomes clearer, Moody's would reflect any related changes in risks to private creditors in further rating announcements.

The stable outlook reflects Moody's view that the pressures the sovereign faces in the wake of the coronavirus shock and prospects for its credit metrics in general are likely to remain consistent with the current rating level, given Cameroon's comparatively more diversified economy relative to neighbours, the anticipated renewal of the IMF programme providing a backstop, and Cameroon's membership of the Central African Economic and Monetary Union (CEMAC) attenuating external vulnerability risks. In addition, the credit is broadly resilient to pressures on the government's finances, exacerbated by the coronavirus shock, constrained debt financing options and continued, but moderating, political unrest in the Anglophone region.

The foreign-currency and the local-currency bond and deposit ceilings remain unchanged at Ba2.

RATINGS RATIONALE

RATIONALE FOR CONFIRMING THE B2 RATING

Moody's initiated a review for downgrade for Cameroon's rating following the country's participation in DSSI to reflect the potential for private sector losses given the call in the G20's 15 April term sheet for private creditors to participate in debt service relief on comparable terms to official creditors. The review for downgrade reflected the tension evident between participating governments' stated intention not to seek relief from private sector debt service obligations, and the clearly-stated view of the key sponsors of the DSSI, specifically the IMF and World Bank, that private creditors should participate in the DSSI on comparable terms. Private sector losses incurred as part of the DSSI would likely constitute a default under Moody's definition.

There remains considerable uncertainty regarding the treatment of private sector creditors of the sovereigns which choose to participate in DSSI, including Cameroon. Recent statements by the Institute of International Finance (IIF) suggest that some DSSI participants have had informal discussions with private sector creditors regarding deferral of interest payments.

However, the risk of broad-ranging involvement of private sector creditors in many or most DSSI cases appears to have diminished. There has not been any material progress in clarifying where and how private sector creditors would be asked to provide debt service relief. While the most recent communique issued by the G20 Finance Ministers and Central Bank Governors on 18 July reiterated that sponsors continue to "strongly encourage private creditors to participate in the DSSI on comparable terms" the clarifying language "when requested by eligible countries" [1] seems to acknowledge the need for support from the borrower for that to happen. Participating governments including Cameroon have continued to assert that they do not wish to engage with private sector creditors. And a number of DSSI-participating governments have continued to make interest and coupon payments to private creditors as they fall due.

The risks that prompted the initiation of the review for downgrade for Cameroon have not disappeared and there has been limited additional clarification since the initial DSSI terms were announced. However, the risks have become more specific to each DSSI implementation case and at this stage, Moody's assesses the probability that private sector creditors of Cameroon incur losses through DSSI to be captured in the B2 rating. Should the probability of losses to private sector creditors increase as implementation of DSSI for Cameroon becomes clearer, Moody's would reflect any related changes in risks to private creditors in further rating announcements.

RATIONALE FOR THE STABLE OUTLOOK

Cameroon's B2 rating balances a weak institutional framework, rising external debt with weak foreign-revenue generation capacity, state-owned enterprise (SOE) contingent liability risks and elevated domestic political risks with credit supports such as high debt affordability and the economy's diversification which helps mitigate the impact of shocks in the oil and gas sector. The stable outlook underpins Moody's view that, despite continuing pressures on the government's fiscal and external positions, exacerbated by the coronavirus shock, a marked deterioration in credit metrics is unlikely and Cameroon's credit metrics are likely remain consistent with a B2 rating.

In the wake of the coronavirus shock, Moody's expects Cameroon's economy to contract by 1% in 2020, while the anticipated recovery in 2021 will still see GDP growth remain below the 4-5% average growth rate of the last decade. On account of lower hydrocarbon revenues, Moody's anticipates the fiscal deficit will increase to 4.5% of GDP in 2020, leading to the debt burden increasing to more than 45% of GDP. However, government liquidity risk will remain contained. Moody's estimates Cameroon's gross financing needs to peak at 7.8% of GDP in 2020, up from 6.4% in 2019, before dropping to 6.7% in 2021, comparing favorably to peers.

Since the start of the coronavirus shock, the government has successfully secured 1.7% of GDP in new exceptional financing from development finance institutions. These correspond to additional financing above the 0.9% of GDP that is part of the current IMF Extended Credit Facility (ECF) programme. This includes 0.6% of GDP in Rapid Credit Facility (RCF) financing from the IMF, 0.5% of GDP in DSSI savings as well as 0.3% from the African Development Bank. Together with an increase in domestic bond issuances by 0.2% of GDP, this will likely be sufficient to meet the increase in gross financing needs. In addition, Moody's also expects the authorities to request a second tranche from the RCF from the IMF during 2021, with the country also likely to seek to renew the IMF-ECF programme ending in September.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Cameroon is significantly exposed to environmental risks, with the country's coastal regions facing the world's highest risks of flood related mortality as a result of steadily rising sea levels. In addition, very high and rising temperatures pose a threat to public health sector and also to agricultural crops and livestock, which employ more than 60% of the country's population. This means that the severity and frequency of extreme weather events can significantly influence Cameroon's key credit metrics, such as GDP growth volatility, household incomes and agricultural export earnings. That is why Moody's has identified Cameroon as one of the countries whose credit profiles are most susceptible to climate change.

Social risks also inform Cameroon's credit profile: the unrest in the country's Anglophone regions and the presence of other key ingredients of social unrest (low wealth levels, income disparity, low voice and accountability) add to the downside pressures in Moody's political risk assessment. Moody's regards the coronavirus outbreak as a social risk under Moody's ESG framework, given the substantial implications for public health and safety.

In terms of governance, Cameroon scores poorly on institutional factors, as measured by the Worldwide Governance Indicators, with control of corruption and public financial management representing particular challenges.

Given the outstanding review for downgrade initiated on 27 May, the publication of this credit rating action concluding the review for downgrade occurs on a date that deviates from the previously scheduled release date in the sovereign release calendar, published on www.moodys.com

GDP per capita (PPP basis, US$): 3,955 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.9% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.4% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -2.3% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -3.7% (2019 Actual) (also known as External Balance)

External debt/GDP: 30.9% (2019 Estimate)

Level of economic development: b2

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

On 3 August 2020, a rating committee was called to discuss the rating of the Government of Cameroon. 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 governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Prospects of a durable improvement in Cameroon's fiscal and external position could warrant upward rating migration. Moody's would likely upgrade the rating if fiscal consolidation were to become entrenched, largely independent of cyclical and one-off factors, reflected in lasting fiscal discipline and institutional strength. Significant progress in settlement of the Anglophone political crisis which preserves peace of the region and removes the threat of negative economic spillovers on the economy would be supportive to the credit profile.

An intensification of fiscal pressure with materially higher fiscal deficits and debt than Moody's currently expects and/or inability to secure external financing on a timely basis and at stable costs would likely lead to a downgrade. Furthermore, a rising probability of private sector participation in DSSI would likely point to a lower rating, commensurate with the potential losses to be incurred.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, 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 further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are unsolicited.

a.With Rated Entity or Related Third Party Participation: NO

b.With Access to Internal Documents: NO

c.With Access to Management: NO

For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

Items color coded in purple in this Press Release relate to unsolicited ratings for a rated entity which is non-participating.

REFERENCES/CITATIONS

[1] G20 communique

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.

Kelvin Dalrymple
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
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