Fitch Ratings has revised the Outlook on Benin’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at ‘B’.
Key Rating Drivers
The revision of the Outlook to Positive reflects our baseline expectation that Benin will return to strong growth as the impact of the pandemic fades and following the re-opening of the border with Nigeria. It also reflects our view that the government will gradually reverse the temporary deterioration in public finances and stabilise government debt at well below the forecast ‘B’ median over the next few years.
The re-opening of the border, shut by Nigeria between August 2019 and December 2020, should allow bilateral trade flows to recover in 2021. However, the impact is likely to be moderate as quarterly official trade data signals that the 800km border probably remained partially porous during part of the closure. Official imports, around 40% of which are smuggled to Nigeria, started to recover in 2Q20 and reached around 80% of pre-closure levels by 3Q20. Ongoing discussions between both governments reflect an easing of relations and limit the risk of a renewed closure in the near term, although it remains a tail risk.
The Beninese economy has shown relative resilience to the double shock stemming from the pandemic and the border closure, with GDP growth estimated at 2.3% in 2020 from 6.9% in 2019, well above the ‘B’ median of -4.5% in 2020. Moderate activity in the agro-industry and construction sectors, driven by public investment, partially offset weak performance in the agricultural, trade and transport sectors that were affected by containment measures – albeit mild and without a full lockdown – and lower global demand and informal trade with Nigeria.
We expect growth to recover to 5.6% in 2021 and to then return to pre-pandemic-shock levels at 6.2% in 2022, driven by a rebound in trade, transport, agriculture and construction. Our forecast assumes a slow recovery in Nigeria (1.5% GDP growth in 2021), a gradual easing of local coronavirus-related disruptions and improved global prospects. Downside risks stem from uncertainty about the duration and severity of the pandemic in Benin, where vaccination prospects remain unclear, and in key trading partners, which could weigh on the recovery.
Macroeconomic policy credibility is likely to remain robust in the medium term. We expect Benin to renew its medium-term programme with the IMF, which expired in mid-2020, after the election in April 2021. Benin’s performance under its latest ECF programme has been strong, with all targets met, and the country has developed a track-record of fiscal prudence and progress on structural reforms since 2016.
Our forecast for the general government (GG) deficit envisages a slightly slower fiscal consolidation trajectory than the 2021 budget, with the GG deficit narrowing to 4.7% of GDP in 2021 and 3.5% in 2022 from 5.1% in 2020. We assume the phasing-out of pandemic-related expenditure and recovery in government revenues will be slower than forecast by the authorities, given the context of high economic uncertainty and persisting disruptions related to the pandemic.
Gradual progress on fiscal consolidation and stronger medium-term growth will result in GG debt stabilising at around 48% of GDP over the projection period, after increasing to 46% in 2020 from 41% in 2019, remaining well below the forecast ‘B’ median of 70% in 2022. Under our baseline, government deposits will decline to 8% of GDP in 2022 from 10% in 2020, after three years of steady increase. Guaranteed debt and SOE debt together represent less than 1% of GDP in 2020 while the government has not yet signed any public-private-partnership agreements.
Benin’s ‘B’ IDRs also reflect the following key rating drivers:
Financing flexibility has improved. Benin issued two Eurobonds (EUR700 million, 4.875%, 2032; EUR300 million, 6.875%, 2052) in January 2021 with longer maturities than its inaugural Eurobond in 2019, and still benefits from strong official creditor support. Nonetheless, potentially tightening conditions for frontier market issuers may affect external financing prospects in the medium term. The regional bond market is shallow, but the regional central bank’s liquidity measures will likely continue to support demand for local currency bonds.
We estimate fiscal financing needs at around 12% of GDP in 2021. There is no external market debt coming due before 2024 and the government used the proceeds of its recent issuance to buy back 65% of its first Eurobond, smoothing the repayment profile and limiting medium-term refinancing risks. The remaining proceeds of the Eurobonds (EUR675 million) will cover around 40% of funding needs in 2021 and we expect Benin to finance the remaining funding needs with official creditor support and rolling-over maturing domestic debt.
We expect the current account deficit to widen to 4.2% in 2021 and 2022, from 4.0% in 2020 and 2019, including official estimates of informal flows. We forecast government external borrowing to cover most of the gross external funding requirement, which we estimate at around 9% of GDP per year over 2021-22. Benin’s access to the region’s pooled reserves, worth USD19.8 billion at end-August 2020 (6.2 months of the region’s 2019 imports), limits external liquidity risks. Net external debt will remain comparable with peers, increasing slightly to 34% of GDP in 2022 from 33% in 2020.
Political risks are moderate. In our assessment, the re-election of the current President Patrice Talon, who will run for a second term in the April 2021 elections against 19 other candidates, is likely as the opposition remains somewhat fragmented and ongoing legal cases against some opposition leaders have barred them from entering the race. New electoral rules sparked criticism from the opposition, but we assume a peaceful electoral process. Tensions surrounding the 2019 parliamentary elections have subsided and the May 2020 municipal elections took place calmly. Nonetheless, further deterioration in certain aspects of governance could weigh on the World Bank Governance Indicators variable that is an important component of Fitch’s Sovereign Rating Model, potentially exerting downward pressure on the ratings.
ESG – Governance: Benin has an ESG Relevance Score of ‘5’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) has in our proprietary Sovereign Rating Model. Benin has a low-mid range WBGI ranking at the 38.0th percentile, reflecting a governance score in line with the B median, balanced by progress on control of corruption and government effectiveness against a deterioration of the score on political stability following the tensions surrounding the 2019 parliamentary elections.
The main factors that may, individually or collectively, lead to positive rating action/upgrade are:
- Macroeconomic performance and External Finances: Further evidence of a recovery of trade flows with Nigeria in the context of the pandemic shock, through for example higher customs receipts, which could lead to the removal of the -1 notch on External Finances.
- Public Finances: Continued fiscal consolidation and progress on fiscal revenue-enhancing reforms leading to a reduction in budget deficits sufficient to stabilise the GGGD/GDP ratio below 50% in line with Fitch’s base case forecasts over the medium term.
The main factors that may, individually or collectively, lead to a negative rating action/downgrade are:
- Macroeconomic performance and External Finances: Heightened external vulnerability to a prolonged or more severe pandemic shock, reflected for example through weaker growth and trade prospects.
- Public Finances: Failure to stabilise debt/GDP over the medium term, for example due to increasing fiscal deficits or lower GDP growth.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
Fitch’s proprietary SRM assigns Benin a score equivalent to a rating of ‘B+’ on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:
- External Finances: -1 notch to reflect risks to the recovery of trade flows with Nigeria, in the context of the potential further disruptions and containment measures stemming from the pandemic shock, which could have an adverse effect on GDP growth and public finances.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
We expect global economic trends to develop as outlined in Fitch’s most recent Global Economic Outlook. We project Brent oil prices to average USD45/barrel in 2021 and USD50 in 2022.
Benin has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.
Benin has an ESG Relevance Score of 5 for Rule of Law, Institutional and Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in the SRM and are therefore highly relevant to the rating and a key rating driver with a high weigh.
Benin has an ESG Relevance Score of 4 for International Relations and Trade as dependence on trade to Nigeria is relevant to the rating and is a rating driver.
Benin has an ESG Relevance Score of 4 for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver, as for all sovereigns.
Benin has an ESG Relevance Score of ‘4’ for Human Rights and Political Freedoms, as the Voice and Accountability pillar of the World Bank Governance Indicators are relevant to the rating and a rating driver.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies).