October 20, 2017 / 8:51 PM / a year ago

Fitch: Slow IMF Talks Compound Republic of Congo Liquidity Risk

(The following statement was released by the rating agency) LONDON, October 16 (Fitch) Slow IMF negotiations and continuing legal uncertainties are compounding the Republic of Congo's acute liquidity pressures, Fitch Ratings says. Fiscal buffers are depleted and financing options have narrowed significantly, and recent statements by the government suggest it wants to reschedule its debt, although it has not made detailed proposals. Congo's 'CC' sovereign rating indicates a very high level of credit risk. IMF talks initiated in March have been slowed by structural shortcomings in public finance management, highlighted by persistent uncertainty regarding gross general government debt (GGGD). The IMF recently raised its estimate of Congo's GGGD to XAF5.33 billion (USD9.14 billion) or 110% of GDP, from 77%. We projected GGGD to rise to 88.5% at end-2017 in our most recent sovereign rating review, but highlighted the uncertainty surrounding the actual level due to undisclosed government arrears and low transparency. The IMF is likely to raise its estimate further, to take account of domestic arrears accumulated since 2014. These include arrears on civil service wages and pensions and those of employees of state-owned enterprises, according to an October report by Banque de France. The IMF's estimate also excludes "debt under litigation". Congo has been in litigation with Commissions Import Export SA (Commisimpex), a former contractor, for several years over allegedly unsettled bills. Reuters reported in September that Commisimpex had initiated new proceedings in France last year in an attempt to receive payments due to the sovereign from international oil companies. A government spokesman told Reuters that the state will "defend its position which is that these taxes cannot be subject to seizure." Congo has derived two-thirds of general government (GG) revenues from the oil sector over the last nine years. We expect the partial recovery in oil prices and the gradual expansion of production, mainly from the new Moho Nord offshore field, to modestly boost revenues in 2018 and 2019. But Commisimpex's new judicial procedure raises new risks around our baseline scenario. Payments on Congo's 2029 dollar notes were temporarily frozen last June under restraining notices issued by Commisimpex which were subsequently lifted by a US court. Congo's 'CC' rating reflects persistent legal uncertainty due to the dispute and the resulting risks of disruptions to payments to bondholders. Following the recent IMF mission, Congo's Finance Ministry said that the government will "begin discussions with its primary lenders with the objective of refinancing or re-profiling its debt", which may refer to the possibility of rescheduling some loan maturities. Congo's Prime minister also said the government will "consider...a moratorium" on its debt owed to commodity trading firms, according to Reuters. This supports our view that a potential IMF programme would not remove the need to reschedule some payments on loans, as Congo is facing a high concentration of maturities coming due over the next three years. The partial recovery in oil revenues will reduce the GG deficit, but the government has yet to set out consolidation plans that could restore public debt sustainability. Past capital spending cuts were due to limited financing options rather than an active consolidation strategy. The public payroll is growing and efforts to limit operating expenditure, cut public sector bonuses and take a census of civil servants are unlikely to alleviate liquidity strains. Failure to consolidate could expose the country to disciplinary measures by Banque des Etats de l'Afrique Centrale (BEAC), the central bank of the CEMAC currency bloc. BEAC could consider measures aiming at limiting bank holdings of sovereign bonds issued by member countries that are not in compliance with regional convergence norms, according to a recent IMF report. Four of the six CEMAC members have entered IMF programmes under the strategy outlined by the heads of state last December to protect the CFA franc peg. Only Equatorial Guinea and Congo are without a programme. Contact: Mahmoud Harb Director, Sovereigns +852 2263 9917 Fitch (Hong Kong) Ltd 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Jan Friederich Senior Director Sovereigns +852 2263 9910 Mark Brown Senior Analyst, Fitch Wire +44 203 530 1588 The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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