New York, March 09, 2021 -- Moody's Investors Service ("Moody's") has today
upgraded the Government of Benin's long-term issuer and senior
unsecured debt ratings to B1 from B2. The outlook has been changed
to stable from positive.
The key drivers of the decision to upgrade Benin's ratings are:
1. A solid track record of fiscal consolidation and improvements
in the structure of debt, supported by strong public finance management
despite the deterioration of some fiscal metrics due to the pandemic.
2. Rising economic resilience, with robust growth prospects
supported by ongoing structural reforms.
The stable outlook reflects balanced risks around Moody's baseline
expectation that the economy will return to robust growth and that Benin's
fiscal and debt metrics will stabilise and comparatively improve over
the medium term.
In a related decision, Moody's raised the local currency (LC)
country ceiling to Baa3 from Ba1 and the foreign currency (FC) country
ceiling to Ba1 from Ba2. Country ceilings indicate the highest
rating level that would generally be assigned to the financially strongest
issuers domiciled in a country, including the strongest structured
finance transactions whose cash flows are generated predominantly from
domestic assets or residents. The decision to upgrade the LC country
ceiling in line with the sovereign rating reflects Moody's assessment
that non-diversifiable risks are appropriately captured in a LC
ceiling four notches above the sovereign rating, taking into account
the small footprint of government in the economy, the weak,
albeit improving, institutional framework, as well as the
mitigating impact of Benin's membership in the West African Economic
and Monetary Union (WAEMU) on external imbalances.
The concurrent upgrade of the FC country ceiling maintains a one notch
gap to the LC country ceiling, reflecting Moody's assessment
of limited Transfer & Convertibility (T&C) risks due to the French
Treasury guarantee of the peg between the CFA franc and the euro.
RATINGS RATIONALE
RATIONALE FOR THE UPGRADE TO B1
BENIN'S PUBLIC FINANCE MANAGEMENT & GOVERNMENT DEBT STRUCTURE
HAVE IMPROVED
The first driver supporting Moody's decision to upgrade Benin's
long-term issuer ratings to B1 is the overall improvement in public
finance management as well as in the structure of public debt.
The authorities have demonstrated their ability to implement significant
fiscal consolidation in recent years (excluding 2020), during which
time the fiscal deficit was reduced to 0.5% of GDP in 2019
from 5.6% in 2015. That period saw structural reforms
relating to both government revenues and expenditures supported by the
IMF through an extended Credit Facility (ECF) program active between 2017
and 2020. The deterioration in public finance related to the pandemic,
with a deficit reaching 5.1% of GDP in 2020, is likely
to be temporary. Moody's expects the authorities' commitment
to fiscal consolidation to remain unchanged, with a new IMF program
likely to be concluded after the Presidential elections in April 2021
which will confirm the country's adherence to strengthening government
finances further. The relatively strong economic recovery should
support a rebound in revenues in 2021. At the same time,
the government plans to progressively withdraw the financial package deployed
during the pandemic to support fiscal consolidation. The intention
to lower the fiscal deficit to the 3% of GDP WAEMU threshold by
2022 appears credible since the bulk of the increase in 2020 was due to
the package deployed to support the economy and to fight the pandemic.
As a result, Moody's expects Benin's public sector debt-to-GDP
ratio to stabilize at around 46% in 2021 and to decline slowly
thereafter. The risk of State-Owned Enterprise (SOE) debt
crystallizing on the government's balance sheet remains low,
with SOEs' debt and government guarantees amounting to less than 1%
of GDP in 2020. Overall, Benin's public debt-to-GDP
compares increasingly favorably to B-rated peers. Notwithstanding,
there are weaknesses which will constrain the rating for some years to
come. In relation to revenue, the debt burden and debt affordability
ratios worsened materially over the last 5 years (debt-to-revenue
estimated at 327% and interest payments to revenue at 15.6%
in 2020 respectively) and remain above B-rated peers. Their
deterioration reflects both Benin's narrow tax base and the increasing
reliance on commercial borrowing. However, structural reforms
aiming at broadening the tax base, as well as the support provided
by the economic recovery, should arrest and ultimately somewhat
reverse the deterioration.
Importantly at this juncture, refinancing risk is low relative to
B-rated peers. The government's strategy of targeting
euro-denominated funding continues to reduce exchange rate risk
within the context of Benin's membership of the West African Economic
and Monetary Union (WAEMU). The share of government debt denominated
neither in CFA nor in euro fell to around 28% at the end of 2020
from more than 50% in 2016. The government has no external
market debt due before 2024, in part as a result of the decision
to use a portion of the latest eurobond issuance to buy back close to
two-thirds of the EUR500 million eurobond issued in 2019.
While the government's gross borrowing requirement has risen to
around 10% of GDP in 2021 from 8% in 2019, post pandemic,
liquidity risk remains no higher than in 2018 when the gross borrowing
requirement was around 10% of GDP. Overall, the average
maturity of external debt currently exceeds 13 years while the average
domestic debt maturity is around 3 years. Looking ahead,
Moody's expects liquidity risk to decline alongside the anticipated
fiscal consolidation over the medium term.
ROBUST ECONOMIC PROSPECTS AND RISING ECONOMIC RESILIENCE SUPPORTED BY
ONGOING STRUCTURAL REFORMS
The second driver that supports Moody's decision to upgrade Benin's
long-term issuer ratings to B1 is the continuous strengthening
of the country's economic resiliency, supported by the implementation
of structural reforms included in the PAG (Plan Action du Government 2016-2021).
The plan aims to open and diversify the economy, as well as to improve
infrastructure and address bottlenecks in the business environment to
attract further private investment. Key structural reforms to which
the government has committed include the liberalization of the labor market;
the modernization of the port of Cotonou currently managed by the Port
of Antwerp; the near-tripling of cotton production since 2015
(estimated at 715,000 tonnes in 2019) thanks to a targeted support
policy and the introduction of fertilizers; and the improvement of
the electrification rate to 53%, and the reduction of the
share of electricity imports to 40% of the country's consumption
in 2020 against 100% in 2016.
Benin's recent economic performance also supports the assessment
of growing economic resiliency. Benin is among the few countries
whose GDP expanded in 2020, despite the impact of the coronavirus
outbreak exacerbated by the border closure with Nigeria -- Benin's
largest trading partner. Moody's estimates the economy grew
at an estimated 2.3% in 2020, well below the 6.9%
reached in 2019 but well above the -3% median growth rate
of B2-rated peers in 2020 (excluding Benin). That strong
growth took place notwithstanding the small size of Benin's economy,
the concentration on agriculture and low (though rising) income per capita.
Looking ahead, we expect Benin's economic recovery to be faster
than its peers, with real GDP growth forecast at 5% in 2021,
and above 6% thereafter. Large infrastructure projects such
as the construction of a new airport and investment in roads, ports
and energy infrastructure will also support economic growth in the future.
With the reopening of the border, the possibility that Nigeria's
recovery is stronger than currently expected offers some upside risk.
The impact of external imbalances is reduced because of Benin's
membership of the WAEMU's pool of foreign exchange reserves which
has increased to USD15 billion in December 2020, equivalent to 5-6
months of import cover. Benin's current account deficit is
likely to remain around 4% of GDP and inflation around 2%
over the next three years. Despite increasing political tensions
ahead of the April 2021 elections, political risk is also unlikely
to derail Benin's economic development given the fragmented opposition
and Moody's expectation that Benin's track record of overall
peaceful elections will continue.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's expectation that the economy
will remain resilient to the impact of the pandemic as shown in 2020 and
return to robust rates of growth exceeding 6% by 2022. It
also reflects the rating agency's expectation that the government
debt burden will stabilize and gradually decline from 2021 onwards.
In particular, the country's fiscal deficit is likely to return
below 3% in 2022 given the authorities track-record and
commitment to fiscal consolidation through both increasing revenue and
reducing spending by progressively phasing out of the extraordinary economic
support measures implemented to fight the pandemic. However,
downside risks remain due to the uncertainty surrounding the evolution
of the pandemic in the region, given for example the distant vaccination
prospects. Additionally, there are weaknesses which will
constrain the rating for some years to come, related for example
to the country's narrow tax base and to the relatively weak fiscal
metrics associated with that.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Benin's ESG Credit Impact Score is highly negative (CIS-4),
reflecting high exposure to social (S) risk, moderate exposure to
environmental (E) risk, and weak governance that, together
with low income levels, reduce the country's resilience to
S and E risks.
Benin's exposure to environmental risks is moderately negative,
reflected in its E-3 issuer profile score. While the country
pursues its efforts to preserve its natural capital, its exposure
to physical climate risk is high given the economic importance of primary
sector, dominated by cotton and subsistence agriculture which is
less resilient than sophisticated agriculture to climate-related
disruptions.
Exposure to social risks is highly negative (S-4 issuer profile
score), mainly related to poverty, poor educational outcomes,
low income levels and poor access to basic services. Around half
of the population lives below the poverty line (PPP $1.90
per day), and the country ranks poorly (lowest decile) in terms
of education, health and income. Despite its track record
of political stability, there is risk of social unrest, especially
given the level of youth unemployment.
Benin's institutions and governance profile is weak and captured
by a moderately negative G issuer profile score (G-3). This
is illustrated by the low, but overall improving, worldwide
governance indicators especially voice and accountability and control
of corruption indicators that are better than their respective median
of B-rated peers.
GDP per capita (PPP basis, US$): 3,423 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 6.9% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.3%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: -0.5%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.1% (2019 Actual)
(also known as External Balance)
External debt/GDP: 24% (2019 Actual)
Economic resiliency: ba3
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 04 March 2021, a rating committee was called to discuss the ratings
of Benin, Government of. The main points raised during the
discussion were: The issuer's economic fundamentals, including
its economic strength, have materially increased. The issuer's
institutions and governance strength, have materially increased.
The issuer's fiscal or financial strength, including its debt profile,
has materially increased. Other views raised included: The
systemic risk in which the issuer operates 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
FACTORS THAT COULD LEAD TO AN UPGRADE
A sustained and material reduction of the government debt burden and debt
affordability beyond Moody's current expectations would put upward
pressure on the ratings, particularly if evidence of a sustained
improvement of Benin's institutions and governance framework.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Negative pressure on the ratings could rise were Benin's fiscal
metrics to deteriorate markedly against Moody's current expectations
of a steady and structural improvement in the wake of the pandemic.
An increase in ongoing borrowing requirements and refinancing risks driven
by a failure to sustain the reform effort would be particularly negative.
Similarly, a failure to return to robust rates of growth as Moody's
currently expects would also be credit negative, particularly if
driven by weaker than expected policy outcomes.
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.
The local market analyst for this rating is Aurelien Mali, +971
(423) 795-37.
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
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a.With Rated Entity or Related Third Party Participation:
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and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
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3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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Elisa Parisi-Capone
Vice President - Senior Analyst
Sovereign
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
Marie Diron
MD - Sovereign Risk
Sovereign
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
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