Fitch affirms Cameroon at 'B'; outlook stable

June 05 (Fitch) Fitch Ratings has affirmed Cameroon's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B'.

The Outlooks are Stable. The Short-term foreign currency IDR has been affirmed at 'B'. Fitch has also affirmed the Country Ceiling for Cameroon at 'BBB-', in line with the Country Ceiling for Communaute Economique et Monetaire d'Afrique Centrale (CEMAC) at 'BBB-'.

KEY RATING DRIVERS The affirmation of Cameroon's sovereign ratings reflects the following key rating drivers: Cameroon benefits from relatively robust growth momentum. However, GDP per capita remains well below peers.

Investment-led growth has been driven by public infrastructure projects, which has also led to a rapid increase in debt levels. Oil accounts for less than 10% of GDP, which is low compared with other rated African oil producers. Cameroon benefits from the institutional and monetary framework of the CEMAC, but structural weaknesses continue to weigh on growth prospects and the rating.

GDP growth is estimated to have accelerated to about 5.6% in 2014 and is expected to continue fluctuating around 5% in the coming years, on the back of public investment and increased commodity production. Despite this, demographic trends will limit GDP per capita growth. Structural constraints, lack of skilled labour, infrastructure bottlenecks and execution issues on major projects continue to weigh on growth prospects. The newly built Kribi power plant will allow for a modest pick-up in aluminium production, although missing links to the broader economy limit spill-over effects.

Oil production grew again in the first months of 2015, reaching 100,000bpd. Current investment and exploration, notably in the offshore Kribi/Campo oilfield, indicates further growth in oil production in the coming years.

Oil represents about 25% of fiscal revenue. The fiscal deficit shrank slightly in 2014, to an estimated 3.5% of GDP, but is expected to widen again in the coming years, around 5% of GDP, primarily as a result of the government's ambitious investment programme, which represents nearly 40% of public spending.

Military spending will also grow, in response to the threat posed by the Boko Haram terrorist group. Lower oil prices will weigh on public revenue (a reduction of about 3%-4% of GDP in 2015), as the non-oil tax base is narrow compared with rating peers, but the reduction in retail fuel subsidies (about 2.8% of GDP in 2013, down to an expected 1.0%-1.5% in 2015) will reduce the fiscal impact. Public debt is forecast to reach nearly 30% of GDP in 2015 and to continue to grow afterwards, compared with about 20% in 2013.

Debt will continue to grow to an expected 40% of GDP by 2019, on the back of the government's large investment programme, posing risks to fiscal sustainability.

External debt will grow and become less concessional, raising debt service costs and limiting financing flexibility. The local market is not deep enough to absorb the government's large financing needs, which could pose liquidity and execution risk.

Fitch views public finance management as a key weakness. The government runs up arrears (nearly 5% of GDP according to IMF estimates), notably to public companies, as a form of financing. Although precise figures are not available, this raises the risk of further fiscal slippage or the accumulation of contingent liabilities.

The current account deficit widened to an estimated 4.6% of GDP in 2014, and is expected to grow to nearly 5% in 2015-16. This is mainly due to investment-linked import growth and the decline in oil prices.

However, Franc zone membership has ensured a supportive macro environment, including a stable currency and low inflation. The monetary arrangement is backed by high foreign reserves pooled at the central bank and the French Treasury's guarantee on currency convertibility, thereby effectively reducing foreign currency liquidity risks.

Security issues linked to the activity of the Boko Haram terrorist group remain present in the north of the country. Mainly based in neighbouring Nigeria, Boko Haram does not appear to have a territorial agenda in Cameroon but is proving disruptive to tourism and dents business and investor confidence.

Cross-border attacks from Boko Haram have led to an up-scaling of the military presence, and several joint operations with the Chadian and Nigerian armies have taken place. Fitch does not expect the conflict to be resolved soon. The eventual succession to President Biya, aged 82, is a continuing source of political risk.

The immediate transition issue has been resolved with the 2013 senatorial elections, as the President of the Senate will assume power in the transition period.

However, the succession to President Biya could break the balance of power between the different religious, ethnic and linguistic groups, in particular between the north (Muslim) and the south (Christian), in a context of rising insecurity in the north. Data quality and timeliness is weak, hampering fiscal and economic management.

RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced.

The main risk factors that, individually or collectively, could trigger negative rating action are: - Further large budget slippages or a loosening of the fiscal stance, which accelerates the accumulation of public debt. - A slowdown in GDP growth that would worsen debt dynamics and widen the gap between GDP growth and per capita incomes compared with rating peers. - A widening of the current account deficit, leading to growing external indebtedness. - Political events triggered at the time of the succession to President Biya or an intensification of Boko Haram terrorist activity in the north of the country.

The main risk factors that, individually or collectively, could trigger positive rating action are: - Improved management of public finances, leading to a reduction in arrears to public enterprises and state suppliers, and an improvement in debt dynamics. - Effective measures to improve the business climate resulting in higher private sector led growth.

KEY ASSUMPTIONS - Fitch assumes no break-up of the CEMAC monetary arrangement. - Fitch's current assumption for Cameroon's medium-term growth is 5.5%. - Fitch assumes that the oil price (Brent) will be USD65 per barrel in 2015, and USD75 per barrel in 2016. - Fitch does not expect the tensions with Boko Haram to escalate significantly.