New York, November 11, 2022 -- Moody's Investors Service ("Moody's") has today upgraded the long-term local and foreign currency issuer ratings of Government of Democratic Republic of the Congo (the DRC) to B3 from Caa1 and changed the outlook to stable from positive.
The decision to upgrade the issuer ratings to B3 recognises the country's strengthening economic and fiscal prospects fostered by institutional improvements supported by the IMF programme that started in July 2021. The country's external position also continues to strengthen, evidenced by the accumulation of official foreign exchange reserves. Recent improvements notwithstanding, the DRC's creditworthiness remains constrained by its very low GDP per capita, low competitiveness, still-weak institutions and deteriorating political risk environment, as well as its very limited domestic financing capacity and reliance on external concessional funding.
The stable outlook reflects Moody's view that the credit risks are balanced at B3 between the potential for more positive developments on the DRC's credit fundamentals, if structural reforms continue and elevated commodity prices support further improvements in economic and fiscal strength along with a further reduction in external vulnerability, against both elevated domestic and geopolitical risks, very weak albeit improving institutions, and the still-high vulnerability to commodity price shocks that can translate into severe episodes of macroeconomic volatility.
Concurrently, the DRC's local currency (LC) and foreign currency (FC) country ceilings have been raised to B2 and B3, respectively, from B3 and Caa1 previously. The one-notch gap between the LC ceiling and the sovereign rating reflects a high degree of unpredictability of government actions, domestic political risk, as well as the significant exposure of the economy to the mining sector. The one-notch gap between the FC ceiling and the LC ceiling reflects limited policy effectiveness and the relatively low openness of the capital account and convertibility risks given the track record of exchange rate volatility during episodes of commodity price shocks.
RATINGS RATIONALE
RATIONALE FOR THE UPGRADE AT B3
STRUCTURAL REFORMS SUPPORT THE COUNTRY'S STILL-WEAK BUT IMPROVING INSTITUTIONS
Institutional improvements, in particular in public finance management including tax administration and the strengthening of the monetary policy framework, represent a key driver of the upgrade to B3. Moody's expects government revenues to reach 15.4% of GDP in 2022, three years in advance of the objective set at the beginning of the IMF programme. The target was to increase government revenue by four percentage points to reach 14% of GDP by 2025. Government revenues plumbed a low point in 2020 at 9% of GDP. While a significant portion of the surge in revenues can be explained by the increased domestic commodity production and higher international prices, a similarly significant part can also be explained by the reforms pursued during the period. These include improving the efficiency of the tax administration through simplification, rationalization of tax expenditures and some non-tax charges, improving VAT efficiency, and promoting digitalization. Overall, budget credibility has been enhanced as well as cash management with resources earmarked for capital spending and executed as such. Meanwhile, the independence of the Central Bank of the Congo was reaffirmed, and the government signed an agreement to recognize the debt due to the central bank, which is a first step towards its recapitalization.
Moody's expects that the authorities will continue to strengthen the country's fiscal policy framework as well as improving transparency, in particular in the mining sector. The central bank is also involved in reforms aimed at improving the supervision of the banking system as well as financial and price stability and external stability.
ROBUST ECONOMIC PROSPECTS SUPPORTED BY THE MINING SECTOR; STRENGTHENED EXTERNAL POSITION REDUCES THE SEVERITY OF POTENTIAL EPISODES OF MACROECONOMIC VOLATILITY
The DRC's robust economic growth prospects also support Moody's decision to upgrade the ratings to B3. Moody's expects GDP growth to average 7% in real terms over the 2022-2025 period. The main contributor to growth has been the extractive sector that is likely to continue to play a major role in the economy and is likely to continue to grow around 10% each year. Global demand for copper and cobalt - the DRC's main mining exports - is likely to remain strong with continuing growth in electric vehicle componentry demand worldwide. Copper production continues to accelerate, and the authorities expect the latter to exceed 2.3 million tonnes in 2022 (against 1.7 million tonnes in 2020) and revising up projections to almost 3 million tonnes by 2026. Beyond the mining sector, the economy is likely to benefit from increased capital spending by the government and the growing level of investment in the economy to address key infrastructure bottlenecks, with the service sector remaining the second largest contributor to growth over the next few years.
Meanwhile, the DRC's external position has improved, evidenced by growing official foreign exchange reserves at the central bank and the lasting stabilization of the exchange rate of the Congolese franc against the US dollar. The latter has been stable since 2020 at around CDF2000 per dollar. Foreign reserves have accumulated at a rapid pace to reach a record high of $4.4 billion at the end of August 2022 (which is equivalent to 2.4 months of import of goods and services cover) from $710 million at the end of 2020 (equivalent to 0.6 months). Moody's anticipates that gross official foreign exchange reserves will continue to increase and exceed $6 billion by 2025, supported by the country's current account that is expected to remain slightly in surplus over the 2022-2025 period. Additional disbursements from international financial institutions will also support reserves, especially during the implementation of the programme. This structural improvement reduces the country's exposure to downturns in commodity prices and the severity of episodes of macroeconomic volatility associated with them.
CREDITWORTHINESS REMAINS CONSTRAINED BY CHRONIC CREDIT CHALLENGES
Recent institutional improvements and enhanced economic prospects notwithstanding, the DRC's creditworthiness remains constrained by a host of chronic credit challenges: very low GDP per capita, which is amongst the lowest in Moody's rated universe; low competitiveness and large infrastructure deficiencies that constrain growth potential; still-weak albeit improving institutional strength, with the DRC ranking towards the bottom of international rankings measuring governance and the effectiveness of institutions; and very limited domestic financing capacity and reliance on external concessional funding, despite DRC's low debt burden.
Exposure to social risks is very highly negative (evident in Moody's S-5 issuer profile score), mainly related to poverty, low education outcomes, and poor access to basic services. Meanwhile, the DRC remains vulnerable to political risk ahead of the presidential election next year and increased instability in the east of the country with the recent resurgence of the M-23 rebel group.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's view that credit risks are balanced at B3 between the potential for more positive developments on the DRC's credit fundamentals, if structural reforms continue and commodity prices remain supportive, against elevated domestic and geopolitical risks, very weak, albeit improving, institutions and the still-high vulnerability to prolonged commodity price shocks that can translate into severe episodes of macroeconomic volatility. Moody's expects that the economy will continue to grow quickly, despite large infrastructure deficiencies, very low income per capita, low competitiveness and very weak institutional capacity which are long-term constraints on the ratings. The authorities are likely to continue to implement structural reforms under the IMF programme with relatively tight budgetary control to avoid significant fiscal slippage. As a result, government debt will remain very low and affordable.
ENVIRONMENTAL, SOCIAL AND GOVERNMENTAL CONSIDERATIONS
The DRC's ESG Credit Impact Score is very highly negative (CIS-5), reflecting a very high exposure to social risk, a moderate exposure to environmental risk, and a very weak governance that, with low income levels, reduce the country's resilience to S and E risks.
The DRC's exposure to environmental risks is moderately negative, reflected in its E-3 issuer profile score. While the country remains committed to preserve its natural capital, its exposure to physical climate risk is high given the economic importance of primary sector, dominated by subsistence agriculture which is less resilient than sophisticated agriculture to climate-related disruptions.
Exposure to social risks is very highly negative (S-5 issuer profile score), mainly related to poverty, low education outcome, and poor access to basic services. In particular, the DRC has very low income levels, the lowest among the sovereigns Moody's rates, with GDP per capita at $1,206 on a PPP basis in 2021. Poverty and unemployment are widespread, with 64% of the population living below the poverty line (PPP $2.15 per day) at the end of 2021. The extreme poverty of some regions, where residents are often isolated by a lack of transport infrastructure, may be a source of future instability and threaten national cohesion. The ongoing violent conflicts in some regions and the Ebola epidemic are two major threats to the country's stability.
The DRC's weak institutions and governance profile constrain its rating, as captured by a very highly negative G issuer profile score (G-5). For example, corruption is a significant structural challenge that undermines policy formation, economic stability and social cohesion. The two-year delay to the 2016 presidential elections and the seven-month delay to the formation of the government in 2019 highlight the weakness of the DRC's governance, as well as its institutional framework.
GDP per capita (PPP basis, US$): 1,206 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 6.2% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.3% (2021)
Gen. Gov. Financial Balance/GDP: -1% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.9% (2021) (also known as External Balance)
External debt/GDP: 12.1% (2021)
Economic resiliency: b3
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 09 November 2022, a rating committee was called to discuss the rating of the Democratic Republic of the Congo, Govt. of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have increased. The issuer's institutions and governance strength have improved. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become increasingly susceptible to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Positive pressures would develop on the DRC's B3 ratings if: 1) the ongoing implementation of structural reforms supported by the IMF program lead to stronger institutions and higher economic shock-absorption capacity than Moody's currently expects; 2) the current period of relatively favourable economic conditions and commodity prices serves to build the country's financial buffers large enough to smooth the impact of future episodes of macroeconomic volatility even in case of a prolonged downturn in commodity prices.
Moody's would likely consider a downgrade of the DRC's ratings if the implementation of structural reforms and the anticipated improvements in the credit fundamentals do not materialize or worse, reverse. An economic or political shock that would contribute to severe macroeconomic instability could also lead to a lower rating. Significant domestic political tensions ahead of the presidential elections or severe political instability due to escalating armed conflict in the east of the country, both potentially hindering the country's medium-term growth prospects, would also exert negative pressure on the ratings.
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.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 on https://ratings.moodys.com/rating-definitions.
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At least one ESG consideration was material to the credit rating action(s) announced and described above.
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Elisa Parisi-Capone
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
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Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
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