Fitch Affirms Cote d'Ivoire at 'B'; Outlook Positive
KEY RATING DRIVERS
Cote d'Ivoire's 'B' IDRs and Positive Outlook reflects the following key rating drivers:
Macroeconomic performance is a key rating strength, with GDP growth averaging 6.3% in 2010-14 (which includes a period of civil conflict), well above the 'B' median. Cote d'Ivoire continues to benefit from strong domestic demand growth, underpinned by public and private investment. Rising agricultural production will continue to boost exports, while ongoing reforms to the business environment will encourage investment in secondary and tertiary industries. Fitch expects GDP growth to average 7.7% in 2015-16. Medium-term growth challenges include improving the competitiveness of the country's ports and energy facilities, sustaining the reform momentum and achieving greater regional integration.
Political stability indicators are weaker than peers The October 2015 presidential election will be a key test for the country's revamped institutional framework (the last presidential election in 2010 triggered a short-lived civil war). Current President Ouattara remains favourite to win a second term and has received the formal backing of all parties in the ruling coalition. The opposition has been able to mend some of its differences and is likely to take part in the election. This has reduced the scope for political violence. However, threats of political instability persist and constitute the biggest risk to short-term economic performance.
The central government budget deficit remained broadly stable last year, at 2.2% of GDP, despite revenue collection falling short of target, helped by the under-execution of capital expenditure. Fitch expects the deficit to widen in 2015 to 3.4% of GDP, driven by higher wages, ongoing infrastructure spending and election-related costs. The deficit is projected to narrow over the medium term, although a failure to improve tax collection or rationalise wage increases would put consolidation efforts at risk. To limit this, the authorities are placing greater emphasis on medium-term fiscal planning.
Significant debt relief in 2012 and improved market access has strengthened the sovereign's debt profile. Cote d'Ivoire issued Eurobonds in July 2014 and February 2015 raising a total USD1.75bn. Fitch estimates government debt averaged 44.5% of GDP in 2012-14 and will remain broadly stable in 2015, reflecting in part strong nominal GDP growth. Part of the public sector debt (XOF1.4bn at end-2014, around 8% of GDP) is owed to France under a special mechanism where the proceeds of the debt repayments are transferred back to Cote d'Ivoire in the form of grants to finance investment projects. Excluding this mechanism, in line with the government's and the IMF's preferred accounting measure, public debt stood at 38.4% of GDP in 2014.
Public finance management is continuing to gradually improve, with the authorities strengthening the institutional framework to avoid off-budget spending and increase procurement transparency. However, important challenges remain, in particular in managing public sector entities.
The current account deficit (CAD) narrowed to only 0.7% of GDP in 2014 (well below our projection of 3.1% in January), reflecting in part moderate import growth, in line with lower oil and food prices. Rising agricultural exports will help keep the CAD broadly stable in 2015-16, and will be more than financed by rising foreign direct investment inflows. Fitch expects Cote d'Ivoire will remain a net external creditor over the forecast period.
Banking sector indicators have improved, with the aggregate capital ratio for the system reaching 10.1% at end-2014 (from 9.2% at end-2013) and the ratio of non-performing loans falling to the lowest level in over eight years (10.4%). The sector is benefiting from sound macroeconomic policies, rising financial inclusion and strong credit growth (22% in 2014). Restructuring of public sector banks continues but progress has been gradual.
Cote d'Ivoire's ratings also reflect weak structural indicators, including low GDP per capita, weak governance and a history of recent defaults on government debt service. The country's human development score is well below 'B' peers. On the up side, Cote d'Ivoire has made significant efforts in improving its business environment in the past three years.
RATING SENSITIVITIES
The main factors that could lead to an upgrade are:
-Smooth 2015 presidential election and continued political stability thereafter.
-Continued high GDP growth in the context of macroeconomic stability.
-Improvements in public finance management that lead to rapid clearance of domestic arrears, stronger tax receipts and greater transparency of public sector entities.
The current Outlook is Positive. Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to a downgrade. However, the following factors could lead to negative rating action:
-Political instability or violence surrounding the 2015 presidential election.
-Marked deterioration in public sector finances that leads to a sharp rise in government debt.
KEY ASSUMPTIONS
Fitch assumes that Cote d'Ivoire will continue to successfully implement the targets under its current External Credit Facility with the International Monetary Fund, boosting its relationship with donors.
Fitch assumes that moderate global growth in 2015-16 will support demand for Cote d'Ivoire's mainstay products such as cocoa, rubber, gold and coffee.
Fitch assumes the monetary arrangement with France will continue to support macroeconomic stability and the fixed parity of the CFA franc against the euro will remain unchanged.
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