ֳ

Rating Action Commentary

ֳ Assigns Benin 'B' IDRs; Outlook Positive

Fri 08 Mar, 2019 - 12:23 PM ET

ֳ-Hong Kong-08 March 2019: ֳ has assigned Benin a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'B' with a Positive Outlook.

A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
Benin's ratings are underpinned by rapid economic growth, and relative political and institutional stability. These strengths are balanced against low development indicators, limited diversification of the economy and a weak external position.

The Positive Outlook reflects our expectation of continued fiscal consolidation putting deficits and public debt on a declining trend, bolstered by strong medium-term growth prospects supported by the 2016-2021 Government Action Plan (PAG). The Positive Outlook also reflects an expected improvement in Benin's external and public finance ratios and per capita income levels as a result of planned methodological changes and rebasing of GDP statistics to be published later this year.

GDP growth was estimated at 6.8% for 2018 and ֳ expects growth to average 7.0% in 2019 and 2020. This recovery from the 2015 slowdown is largely supported by public investments under the 2016-2021 PAG. It is also being driven by a surge in cotton production evident over the last two seasons, and the tentative recovery in Nigeria, Benin's main trading partner.

Inflation remained low in 2018 at 1%, and is expected to rise only moderately to around 2% in 2019 and 2020. Inflation is low relative to peer medians and benefits from Benin's membership in the West African Economic Monetary Union (WAEMU) and the peg of the WAEMU CFA franc to the euro.

The government deficit narrowed to just below 5% of GDP in 2018 based on official estimates, from 6.2% in 2016 and 2017, mainly due to a reduction in capital expenditure and higher fiscal receipts. ֳ expects the deficit to decline further to 3% in 2019 and stay at that level in 2020, against government projections of 2.7% and 1.9%, respectively.

In ֳ's view, government targets for domestic revenue mobilisation are unlikely to be attained, in part because of our expectation that reform of tax exemptions and tax increases may be adjusted in the face of popular opposition. Our higher deficit forecast also incorporates the risks of some fiscal slippages and delays in reform implementation ahead of the 2021 presidential elections. To help meet its deficit targets, the government has lowered budgeted capital expenditure in 2019 to 7.1% of GDP from 10.6% of GDP in the original PAG.

We project Benin's general government debt level to decline to 54.9% in 2019 and 51.9% in 2020 from its estimated peak of 56.4% of GDP in 2018. Between 2014 and 2017, general government debt rose from 30.5% of GDP to 54.5%, reflecting high deficits due to an increase in spending on energy and agricultural subsidies, a surge in public investment in the run-up for the 2016 elections and slower growth. Contingent liability risks arising from the government's plan to finance 60% of the PAG with PPPs should be contained, given the planned scaling down of public investment in 2019 and 2020.

High reliance on regional market financing in recent years has resulted in a rise in interest expenditure and an aggravation of rollover risks. The buyback of costly domestic debt in October 2018 financed by a EUR260 million commercial loan with a partial World Bank guarantee, equivalent to 3% of 2018 GDP, will help contain interest expenditure. The government has committed to making greater use of concessional and long-term financing in their debt strategy.

External finances remain a credit weakness. We estimate the current account deficit (CAD) peaked at 10.6% of GDP in 2018 as a result of high investment-related imports, and will narrow to 7.9% of GDP in 2020. This would still be much higher than the current 'B' peer median of 4% of GDP. The narrowing reflects enhanced cotton production and the recovery of the Nigerian economy bolstering exports, while a reduced pace of investment should contain imports. Large accumulated CADs have caused net external debt to rise to 27.7% of GDP in 2018 from 11.9% in 2015, with a further rise to 34% expected in 2020.

High growth levels have been insufficient to prevent a widening of the development gap with rating peers. GDP per capita is low, at USD909 compared with the USD3,229 current median of the 'B' category. The country has been constrained by wide infrastructure gaps, especially in the energy sector where electricity shortages remain despite the increase in capacity since 2016. In addition, despite a new investment code and labour legislation, the business climate is difficult, as reflected in Benin's ranking 153 out of 190 economies in the World Bank's Doing Business report. The informal sector is large and represents 60% of GDP according to the IMF.

Governance indicators are slightly above the historical 'B' median. Transfers of power have occurred peacefully through elections since the advent of democracy in 1991. Legislative elections, scheduled for 28 April 2019, will take place in the context of a new electoral law and rules for political parties. The new rules are intended to reduce fragmentation of the political spectrum by significantly raising the hurdles for parties to stand in the election. Only two party lists have so far obtained approval to run in the election, both supporting the president. Appeals are under way to allow opposition lists to run.

SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
ֳ's proprietary SRM assigns 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 by applying its QO, relative to rated peers.

ֳ'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.

KEY ASSUMPTIONS
ֳ expects global economic trends and commodity prices to develop as outlined in ֳ's Global Economic Outlook.

RATING SENSITIVITIES
The main factors that could, individually or collectively trigger positive rating action are:
- Stronger public finances and decline in the general government debt /GDP ratio
- An improvement in public and external finance ratios resulting from revisions of national accounts statistics in line with international standards
- Continued implementation of reforms leading to an improvement in the business climate and diversification of the economy, supporting medium-term growth prospects

The main factors that could, individually or collectively trigger negative rating action are:
- Financing pressure due for example to worsening liquidity conditions, a deterioration of the regional market or weaker support from official creditors
- A deterioration in the economic policy framework leading to weaker external and public finances and shift away from the fiscal consolidation and reform agenda
- Weaker medium-term growth prospects resulting from adverse regional spill overs or delayed reform.

The full list of rating actions is as follows:

Long-Term Foreign-Currency IDR assigned at 'B'; Outlook Positive
Long-Term Local-Currency IDR assigned at 'B'; Outlook Positive
Short-Term Foreign-Currency IDR assigned at 'B'
Short-Term Local-Currency IDR assigned at 'B'
Country Ceiling assigned at 'BB+'

Contact:
Primary Analyst
Adrienne Benassy
Associate Director
+852 2263 9620
ֳ (Hong Kong) Limited
19/F Man Yee Building
68 Des Voeux Road Central
Hong Kong

Secondary Analyst
Mahmoud Harb
Director
+852 2263 9917

Committee Chairperson
Stephen Schwartz
Senior Director
+852 2263 9938

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@thefitchgroup.com
Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@thefitchgroup.com

Additional information is available on
Applicable Criteria
Country Ceilings Criteria - Effective from 19 July 2018 to 5 July 2019 (pub. 19 Jul 2018)
Sovereign Rating Criteria - Effective from 19 July 2018 to 27 May 2019 (pub. 19 Jul 2018)

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