OREANDA-NEWS. September 01, 2015. Fitch Ratings has affirmed Cabo Verde's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B' with Stable Outlooks. The Short-term IDR has been affirmed at 'B' and the Country Ceiling at 'B+'.

KEY RATING DRIVERS
Cabo Verde's ratings balance its weak public finances, high external indebtedness and weak growth compared with the 'B' median, against relatively strong governance indicators and a high share of concessional debt in total public sector external debt, which eases the sovereign's external debt service burden.

The authorities estimate that real GDP grew 1.8% in 2014, consistent with the low growth in recent years. Cabo Verde's economic performance has trailed the 'B' median, held back in part by slow growth in eurozone trading partners, but Fitch expects it to pick up over the forecast period, driven by tourism, remittances and foreign direct investment.

Public finances remain weak due to high gross general government debt, which Fitch expects to exceed 118% of GDP in 2015, and large fiscal deficits. The government has scaled back public investment, and expects to reduce the fiscal deficit to 3.5% of GDP by the end of 2018 from 7.3% of GDP in 2015. Nevertheless, Fitch envisages a higher fiscal deficit over the forecast period, expecting it to average 7.5% of GDP between 2015-2017. The deficit is driven largely by capital spending.

Fitch's expectation of a slower pace of improvement in fiscal finances takes into account several factors, including past fiscal slippages, the gradual wind-down of the public investment programme and a less optimistic growth forecast than official projections. As a result, the general government debt ratio will continue to rise in 2015-2017.

Cabo Verde's high gross and net external debt remains a source of credit weakness. Net external debt at end-2014 was about 46% of GDP, far above the 'B' median of 16.4%. Nevertheless, the vulnerability from a high level of external indebtedness is mitigated by the fact that a large portion of this debt is concessional in nature. External debt service represented 3.7% of current external receipts in 2014, against the 'B' median of 9.9%. The average maturity of government debt is more than 20 years and the average interest rate also remains low.

RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main risk factors that, individually or collectively, could trigger negative rating action are:
- Public finances materially weaker than expected under Fitch's baseline scenario.
- A sharp increase in the sovereign's external debt servicing burden
- Weaker than expected medium-term growth potential that adds to pressure on the government debt-to-GDP ratio. This includes failure of the public investment programme to improve infrastructure and support higher medium-term growth.

The main factors that, individually or collectively, could lead to positive rating action are:
- Improvement in fiscal finances evidenced by a stabilisation in the public debt-GDP ratio.
- Evidence of capital investment projects translating into higher economic growth and broad development of private sector activity, which boosts medium-term growth prospects.

KEY ASSUMPTIONS
Fitch assumes that the peg of the Cabo Verdean Escudo to the euro remains and support for the system from the Portuguese government continues.

Due to a high degree of dependency on eurozone developments, Fitch's macroeconomic forecasts for Cabo Verde are premised on the eurozone recovery staying on track.

Fitch assumes that the sovereign's public investment projects will continue, although the pace of expenditure could become more gradual. We expect concessional financing to Cabo Verde to gradually decline over time.