Are we there yet?
Ratings agency S&P has affirmed Cameroon’s long term sovereign rating at ‘B’ with a stable outlook but has warned that this could be lowered if there is a sharp rise in public debt or if political or other setbacks occur. The ratings agency highlighted the economy’s resilience to external and geopolitical shocks, including the drop in oil prices and instability in the northern part of the country, to register growth of 5.8% in 2015. According to the IMF, Cameroon’s economy will grow by 4.9% in 2016, with the economy expected to expand at an annual rate of 4% and above into 2021.
FrancTrade view: The report from S&P should provide some near term relief for investors exposed to Cameroon risk. Large road and infrastructure projects and developments in the energy sector, particularly in LNG, give room for optimism. However, there are a number of takeaways which will keep the market guessing as to the longer direction of Cameroon’s economy.
We assign a greater risk to the fiscal deficit which was been underpinned by one-off public receipts in 2015. However, large infrastructure outlays in the medium term could see the public deficit widen. The likely increase in government domestic borrowing will pressure liquidity and tighten monetary conditions.
Current account deficit will widen on account of a weaker Nigerian Naira
We also assign a greater risk to the current account deficit which we expect to widen partly on account of a more competitive Nigerian Naira (Nigeria is a key trading partner), and weaker energy prices. While laudable, we do not believe the potential expansion in other commodity sectors, including cocoa and coffee, will be large enough to compensate for the long term decline in oil prices as forecast by S&P. Not least because lead times are relatively long.
BEAC forex reserves pressured – questions over the sustainability of the CFA franc
The drop in commodity prices is pressuring foreign exchange reserves in the central African monetary zone (CEMAC) and we agree with S&P that this could lead to question marks over the sustainability of the CFA franc peg to the euro. We also hold the view that risks to the CFA franc peg are muted for now. That said, Cameroon’s foreign exchange reserves have also shown remarkable long term resilience, at around USD 2bn.