Moody’s downgrades the Democratic Republic of the Congo’s rating to Caa1, changes outlook to stable from negative
18 Jun 2019
New York, June 18, 2019 — Moody’s Investors Service (“Moody’s”) has today downgraded the Government of the Democratic Republic of the Congo (DRC) issuer rating to Caa1 from B3 and changed the outlook to stable from negative.
The decision to downgrade the rating reflects Moody’s assessment that the capacity of the country’s policymaking institutions to respond to economic or political shocks is very weak. Although DRC’s debt burden is low, even a moderately severe shock could raise the risk of default given very low income levels and the large and dispersed population reliant on poor infrastructure. Possible sources of such a shock remain those identified in the rating action in 2017, relating to commodity prices, impairment of major commodity production facilities, or — notwithstanding the apparent calm following the recent elections — renewed political tensions.
The stable outlook corresponds to balanced risks at the Caa1 rating level. On the one hand, with a very low government debt burden, the probability of default remains quite low. Conversely, the institutional and economic weaknesses characterising DRC’s credit profile pose significant challenges to the government and are unlikely to alleviate significantly in the near future.
The long-term local-currency bond and deposit ceilings remain unchanged at B3. The long-term foreign-currency bond and deposit ceilings remain unchanged at B3 and Caa1, respectively.
RATIONALE FOR THE DOWNGRADE TO Caa1
VERY WEAK CAPACITY TO RESPOND TO SHOCK FOR POLICYMAKING INSTITUTIONS AND ECONOMY
Moody’s decision to downgrade the DRC’s ratings to Caa1 reflects its assessment that the capacity of the country’s policymaking institutions and economy to respond to economic or political shocks is very weak.
Notwithstanding significant and largely untapped natural resources wealth, the shock absorption capacity of the DRC’s economy is very weak. Income levels are the lowest amongst Moody’s-rated sovereigns (with GDP per capital at under $800 in 2018 at purchasing power parity) and socioeconomic outcomes are poor across the country’s large population. Poor infrastructure significantly impairs growth, and the deployment of support at times of need.
GDP growth has picked up since 2017 on the back of rising production in the mining sector, with copper and cobalt two major commodities for DRC. In 2018, real GDP growth reached 5.8% of GDP, compared to population growth of 3.0%.
However, the country’s dependence on the mining sector — which accounts for close to 90% of total exports on average over the last three years — means that both the economy and the public finances are extremely vulnerable to sustained falls in commodity prices. Natural disasters such as widespread epidemics would likely have a similarly negative impact. In Moody’s view, although such events are not part of its base case assumptions, they should not be thought of as ‘tail’ events, having already occurred in the DRC and elsewhere in the region in recent years.
The high exposure to such events arises in part because of the very high level of poverty in the DRC and the very low quality of the infrastructure on which a large and dispersed population is reliant. It also reflects the weakness of the DRC’s institutions. The DRC ranks towards the bottom of international rankings for governance and institutional strength, and its policymaking institutions have limited capacity to respond to such shocks and mitigate their effects. Pressure on the currency and/or public finances has in the past led to significant macroeconomic instability. While foreign exchange reserves have risen, to $1.13 billion at the end of April 2019, they cover less than one month of imports and do not offer significant financial and policy room to respond to a shock. With low and falling debt, the government has in principle considerable fiscal space with which to mitigate shocks. However, in practice, the government continues to manage its budget with a narrow range of options to reallocate expenditure or raise revenue in case of need.
Political developments remain a possible source of shock. The transition from former President Kabila to President Tshisekedi was achieved without widespread violence, notwithstanding the controversy surrounding the vote count. Nevertheless, in Moody’s view political risk remains high given the potential for demands for more representation in parliament and government, the former being currently dominated by former president Kabila and his party. As was the case when Moody’s assigned a negative outlook to the DRC’s rating in 2017, political risk would have the greatest impact were it to undermine foreign investors’ and lenders’ willingness to maintain a presence in the country. That risk appears to have faded following the election but could quickly reappear.
RATIONALE FOR THE STABILIZATION OF THE OUTLOOK
The stable outlook corresponds to balanced risks at the Caa1 rating level.
In particular, the DRC has a low and affordable debt. Government external debt almost exclusively consists of concessional debt without any large payment due over the coming years. In consequence, interest payments amount to 4% of revenue, a very low level. As a result, the probability of default and loss given default are limited absent further shocks, which are not part of Moody’s baseline.
On the upside, a normalisation of DRC’s relations with the international community that leads to significant and sustained financing at low costs would lift the economy’s prospects, shore up foreign exchange reserves, and provide more flexibility to the government in the conduct of its budget.
Conversely, an increase in political tensions would jeopardise the fragile equilibrium that seems to prevail currently. Longer term, the institutional and economic weaknesses characterising DRC’s credit profile pose significant challenges to the government and are unlikely to alleviate significantly in the near future.
FACTORS THAT COULD LEAD TO AN UPGRADE
Signs that the government is increasingly able to use a period of relatively favourable economic and commodity prices to rebuild its foreign exchange reserve and fiscal buffers, and also to survive less favourable periods without depleting those buffers, would point to stronger institutions and higher economic shock absorption capacity, which could lead to an upgrade.
FACTORS THAT COULD LEAD TO A DOWNGRADE
An economic or political shock that contributed to renewed macroeconomic instability, including pressure on the currency that would significantly raise the government’s debt burden, could lead to a downgrade.
GDP per capita (PPP basis, US$): $767.4 (also known as Per Capita Income)
Real GDP growth (% change): 5.8% (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 7.2%
Gen. Gov. Financial Balance/GDP: 0.1% (also known as Fiscal Balance)
Current Account Balance/GDP: -5.5% (also known as External Balance)
External debt/GDP: 12.5%
Level of economic development: Low level of economic resilience
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 13 June 2019, a rating committee was called to discuss the rating of the Democratic Republic of the Congo, Govt. of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have materially decreased. The issuer’s susceptibility to event risks has not materially changed. Other views raised included: The issuer’s institutional strength/ framework, have not materially changed. The issuer’s governance and/or management, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
The local market analyst for this rating is Aurelien Mali , +971 (423) 795-37.
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