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Gabon looks to diversification to overcome negative credit ratings

Gabon looks to diversification to overcome negative credit ratings

Although the continuation of low oil prices has led to a recent downgrade in its credit rating, Gabon’s government is taking a number of steps to improve its public finances and economic buffers.

Despite the downgrade, the country’s fiscal deficit is forecast to remain relatively contained, and public debt is expected to reach a peak next year as the government seeks to further reduce discretionary spending.

Healthy growth levels are anticipated for the remainder of the year, with further momentum on the horizon thanks in part to ongoing diversification efforts and interest rate cuts.

Credit-rating downgrades

In early August, ratings agency Standard & Poor’s (S&P) revised its outlook for the nation from stable to negative while affirming its long- and short-term sovereign ratings at B+ and B, respectively.

The move follows a decision in May by fellow rating agency Fitch to downgrade the country’s long-term foreign and local currency issuer default ratings from BB- to B+, after downgrading the outlook from stable to negative in December.

Amongst the factors cited by S&P for the change in its outlook were arrears in government debt repayments registered during the first half of the year. Despite the downgrade, the ratings agency reported that delays were all cleared within 30 days, and were generally caused by coordination issues rather than an inability or unwillingness to repay. In addition, Gabon had taken concrete measures to avoid a repeat of the situation.

S&P estimates the fiscal deficit to peak at 2% of GDP this year, with public debt reaching 38% of GDP. S&P’s outlook is slightly less optimistic than the IMF, which forecasts public debt at 34.4% of GDP – from 27.7% in 2014 − with levels expected to peak next year before a gradual decline.

Fighting against falling oil prices

With oil revenues traditionally accounting for more than half of government receipts, the decline in international oil prices has played a major role in Gabon’s financial deterioration. A former OPEC member, Gabon pumps roughly 230,000 barrels per day, but gradual declines in local production, along with recent oil-sector strikes (including an industry-wide stoppage in December 2014) have only served to exacerbate the problem.

To cushion the impact of declining prices, the government has reduced capital expenditures and intends to cut subsidies, including fuel price support mechanisms, later this year. In April, Moody’s noted that Gabon had established “fiscal buffers” in the face of declining oil prices following a new budgetary law passed in April. “If oil prices fall substantially below forecast levels, the government could still make further cuts to discretionary capital spending,” said the ratings agency. “Although Moody's expects the government to post a fiscal deficit in 2015 − with its debt peaking at 39% of GDP in 2015 on a gross basis, or 26% on a net basis − these figures remain in line with Gabon's peers”.

Regional monetary authorities are also hard at work to stimulate economic growth in the region. In July, the governor of the central bank of the six-nation Central African States cut its interest rate by 50 basis points to 2.45%, citing reduced regional growth prospects due to declining oil prices and a reduction in regional inflationary pressures.

Stability through diversification

Even in the face of ratings downgrades, renewed diversification efforts have helped minimise the impact of low oil prices. S&P forecasts average annual real GDP growth to exceed 4% over the next three years, while the IMF predicts even stronger growth of 4.4% this year, with levels averaging around 5.6% through to 2018.  

In a report published by the IMF earlier this year, Gabon’s plan to diversify away from its dependence on oil was hailed as “more relevant than ever” with real GDP growth averaging about 6% in the last four years thanks in part to the launch of the ambitious Plan Stratégique Gabon Emergent (Gabon Emergent Strategic Development Plan) in 2010. The fund highlighted the importance of upgrading the level and quality of local infrastructure and human capital. It also noted the value of continuing to establish joint ventures with foreign firms for development of non-oil natural resources including timber, minerals and agricultural products.  

Source: Oxford Business Group


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