Fitch Revises Cape Verde's Outlook to Negative; Affirms at 'B+'

Fri Apr 5, 2013 12:20pm EDT

LONDON, April 05 (Fitch) Fitch Ratings has revised the Outlook on Cape Verde's Long-term foreign currency Issuer Default Rating (IDR) to Negative from Stable and affirmed it at 'B+'. The Long-Term local currency IDR has been downgraded to 'B+' from 'BB-'. The Outlook is Negative. The Short-Term foreign currency IDR has been affirmed at 'B'. Fitch has affirmed Cape Verde's Country Ceiling at 'BB-'. KEY RATING DRIVERS The downgrade of the local currency IDR and Negative Outlooks reflect the following key rating factors: - Revised GDP data show Cape's Verde's real GDP growth is significantly weaker than previously thought. Under the revised methodology, Fitch's estimate of five-year average real GDP growth up to 2012 is now 2.6%, compared with Fitch's previous calculation of 5.1%. - In addition, lack of data prior to 2007 and for 2011 and 2012 make it difficult to assess current growth rates or make a robust assessment of Cape Verde's medium-term growth potential. Pending the government's publication of its full data revision, which is expected by mid-2013, Fitch has revised down its estimate of GDP growth for 2011 and 2012 to 3%. - Government debt is high and still rising. The data issues identified above make it difficult to estimate public debt and budget deficit ratios precisely. Based on the lower growth estimates, Fitch projects government debt levels will peak materially higher than previously expected, as illustrated by our estimate that gross general government debt to GDP will reach 96.6% in 2013, much higher than our previously anticipated peak of 85%. - This scenario assumes full implementation of the government's investment programme in 2013. Consequently, the budget deficit is projected to widen to 12.3% of GDP in 2013 from 9.5% of GDP in 2012. Official projections show the deficit falling to very low levels by 2015 as public investment falls substantially. However, Fitch believes investment is likely to be sustained at a high level while concessional finance remains available. - Although there is a high likelihood of lower grants from Cape Verde's largest but fiscally constrained bilateral creditors (notably Portugal and Spain), substantial concessional funding is likely to remain in place, provided by other donors. The high concessional nature of debt has so far kept interest/revenue within 'B' category medians, although this ratio is rising. - The government has demonstrated active reform in expanding its tax base. Several new taxes will be introduced in 2013 as well as standardisation of VAT across goods and services and better rationalisation of tax exemptions across sectors. However, efforts have been offset by continued increases in current expenditure on public salaries, goods and services. The effective consolidation of government expenditure is constrained by a high share of mandatory spending. - The affirmation of Cape Verde's 'B+' Long-term foreign currency IDR reflects continuing good governance and well-functioning institutions relative to 'B' category peers. Sustained implementation of the government's current Growth and Poverty Reduction Strategy (GPRSP III) should help Cape Verde foster private sector development by addressing the country's critical infrastructure needs, but at the cost of deteriorating public finances. - The downgrade of the Long-term local currency IDR additionally reflects Fitch's assessment that the likelihood of the government preferring domestic (local currency) creditors over foreign creditors has declined as a result of its increased reliance on international donors and external borrowing. RATING SENSITIVITIES The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the rating: - Lack of timely fiscal consolidation necessary to prevent public debt to GDP continuing on its current unsustainable upward trajectory would likely lead to a downgrade. - Lack of clarity on macroeconomic performance due to poor timeliness and/or reliability of data would increase negative rating pressure. - Material negative divergence in economic and fiscal performance from Fitch's own assumptions will likely lead to a downgrade. - Failure of the ongoing capital investment programme to deliver the improvements in infrastructure that would support sustainable medium-term growth. KEY ASSUMPTIONS Fitch assumes that the availability of concessional financing will remain a continuing feature of the government's financing programme, and that donors/lenders will generally remain supportive notwithstanding the fiscal and data challenges outlined above. Fitch assumes the currency peg to the euro and support for the system from the Portuguese government will continue. Contact: Primary Analyst Kit Ling Yeung Analyst +44 20 3530 1527 Fitch Ratings Limited 30 North Colonnade London, E14 5GN Secondary Analyst Arnaud Louis Associate Director +44 20 3530 1539 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. 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