OREANDA-NEWS. Fitch Ratings has affirmed Republic of Congo's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B+'. The Outlooks are Stable. Fitch has also affirmed the rating on the 2029 Euroboand at 'B+', the Short-term foreign currency IDR at 'B' and the Country Ceiling at 'BBB-', in line with the Country Ceiling for the Communaute Economique et Monetaire de l'Afrique Centrale (CEMAC).

KEY RATING DRIVERS
The affirmation reflects the following factors:

Congo's strong balance sheet and positive growth outlook, underpinned by rising oil production and investment, are a key support for the country's ratings in the context of significantly lower oil prices. Although Fitch expects government deposits (21.4% of GDP at end-2014) and official foreign reserves (5.7 month of CXP in 2014) to come under pressure in 2015-16, Congo will continue to enjoy strong external and fiscal buffers relative to peers. The country is also expected to remain a net external creditor in 2015.

The sharp fall in oil prices in the past six months has forced the authorities to revise their spending plans significantly, as oil income accounts for 75% of total revenue. In order to preserve its fiscal position, the government will need to make cuts of around 5% of GDP in 2015, mainly by halting investment projects. Unlike other countries in the region, Fitch believes that Congo has the scope to make large fiscal adjustments to mitigate oil revenue shortfalls, as almost 60% of government spending is budgeted for capital expenditure.

Fitch expects the budget to remain in balance in 2015 and post a small surplus in 2016 (0.2% of GDP), in line with government projections. However, limited progress in improving public finance management (including boosting non-oil revenue and enhancing spending efficiency), have heightened medium term fiscal risks given Congo's very high oil dependency. Fiscal transparency is a weakness relative to peers.

Public debt rose by almost 15% of GDP since HIPC completion in 2010 on the back of Chinese lending for infrastructure projects. Fitch expects public debt to rise further, to 38.4% of GDP in 2016, but the bulk of it will remain concessional, with interest payments well below rating peers. On the downside, lower oil income will limit the government's ability to clear non-financial domestic arrears (4.5% of GDP in 2014), which will continue to drag on the sovereign's rating profile.

Non-oil growth has been strong in recent years and reached a high of 14.8% in 2014. Although fiscal retrenchment will lead to a significant slowdown across key non-oil sectors such as construction, Congo's economy is set to benefit from a gradual increase in oil production. Underpinned by a USD10bn investment programme, oil output is expected to increase by an average of 10% in the next three years to reach a peak of 330,000 barrels a day in 2017 (from 250,000 b/d in 2014). As a result, Fitch forecasts headline GDP growth to average a solid 5.9% in 2015-16, well above 'B' rated peers.

The government's limited efforts in diversifying the economy and the country's very weak business environment (Congo ranked 178 out of 189 countries in the World Bank's 2015 Doing Business) limit non-oil investment and accentuate the risks stemming from oil price volatility. Despite a rise in social spending in recent years, human development indicators remain low and much weaker than for peers. Weak data quality also constrains the rating.

Fitch expects the current account deficit to widen sharply to 10.5% of GDP in 2015, from 3.1% in 2014, in line with a projected 25% contraction in oil exports. Strong foreign direct investment inflows into the hydrocarbon sector will prevent a significant weakening of the external accounts, but foreign reserve coverage is expected to fall gradually, to 4.7 months of CXP in 2016. Congo is a net external creditor and sovereign net foreign assets stood at 16.9% in 2014 (among the highest in the 'B' rating category) but its position is set to weaken in 2015-16 as public external debt continues to rise.

RATING SENSITIVITIES
The main factors that, individually or collectively, could lead to negative rating action are:
-Failure to put in place an adequate fiscal policy response to lower oil prices, leading to a weaker fiscal position and the depletion of the country's fiscal buffers.
-A sharp rise in government debt that would weaken external debt metrics and the sovereign balance sheet.

The main factors that, individually or collectively, could lead to positive rating action are:
- Improving public finance management and achieving progress in the resolution of unsettled external debt claims and clearing domestic arrears.
- Effectively tackling structural weaknesses, including improving the business environment to achieve economic diversification and expand the revenue base.

KEY ASSUMPTIONS
Fitch forecasts Brent crude to average USD65/b in 2015 and USD75/b in 2016.

Fitch assumes that the monetary arrangement with France will remain unchanged, supporting the macro environment, including a stable currency and low inflation. The monetary arrangement is backed by high foreign reserves pooled at the central bank and the French guarantee on currency convertibility.

Fitch assumes that President Denis Sassou N'Guesso will be able to run again in 2016 and the he will win a new term. Risks of political instability ahead of the elections are mitigated by a weak opposition.