TEXT-S&P revises Benin's outlook to negative

Mon Dec 10, 2012 9:55am EST

Overview
     -- Key reforms have stalled and we think Benin's policymaking process has 
become more unpredictable.
     -- External imbalances appear to have increased. We expect growth per 
capita to remain weak at 1% over the next few years and we see a risk of 
loosening fiscal management.
     -- Accordingly, we are revising the outlook to negative from stable, 
reflecting the potential for a downgrade if Benin's external imbalances 
continue to grow or if reforms to boost key economic sectors and tax 
collection do not progress. Further weakening in fiscal management may also 
affect any decision to lower ratings.
     -- That said, we are affirming our 'B/B' ratings on Benin.


Rating Action
On Dec. 10, 2012, Standard & Poor's Ratings Services revised its outlook on 
the Republic of Benin to negative from stable. At the same time, we affirmed 
the 'B/B' long- and short-term sovereign credit ratings.

The transfer and convertibility (T&C) assessment is 'BBB-'. The T&C assessment 
reflects our view of the likelihood that the Central Bank of West African 
States (BCEAO) would restrict access to foreign exchange needed for debt 
service.

Rationale
Our ratings on Benin are constrained by Benin's low per capita income (US$800 
in 2011), narrow economic base, and weak net external position. Furthermore, 
in our view, there is a lack of social consensus and political leadership to 
back much-needed reforms supporting tax collection, business climate, and 
governance in key economic sectors such as the cotton sector and port 
activity. 

The ratings are supported by Benin's moderate fiscal debt burden, a product of 
debt relief from bilateral and multilateral creditors in the context of the 
Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiative 
(MDRI) programs. The ratings are furthermore supported by grants and 
concessional financing, in line with post-HIPC and MDRI commitments, which 
keep the public external interest burden relatively low.

In our opinion, Benin's 2012 real per capita GDP growth will remain weak at 
under 1%, even though activity will be supported by good performance in food 
crop production; increased cotton production linked to exceptional government 
support; and the recovery in the Port of Cotonou, which is supported by strong 
growth in Nigeria. Inflation is likely to rise to 7% in 2012 after a cut in 
fuel subsidies in Nigeria. However, if food production is normal, we expect 
inflation to return to about 3% in the next few years.

In the medium term, we estimate that per capita GDP growth will remain 
constrained at 1%. The cotton sector and the Port of Cotonou, the two pillars 
of the Beninese economy, are facing uncertainty. The government has not yet 
proposed a clear roadmap for these two sectors, after declaring in Spring 2012 
the temporary renationalization of part of the cotton sector and the 
suspension of the import verification program, part of its customs reform in 
the Port of Cotonou. The transport infrastructure also remains weak. 

Although President Boni Yayi was re-elected in Spring 2011 and has a large 
majority in Parliament, the government has made no significant progress in 
implementing key reforms regarding tax collection, business climate, and 
economic competitiveness. The business environment and policymaking process 
have become more unpredictable. The government has temporarily renationalized 
some activities in the cotton sector and has suspended a long-foreseen reform 
that was intended to support operational efficiency and boost customs receipts 
at the Port of Cotonou.

Benin's fiscal debt burden is low, with net general government debt under 20% 
of GDP. However, in our view, the composition of Benin's expenditure is not 
conducive to growth. It spends 45% of revenues on wages, more than its peers; 
the West African Economic and Monetary Union (WAEMU) convergence criterion for 
spending on wages is 35%. Furthermore, in our opinion, the government has 
lacked the capacity to enhance tax revenues. Private companies supplying the 
government report persistent payment arrears, which is a further indication of 
the low quality of fiscal management.

We expect that Benin's current account deficit will remain high at just under 
10% of GDP this year and then begin to slightly shrink. The current account 
deficit might be overstated by unrecorded re-exports to Nigeria, but even the 
lower increases in the net external liability position suggest sizable 
external imbalances. In the absence of significant improvement in transport 
infrastructure, we do not expect a strong boost in trade with neighboring 
countries, while the price of fuel imports (which represent more than 30% of 
total imports) have increased in the aftermath of reduced subsidies in 
Nigeria. Furthermore, in the absence of a clear framework for the cotton 
sector, the prospect of a sustainable rise in cotton exports remains uncertain.

Outlook
The negative outlook indicates that we think there is at least a one-in-three 
chance that we will lower the sovereign rating during the next 12 months. We 
could lower the ratings if Benin's external position continues to weaken or if 
the reform process supporting key economic sectors and tax collection remains 
stalled. In addition, the negative outlook also reflects the risks related to 
what we view to be weakening fiscal management and the lack of clarity on the 
budget impact of partial nationalization in the cotton sector.

Conversely, ratings could stabilize at current levels if we consider that 
notable progress has been made in reinvigorating key economic sectors 
(especially cotton and port activities), addressing competitiveness issues, 
and supporting export growth, thereby supporting external and fiscal accounts.

Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit 
Portal, unless otherwise stated.
     -- Sovereign Credit Rating Methodology And Assumptions, June 30, 2011
     -- Methodology: Criteria For Determining Transfer And Convertibility 
Assessments, May 18, 2009
     -- Bulletin: Disputed Presidential Election Has No Immediate Impact On 
The Republic Of Benin's Sovereign Rating, March 24, 2011
     -- Full analysis on Republic of Benin, April 12, 2012

Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
                                        To                 From
Benin (Republic of)
 Sovereign Credit Rating                B/Negative/B       B/Stable/B
 Senior Unsecured                       B                  
 Transfer & Convertibility Assessment   BBB-               



Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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