Fitch : Affirms Cabo Verde at 'B'; Outlook Stable

29 Jan 2016 4:04 PM EST

Fitch Ratings-Paris/London-29 January 2016: Fitch Ratings has affirmed Cabo Verde's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'B' with Stable Outlooks. The Country Ceiling has been affirmed at 'B+' and the Short-term foreign currency IDR at 'B'.

KEY RATING DRIVERS
Cabo Verde's 'B' rating balances low growth and high public and external debt with strong governance indicators and a high degree of concessionality of public and external debt. More specifically, it reflects the following key rating drivers:

The country's high public debt represents the main credit weakness. It has risen quickly to an estimated 120% of GDP at end-2015, from 57% in 2008, more than twice the 'B' category median of 51%. This largely reflects a large public investment programme to improve infrastructure and subdued fiscal revenues related to weak growth. Fitch forecasts public debt/GDP will stabilise in 2015-2017, and decline gradually thereafter, based on our baseline assumption of declining budget deficits and a moderate pick-up in growth. Public debt sustainability is sensitive to exchange rate stability, with 76% of debt denominated in foreign currencies, although risks are mitigated by the high share of debt from international official creditors at extremely long maturities and low cost.

Fitch estimates the budget deficit narrowed sharply to around 4.8% of GDP in 2015, from 7.4% in 2014, thanks to improved revenues (+19% over the first nine months of 2015) and reduced capital spending. However, it was still above the 'B' median of 3.9%. The government targets a 3.5% of GDP budget deficit by 2018 through a mix of revenue and spending measures. This implies that capital expenditure, which has already fallen to 6.6% of GDP in 2015 from 10.3% in 2012, will decline further in line with tapering assistance from international official creditors.

Real GDP growth performance and potential is weak. It averaged just 2% in the five years to 2015, below the 'B' median of 4.6%. Fitch estimates GDP growth was a moderate 2% in 2015 despite a pick-up in FDI and tourism receipts. Raising growth potential will depend on a pay-off from recent heavy infrastructure investments, and prospects in tourism and agro-processing, but are dependent on continued recovery in the EU.

The peg with the euro has supported macroeconomic stability since its implementation in 1998, reducing inflation and real effective exchange rate volatility. However, Cabo Verde's small size (with half a million inhabitants) induces higher growth volatility than most peers.

As a small economy lacking natural resources and exposed to a large food and energy deficit, Cabo Verde runs a structural current account deficit despite strong remittances and tourism receipts (representing around 10% and 20% of GDP, respectively). We estimate it declined to 6% of GDP in 2015, from 8.7% in 2014, thanks to a better tourism season and lower international oil prices. The deficit has historically been financed mainly by external debt, even if FDI inflows, particularly in the tourism sector, are higher than most sub-Saharan peers.

At an estimated 65% of GDP at end-2015, net external debt is three times higher than the 'B' median and increasingly diverging from it. Public debt inflows have ensured growing international reserves, which covered nearly five months of current account payments at end-2015, a comfortable level to protect the peg.

Governance indicators perform much better than the 'B' median, reflecting strong and democratic institutions. The 2016 legislative, local and presidential elections are expected to be fair and transparent and are unlikely to lead to significant policy changes. Development indicators are better than in most sub-Saharan African countries.

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

The main factors that, individually or collectively, could trigger negative rating action are:
-Failure to stabilise the public debt to GDP ratio.
-Declining growth prospects.
-A sharp increase in the sovereign's debt service burden.

The main factors that, individually or collectively, could trigger positive rating action are:
-A marked decline in the public debt to GDP ratio.
-An improvement in growth potential.

KEY ASSUMPTIONS
Fitch assumes the peg with the euro will remain.

Fitch assumes that concessional financing to Cabo Verde will continue declining in line with the country's graduation to middle income country, therefore reducing public investment, and supporting a gradual reduction in budget deficits.

Fitch assumes that eurozone growth will slightly pick up to 1.7% in 2016 and 2017, supporting FDI and remittance inflows.

Contact:
Primary Analyst
Amelie Roux
Director
[phone]
Fitch France SAS
60 rue de Monceau
75008 Paris

Secondary Analyst
Kit Ling Yeung
Associate Director
[phone]

Committee Chairperson
Ed Parker
Managing Director
[phone]

Media Relations: Peter Fitzpatrick, London, Tel: [phone], Email: [e-mail].

Additional information is available on www.fitchratings.com

Applicable Criteria
Country Ceilings (pub. 20 Aug 2015)
Sovereign Rating Criteria (pub. 12 Aug 2014)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy

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