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Rating Action:

Moody's places Cameroon's B2 rating on review for downgrade

27 May 2020

London, 27 May 2020 -- Moody's Investors Service ("Moody's") has today placed the Government of Cameroon's B2 foreign and local currency issuer ratings on review for downgrade.

The decision to place Cameroon's ratings on review for downgrade reflects Moody's assessment that the country's participation in the G20 Debt Service Suspension Initiative (DSSI) raises the risk that private sector creditors will incur losses. Suspension of debt service obligations to official creditors alone would be unlikely to have rating implications; it provides liquidity relief at a time when Cameroon's external position is experiencing significant pressure as a result of the global coronavirus shock and lower oil prices. However, the G20's call on private sector creditors to participate in that initiative on comparable terms raises the risk of default on privately-held debt under Moody's definition.

The review period will allow Moody's to assess the significance of the statement in the Debt Relief Term Sheet that private sector creditors should participate on comparable terms. The review will assess whether Cameroon's participation in that initiative will be implemented with private sector participation and, if so, whether any losses expected to arise from that participation would be consistent with a lower rating.

The coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and financial market turmoil are creating a severe and extensive economic and financial shock. Moody's regards the coronavirus outbreak as a social risk under its ESG framework. For Cameroon, this shock manifests mainly in lower growth, government revenue and exports receipts given lower oil prices and pressure on the foreign exchange reserves of the Central African Economic and Monetary Union's (CEMAC) of which Cameroon is a member.

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

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

REVIEW FOR DOWNGRADE WILL ASSESS CREDIT IMPLICATIONS OF ACCESSING G20 DEBT SERVICE SUSPENSION INITIATIVE

On 19 May, the Paris Club confirmed Cameroon's access to the G20 Debt Service Suspension Initiative (DSSI) seeking official sector debt service relief. Suspension of debt service obligations to official creditors alone would be unlikely to have rating implications; indeed, relief from official debt service obligations would allow fiscal resources to be devoted to essential health efforts and social spending, while also reducing external and government liquidity pressures at a time when Cameroon is experiencing significant pressure as a result of the steep decline in hydrocarbon revenues. Moody's estimates that the DSSI will save about 1% of GDP in external debt service payments for the remainder of the year.

However, the G20 has called on private sector creditors to participate in that initiative on comparable terms. Moody's estimates full-year government external debt service due to private creditors in 2020 to be around 0.5% of GDP, including service on Cameroon's sole international bond of $750 million issued in 2015 and maturing in 2025. This excludes short-term external commercial debt that has been contracted by the state-owned refinery, SONARA, and that Moody's estimates to represent 1%-2% of GDP in 2020.

While the details for implementing the DSSI are still being elaborated, the G20's current debt relief terms as articulated in the term sheet published on 15 April stipulate a call for private sector participation on comparable terms.

The review period will allow Moody's to assess how the apparent tension will be resolved between the government's participation in the DSSI, potentially seeking relief from debt service owed to official sector creditors only, and the G20's call for private sector creditors to participate. It will assess whether Cameroon's participation in that initiative will be implemented with private sector participation and, if so, whether any losses expected to arise from that participation would be consistent with a lower rating.

CORONAVIRUS SHOCK EXACTING SIGNIFICANT TOLL ON CAMEROON'S GROWTH, FISCAL AND EXTERNAL POSITION; IMF SUPPORT ATTENUATES RISKS

While Cameroon has a more diversified economy than fellow Central African Economic and Monetary Union (CEMAC) member countries, the significant decline in oil prices associated with lower global demand in the wake of the coronavirus shock is nevertheless transmitting significant pressure on Cameroon's growth, fiscal and external position. While the hydrocarbon sector directly represents approximately less than 5% of GDP, it is responsible for generating about 14% of government revenues and 50% of exports receipts. Many of Cameroon's other commodities have similarly suffered price declines, weighing on growth, fiscal and external metrics.

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. As a result of lower hydrocarbon revenues and broader revenue and spending consequences of the coronavirus shock, 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. While the debt-to-GDP ratio remains below the median of B-rated peers, Cameroon's weak revenue generation capacity has resulted in a rising debt-to-revenue burden, increasing by a third to around 350% in 2020, that will be further exacerbated by rising gross borrowing requirements and recent recourse to increasingly expensive external commercial financing at a time of significantly tighter financial market conditions. Moreover, diverting fiscal resources to health care spending that results in lower government spending in the regions risks fueling social unrest, already evident in the Anglophone regions where political tensions continue to simmer.

Lower oil prices will also pressure the CEMAC region's external position. Oil exports represent over 70% of the region's total exports. Pooled foreign exchange reserves fell by about $5 billion in both 2015 and 2016 (i.e. $10 billion cumulative) during the previous oil price shock. According to the central bank of the CEMAC region (BEAC), the gross level of reserves stood at $8.8 billion at 10 May, up from $7.4 billion recorded at the end-2019. Moody's expects the level of CEMAC reserves to drop to $4 billion by the end of the year. While Moody's does not anticipate an immediate balance of payments crisis given the CFA franc peg to the euro benefits from the French Treasury backstop, import cover would drop to 1.6 months, against 2.9 months for end-2019.

These challenges notwithstanding, Cameroon's credit profile is supported by robust medium-term growth prospects, a degree of enhanced macroeconomic stability afforded by CEMAC membership, and the three-year IMF Extended Credit Facility (ECF) arrangement which was approved in 2017 that helps to attenuate risks. Originally in place to June 2020, it has been extended to end-September 2020, at the authorities request, to facilitate further IMF support throughout the coronavirus shock . Progress on the initial aims, to support the country's efforts to restore external and fiscal sustainability and to lay the foundations for a more sustainable, inclusive and private sector-led growth, have been satisfactory and ongoing. With the onset of the coronavirus shock, Cameroon received a disbursement of $226 million, or 60% of quota, from the Rapid Credit Facility (RCF) to help meet the urgent balance of payments needs stemming from the coronavirus shock. The RCF will also boost CEMAC foreign reserve levels. Longer term growth prospects are also supported by the government's ongoing public infrastructure investment strategy to harness the ample agricultural, mineral and hydropower resources.

FACTORS THAT COULD RESULT IN CONFIRMATION OF THE CURRENT RATING OR DOWNGRADE OF THE RATING

The rating would likely be confirmed at its current level should Moody's conclude that participation in DSSI would be unlikely to entail default on private sector debt or, if it would, that any losses experienced would be likely to be minimal and consistent with the current rating level.

Beside the considerations about losses to private sector creditors in debt service relief measures, ongoing material pressure on Cameroon's fiscal and external position could be consistent with a negative outlook at B2, while prospects of a durable stabilisation in Cameroon's fiscal and external position would likely be consistent with a stable outlook at B2.

The rating would likely be downgraded should Moody's conclude that participation in the G20 DSSI would probably entail default on private sector debt and that losses experienced would be likely to exceed the threshold consistent with a B2 rating.

Moreover, an intensification of fiscal and external pressure with materially higher fiscal deficits, increasing debt, and wider current account deficits than Moody's currently expects and/or inability to secure sufficient external financing leading to a further marked erosion of foreign exchange reserves would also likely lead to a downgrade.

Given that the Government of Cameroon is participating in the DSSI and this initiative has the potential to inflict losses on private sector creditors, this event prompted the publication of this credit rating action 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 26 May 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 increased. The issuer's susceptibility to event risks has not materially changed.

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.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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

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/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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