Fitch Ratings has affirmed Cote d'Ivoire's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+'. The Outlook is Stable.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
Cote d'Ivoire's IDRs are supported by strong economic growth and low inflation while fiscal and external metrics are generally in line with historic medians for 'B' rated sovereigns. This is balanced against low governance and development indicators, two debt defaults since 1999, elevated GDP volatility relative to rating peers and high dependence on agricultural commodities. The affirmation and Stable Outlook take into consideration favourable prospects for growth and the government's strong commitment to fiscal reforms and consolidation targets. They also reflect persistent social and political risks, some uncertainty surrounding the transition to a private sector-led growth model and relatively low tax revenue collection.
Cote d'Ivoire is currently experiencing one of the longest expansion cycles of its recent history and its GDP growth has outperformed 'B' rated peers since 2012. Fitch expects GDP will expand at a brisk albeit moderating pace, with an average growth of 7% per year in 2018-2020, almost double the current 'B' median of 3.6%. Fitch expects economic growth to decelerate to 7.3% in 2018 from 7.8% in 2017 as the rebound following a decade-long civil conflict tapers off, the fiscal impulse turns negative for the first time in four years and cocoa production stabilises following a bumper harvest last year.
Over the forecast period, economic activity will be driven by domestic demand underpinned by strong investment in the energy and transport infrastructure under the 2016-2020 National Development Plan (PND), mostly through public-private partnerships (PPP), employment gains and sustained urbanisation. Fitch expects the execution of the PND will not jeopardise macroeconomic stability despite target investments equivalent to 128% of the 2017 GDP. This reflects the authorities' commitment to prudent policies illustrated by the country's satisfactory performance under the 2016-2019 arrangement with the IMF. Fitch expects subdued inflation of 1.8% in 2018 and 2% in 2019, partly reflecting membership the West African Economic and Monetary Union.
The general government (GG) deficit widened to 4.2% of GDP in 2017 from 4% in 2016 overshooting the initial budget target of 3.7%. This was as a result of pay-outs to mutineers within the army, the collapse in cocoa prices and incomplete adjustment of domestic fuel prices following the rebound in oil prices. The authorities target a narrowing of the budget gap to 3.75% of GDP in 2018 and further to 3% in 2019. They aim to contain operational spending and reduce the wage bill by replacing only one in two retiring civil servants, except in the education and health sectors. They also foresee an increase in tax revenues as they are streamlining collection procedures, improving tax coverage of the informal sector and closing tax loopholes.
Fitch forecasts the GG deficit will narrow to 3% of GDP in 2019, but foresees the composition of the consolidation to be less favourable than assumed by the government. The agency forecasts a slower rise in tax revenues/GDP owing to deep-rooted challenges to collections and expects the authorities will offset the shortfall in revenues by under-executing capital spending, which also reflects limited absorption capacity. Fitch expects a moderate fiscal slippage ahead of the upcoming presidential election, causing the GG deficit to widen to 3.2% of GDP in 2020.
GG debt will peak at 44.5% of GDP in 2018, still well below the current 'B' category median of 64.5%, and gradually decline thereafter, under Fitch's forecasts. Tight regional liquidity conditions have led Cote d'Ivoire to increase its recourse to international markets.
Recent Eurobond issuances have lengthened the debt maturity profile but have led to an uptick in the share of foreign-currency debt in total debt, which the agency expects will be 58% in 2018, up from 47% in 2015. It will also result in a rise in the interest/revenues ratio from 7.6% in 2015 to 9% in 2018 - against a current 'B' median of 11% - and further to 12% in 2020. The sovereign's exposure to exchange-rate risk is mitigated by the recent hedging of the bulk of the service for the outstanding US dollar-denominated Eurobonds until 2022.
The government has achieved progress in addressing the financial weaknesses of state-owned enterprises (SOEs) in the banking, transport and energy sectors through a blend of asset sales and restructurings. SOE debt is moderate, at 4.2% of GDP, according to the IMF. Government-guaranteed SOE debt of 0.2% of GDP will rise as a result of an upcoming loan equivalent to 1.5% of GDP by the national refinery SIR to finance its restructuring, and a loan of 1.1% of GDP by CIE-Energy to clear arrears to independent power producers.
Additional contingent liabilities for the sovereign arise from the expanding portfolio of PPPs as the government aims to execute 98 investment projects through such schemes for a total cost of 54% of GDP. The national PPP steering committee has identified several large projects, including the third bridge in Abidjan and the upcoming metro of Abidjan, that entail significant fiscal risks, which are not captured in the budget framework.
The exposure of banks to the cocoa sector raises some risks for the sovereign, following the 2017 collapse in cocoa prices. The default of one big operator with debt to domestic banks worth 0.6% of GDP could lead to a two percentage-point rise in the ratio of non-performing loans from 8.7% of total loans at end-June 2018. The banking sector's fundamentals are generally weaker than current medians for 'B' rated sovereigns, but are expected to improve somewhat with the gradual rollout of the Basel II/III regulatory framework that started in January 2018. Four banks, including one private bank, that account for 2% of the sector's assets are not in compliance with the minimum regulatory threshold of XOF10 billion, according to the Banque Centrale des Etats d' Afrique de l'Ouest (BCEAO).
The current-account deficit (CAD) will widen to average 3.1% of GDP in 2018-2020 from 1.1% over the previous five years. Although exports will benefit from expanding capacities in energy, light industries and mining and the increased diversification of agriculture, the structural trade surplus will be eroded by the drop in cocoa prices in terms of euros, the rise in oil prices and steady growth in import-intensive investment.
Steady annual FDI inflows of 1.5% of GDP will finance half the CAD while the rest of external financing needs will be covered through external sovereign borrowing, under our forecasts. Cote d'Ivoire has a net external creditor position of 18% of GDP at end-2017, which will be eroded by rising external borrowing and a reduction in external assets due to efforts by BCEAO to increase the repatriation of foreign-currency earnings by exporters.
Fitch expects policy continuity to prevail in the run-up to the 2020 presidential election, but there is significant uncertainty regarding the direction of policy afterwards. Material downside risks for the outlook stem from heightened political and social tensions given regional cleavages and a history of recent civil conflict. The breakup of the alliance between the president's RDR party and its main coalition partner PDCI due to disagreements over a possible common candidate for the presidential election and a merger into a single party will not hinder policy-making, in Fitch's view. The government is pressing ahead with the reform of the military, which should reduce security risks arising from the incomplete integration of former rebels within the army.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Cote d'Ivoire a score equivalent to a rating of 'B' on the Long-Term Foreign-Currency IDR scale.
Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR by applying its QO, relative to rated peers, as follows:
- Macroeconomic performance: +1 notch, to reflect high medium-term growth potential, preserved macroeconomic stability reflecting strong macroeconomic management and sustained reform impetus
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
RATING SENSITIVITIES
The main factors that could, individually or collectively, trigger positive rating action are:
- Sustainable improvement in public finances with smaller-than-projected government deficits placing public debt on a downward trajectory;
- Stronger external finances with a more diversified export base leading to a sustained narrowing of the current account deficit;
- Evidence of receding political and security risks, and over the medium term, improvement in development and governance indicators.
The main factors that could, individually or collectively, trigger negative rating action are:
- Deterioration in political stability or aggravation of security incidents leading to material fiscal slippages or jeopardising the sovereign's ability to honour its commitments;
- A significant worsening in public debt dynamics resulting, for instance, from widening deficits or from a materialisation of contingent liabilities on the sovereign's balance sheet;
- A material slowdown of growth resulting from external or domestic shocks
KEY ASSUMPTIONS
We assume that the monetary arrangement with France will continue to support macroeconomic stability and the fixed parity of the CFA franc with the euro will remain unchanged.
We expect other commodity prices and global economic trends to develop as outlined in Fitch's most recent Global Economic Outlook.
The full list of rating actions is as follows:
Long-Term Foreign-Currency IDR affirmed at 'B+'; Outlook Stable
Long-Term Local-Currency IDR affirmed at 'B+'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'B'
Short-Term Local-Currency IDR affirmed at 'B'
Country Ceiling affirmed at 'BBB-'
Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at 'B+'
