Rating Action Commentary
ֳ Affirms Benin at 'B+'; Outlook Stable
Fri 06 Sep, 2024 - 5:01 PM ET
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Benin
ֳ - London - 06 Sep 2024: ֳ Ratings has affirmed Benin's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B+' with a Stable Outlook.
A full list of rating actions is at the end of this rating action commentary.
Key Rating Drivers
Credit Fundamentals: Benin's 'B+' rating reflects a strong growth outlook, supported by a record of structural reforms, which over time should improve the business climate. Commitment to fiscal deficit reduction, anchored by an IMF programme, and proactive debt management will put debt/GDP on a gradual downward path and improve debt affordability metrics. These strengths are set against weak development indicators compared with peers, a relatively small economy dependent on agriculture and trade with Nigeria, and a high level of informality constraining government revenues.
Robust Growth: Benin's economy continued to show resilience to external shocks (notably economic volatility in Nigeria and the border closure with Niger), with growth in 2023 of 6.4% thanks to strong performance in construction and agriculture. We project growth will remain robust, averaging 6.6% in 2024-2026, well above the 'B' median forecast at 4.5%. Growth will continue to be driven by agriculture production, public investments in large infrastructure projects and structural reforms included in the Government Action Plan.
Diversification Progresses: Diversification is likely to continue, with key projects including the expansion of the Port of Cotonou, which aims to position it as a regional hub, and the Glo-Djigbé industrial zone, would help diversify the economy toward higher value-added products. The first phase of the zone is now operational and fully occupied. Development of the second phase has started, boosting prospects for jobs and private investments.
Structural Reforms: We expect Benin to remain on track with the IMF programme, which will expire end-2025. Benin's performance under the programme has been strong. The country is establishing a record of fiscal consolidation and implementation of structural reforms that have improved the business climate and private sector investment since 2016. In 2023, credit to the private sector increased by 19.7% (against 9% expected by the authorities). Private sector lending could further improve thanks to projected fiscal consolidation freeing up resources.
Credible Deficit Reduction Path: We project the budget deficit will fall to 3.7% of GDP in 2024 and 2.9% in 2025-2026, from 4.1% in 2023, in line with the government's fiscal consolidation plan. The fiscal adjustment will rely primarily on revenue collection. The government aims to increase tax revenue, from 12.9% of GDP in 2023, by 0.5% of GDP per year through improvement in tax compliance, administrations' capacities and digitalisation and tax expenditure reduction. We expect total revenue will rise to 16% of GDP by 2026 from 15% in 2023, still well below the 21.7% 'B' median. This remains a constraint on the rating due to the large share of informal activity, despite efforts to tax new activities.
The government plans to improve spending efficiency and reprioritise expenditure. Capex grew significantly to an average of 8.5% of GDP in 2021-2023. We expect capex to decline to 7.4% of GDP by 2026, still above the 2015-2019 average of 5.3%, and that it will provide flexibility to adjust the budget, if needed. Potential fiscal risks stemming from the 2026 presidential election appear mitigated by Benin's commitment to fiscal prudence.
Strengthened Financing Flexibility: We forecast Benin's financing needs will decline from 8.5% of GDP in 2023 to 7.7% in 2024 and 6.1% in 2026 due to projected lower fiscal deficits and debt amortisation. External debt amortisation is low at 1.5% of GDP in 2025 and 1.1% in 2026, with Eurobond repayments at 0.1% of GDP per year. Benin's financing flexibility is underpinned by access to commercial funding and official creditor support, evidenced by Benin's access to IMF's Extended Fund Facility/Extended Credit Facility with a financial package of USD638 million (3.2% of GDP), complemented by a Resilience and Sustainability Facility (USD200 million). Benin could tap both the regional and international markets.
Declining Debt; Improving Structure: Deficit reduction and strong medium-term growth will result in public debt declining from 54.5% of GDP in 2023 to 50.6% in 2026, slightly below the forecast 'B' median of 54.2%. We forecast that debt will decline to 350% of revenue in 2024 from 378% in 2023. This is in line with ֳ's 2024 forecast 'B' median of 352%, but a long way above the forecast 'BB' median of 190%. The 2021 debt reprofiling exercise led to a marked reduction in interest/revenue, expected to average 10.9% over our forecast horizon (below the average 'B' median forecast at 12.7%).
Narrowing CAD: We forecast the current account deficit (CAD) to narrow from 6.0% of GDP in 2023 to 5.3% as stronger agricultural proceeds and higher cotton prices will increase export receipts. We project the CAD to decrease to 5.1% of GDP in 2025 and 4.7% in 2026, mainly due to further progress in cotton production and the decreasing import needs of capital-intensive projects. We expect FDI accompanying import-intensive projects and official creditors' support will continue to adequately cover external financing needs.
Regional Tensions: In February 2024, Mali, Burkina Faso and Niger announced they plan to exit the Economic Community of West African States (ECOWAS). Later that month, ECOWAS lifted sanctions on Niger. However, Niger's authorities have not reopened the border with Benin. Regional tensions might weaken coordination in the fight against terrorist groups in the Sahel. So far, incidents have remained contained in the north. The Benin government is responding to the threat by investing in security and social services in the north.
Moderate Political Risk: Revisions of the electoral law could reduce opposition participation in the 2026 presidential elections, as the candidates will need to be sponsored by 15% of members of the parliament (previously 10%). Opposition members have expressed discontent with the revision. Political tensions may rise in the run-up to the presidential elections, but we expect the authorities to contain any disruptions without a significant impact on policies. World Bank Governance Indicators have improved, in line with the peer median.
ESG - Governance: Benin has an ESG Relevance Score (RS) of '5' respectively for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Benin has a medium WBGI ranking at 39.1 reflecting a recent track record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- Public Finances: Failure to stabilise debt/GDP over the medium term, for example, due to higher than projected investment, additional security spending related to increased terrorist threats, renewed subsidies and/or failure to increase revenue mobilisation.
- Macroeconomic Performance: A significant slowdown in trend growth, for example, due to insufficient progress in attracting foreign and domestic private investment, or a macroeconomic shock, sufficient to affect macroeconomic stability and/or public and external finances.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- Public Finances: Fiscal consolidation that puts government debt/GDP on a firm medium-term downward trajectory, combined with progress on fiscal revenue mobilisation reducing fiscal sustainability risks related to a narrow revenue base.
- Macroeconomic Performance and External Finances: Progress on economic diversification that reduces exposure of the economy and the external accounts to fluctuations in border trade with Nigeria and the cotton sector.
- Structural Features: Sustained improvement in GDP per capita, for example, as a result of continued strong growth and further structural reforms.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
ֳ's proprietary SRM assigns Benin a score equivalent to a rating of 'B+' on the Long-Term Foreign-Currency (LT FC) IDR scale.
ֳ's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR.
ֳ'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 LT FC IDR. ֳ'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.
Country Ceiling
The Country Ceiling for Benin is 'BB-', 1 notch above the LT FC IDR. This reflects moderate constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.
ֳ's Country Ceiling Model produced a starting point uplift of 0 notch above the IDR. ֳ's rating committee applied an offsetting +1 notch qualitative adjustment to this, under the Long-Term Institutional Characteristics pillar reflecting Benin's membership of WAEMU, which benefits from a convertibility guarantee from the French government. The convertibility guarantee and mechanism of pooled reserves limit the risk of member countries imposing additional capital controls and limits external liquidity risks for individual countries, as they are able to pay for imports and service external debt even when foreign-currency from domestic sources is depleted.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Benin as an ESG Relevance Score of '5' for Political Stability and Rights as World Bank Governance Indicators have the highest weight in ֳ's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Benin has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.
Benin has an ESG Relevance Score of '5' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in ֳ's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Benin has a percentile rank below 50 for the respective Governance Indicators, this has a negative impact on the credit profile.
Benin has an ESG Relevance Score of '4'for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Benin has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.
Benin has an ESG Relevance Score of '4' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Benin, as for all sovereigns. As Benin has a fairly recent restructuring of public debt in 2006, this has a negative impact on the credit profile.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit .
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Country Ceiling Model, v2.0.2 (1)
- Debt Dynamics Model, v1.3.2 (1)
- Macro-Prudential Indicator Model, v1.5.0 (1)
- Sovereign Rating Model, v3.14.1 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Benin | UK Issued, EU Endorsed |