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.