Fitch Ratings has revised the Outlook on Benin's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable from Positive and affirmed the rating at 'B'.
KEY RATING DRIVERS
The Outlook revision reflects Fitch's expectation that the significant economic and fiscal impact of the global coronavirus pandemic will compound the shock stemming from the continued border closure with Nigeria. The heightened macroeconomic and fiscal risks associated with these shocks offset Benin's improvements of public and external finance metrics resulting from a track-record of fiscal consolidation since 2016 and the rebasing of GDP statistics published in 2019.
The timing of the border re-opening with Nigeria remains uncertain. Nigeria shut its land border with Benin, as well as with other neighbouring countries, in August 2019 in a bid to curb informal imports. An indication of its severity is given by the fact that formal imports, 40% of which are informally re-exported to Nigeria, dropped 31% yoy in 4Q19, according to official data. Discussions between both countries are on-going but current measures to contain the spread of the coronavirus have led to tighter controls on the 800km long border, although it remains porous, and have delayed a resolution. Assuming a prolonged border closure until end-2020, we project a 40% contraction of informal trade in 2020. However, there is significant uncertainty regarding the potential magnitude of the contraction, as it depends on the duration and severity of the border closure.
We expect growth to decelerate sharply to 1.8% GDP in 2020 from 6.4% in 2019, remaining above the forecast 'B' median of -0.2% in 2020. This is attributable to weak domestic demand and performance in the construction sector as well as our expectation of lower cotton production in the context of sluggish global trade and lower international cotton prices. Recession in Nigeria in 2020 (-1% GDP growth under our baseline scenario) will also have adverse effects on Benin's growth beyond the border closure given reliance on Nigerian demand. While there is no lockdown in Benin, limiting local disruptions to economic activity, the border restrictions as well as the coronavirus containment measures will nonetheless affect commerce and the transport sector.
We currently project GDP to bounce back by 6% in 2021, at higher levels than the forecast 'B' median of 3.9% in 2021, assuming a normalisation of the border closure with Nigeria, a recovery in global demand and a stabilisation of the coronavirus-related shock domestically. However, risks are tilted to the downside given uncertainty regarding global economic conditions and the spread of the pandemic.
We project the fiscal deficit to widen to 4.4% of GDP in 2020 from 2.3% in 2019, in line with the forecast 'B' median of 4.6% in 2020. We expect government trade revenues, which account for around 33% of revenues in 2019, and tax receipts, to fall significantly. We also anticipate an increase in official fuel imports in substitution of informal imports of subsidised fuel from Nigeria (~80% of domestic oil consumption) given the border closure and lower global oil prices, which Fitch projects to average USD35/barrel after USD64.1/barrel in 2019. This will allow for a moderate increase in trade taxes on fuel imports as well as revenue gains from the differential between administrated and international fuel prices. Fitch assumes cuts to current expenditure, as reflected, for example, by the government's recent decision to reduce diplomatic representation abroad, and to capital expenditures will be largely offset by higher health spending and to support to sectors affected by the border and coronavirus-related shocks.
Benin has developed a track-record of fiscal consolidation and progress in structural reform. Performance under the current IMF programme (which will expire mid-2020) has been very satisfactory and the authorities have proven commitment to fiscal discipline, which somewhat mitigates the rising fiscal risks.
We expect the government will cover its funding needs in 2020 from a mix a domestic financing and official creditors support. The latter would likely include the emergency assistance from the IMF (USD85 million; around 0.6% of GDP), the likely renewal of its IMF programme, with a potential upsize, as well as other multilateral financing, to address rising financing needs stemming from the coronavirus-related shock. The regional central bank has eased liquidity conditions and Fitch expects the government will be able to finance itself with relative comfort on the domestic market.
Benin's 'B' IDRs also reflect the following key rating drivers:
We project general government debt to increase to 44.3% of GDP in 2020 from 41% in 2019, due to higher deficits and a contraction in nominal GDP, which compares favourably with the forecast 'B' median of 51% in 2020. Contingent liability risks are small as state-owned enterprise debt represents only 1% of GDP and the government has not yet signed public-private partnerships under the 2016-2021 Government Action Programme.
The government has no foreign marketable debt maturing before 2024 when principal amortisation of its Eurobond begins while annual interest on the Eurobond (USD32 million) represents only 0.2% of GDP in 2020. A potential waiver on interest payments to multilateral and bilateral creditors would only slightly alleviate funding needs, as they represent around 0.3% of GDP in 2020. Benin's track-record of proactive debt management has given priority to obtaining concessional financing, which has reduced refinancing risks and contained debt costs.
We project the current account deficit to widen moderately to 4.7% of GDP in 2020 from around 4.3% of GDP in 2019, basing our estimations and projections on official current account data. The latter incorporate informal export data but may understate informal imports, and Fitch estimates the deficit could reach up to 6.2% in 2020 from 5.2% of GDP in 2019, fully incorporating informal imports. Exports will contract sharply given lower informal re-exports and a fall in cotton export receipts (15% of total exports) due to dampened global demand and lower cotton prices. Imports will likely drop materially almost in tandem with the reduction of exports given a proportional fall in official imports re-exported to Nigeria, sluggish domestic demand and lower oil prices.
Benin's external finances remain weaker than peers but membership of the West African Economic and Monetary Union (WAEMU) underpins macroeconomic stability and reduces foreign exchange liquidity risks. Benin's sizeable current account deficits, which the agency forecasts to range between 4.4% and 5.7% on average over 2020-2021, at similar levels than the 'B' median average of 4.9% over 2020-2021. However, WAEMU membership gives Benin access to the pooled reserves of the eight member states, estimated at USD15.8 billion end-November 2019. In a case of stress, the regional central bank could also access the convertibility guarantee of the French Treasury from West African CFA franc/ECO to the euro if the stock of international reserves was depleted, limiting risks of devaluation of the peg to the euro.
Benin's banking sector asset quality and solvency is weaker than 'B' category peers and will likely deteriorate further. Gross non-performing-loans levels are high, representing 20.4% of total loans at end-2018, and are likely to increase owing to broader reverberations of the coronavirus-related and border closure shocks on domestic revenues. Risks for the sovereign from the banking sector are mitigated by its moderate size (42% of GDP) and the high share of foreign-owned banks.
ESG - Governance: Benin has an ESG Relevance Score of '5' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) has in our proprietary Sovereign Rating Model. Benin has a medium WBGI ranking at the 39.9th percentile, reflecting a history of peaceful transfers of power through elections since the advent of democracy in 1991. Benin witnessed episodes of social unrest following the April 2019 parliamentary elections, but public demonstrations have since subsided.
