Moody's downgrades Republic of Congo's rating to B3

Moody's Investors Service has today downgraded the Republic of the Congo's (ROC) issuer rating to B3 from B2, and initiated a review for further downgrade. 

The key driver for the downgrade is the weak state of the sovereign's institutions, as evidenced by the government's missed payment in June on its only international bond. The purpose of the review for further downgrade is to determine whether the payment will be resolved very quickly, with no loss to bondholders, or whether the payment will remain outstanding for an extended period of time, leading to investor losses. The review will also focus on the state of the country's public finances, the stress on the government's liquidity position, as well as its commitment and institutional ability to honor its future debt obligations. 

Concurrent with the rating action, Moody's has lowered ROC's local and foreign currency bond and deposit ceilings by one notch to Ba3. 

RATINGS RATIONALE 

RATIONALE FOR DOWNGRADING ROC'S RATING TO B3 

The key driver behind Moody's decision to downgrade ROC's rating to B3 is the weak state of the sovereign's institutions, as evidenced by the government's missed payment on its only international bond. The government missed payment of the interest and capital due on 30 June 2016 and failed to remedy the situation during the grace period of 30 days. Moody's estimates that the payment that was due is relatively small compared to the country's GDP, at around 0.25%. A second payment of a similar size is due in December 2016. 

The bond was issued in 2007 as part of ROC's debt restructuring under the umbrella of the London Club. The bond, which represents around 9% of the government's debt at the end of 2015, according to Moody's estimations, constitutes ROC's only outstanding debt on the international market. It already has a relatively concessional structure, meaning that the interest on the bond is well below-market rates and that the maturity (2029) is particularly long. 

The government indicates that the missed payment relates to an administrative error, rather than liquidity shortages, and stipulates that the payment will be made shortly. The review will allow Moody's to assess the veracity of the government's assertion. However, regardless of whether Moody's ultimately concludes that a default has occurred or not, the rating agency believes that a B3 rating better captures the institutional profile of the issuer, given the weaknesses highlighted by this event. 

RATIONALE FOR INITIATING THE REVIEW FOR FURTHER DOWNGRADE 

The key factor informing Moody's decision to initiate a review for further downgrade is the downside risk on the level of potential losses for the holders of the bond. Moody's will also assess the risk of the government's liquidity position deteriorating beyond what is currently envisaged and its institutional ability to honor all debt payments in future. 

As such, the purpose of the review for further downgrade is to determine if the payment issue will be resolved very quickly, with no loss to bondholders, or if whether the payment will remain outstanding for an extended period of time and lead to investor losses. The review will also focus on the state of the country's public finance, the extent of the stress on the government's liquidity over the short- to medium-term, as well as the government's institutional ability to ensure its debts are serviced on time. 

The missed payment came as the ROC government has come under financial pressure from low oil prices. In 2015, the government derived an estimated 43% of its revenue from the oil sector. As such, the drop in oil prices has resulted in a marked deterioration in the government's fiscal position and its balance sheet. 

WHAT COULD RESULT IN A DOWNGRADE 

Moody's would further downgrade ROC's rating if the review were to conclude that a loss will be imposed on bondholders. A downgrade would also be likely should the review reveal that the extent of the stress on the government liquidity over the short- to medium-term is greater than currently expected and/or that the government's institutional ability to ensure timely debt payments remains markedly impaired. 

WHAT COULD STABILIZE THE RATING AT THE CURRENT LEVEL 

Moody's would maintain and confirm ROC's B3 rating if the rating review were to conclude that holders of the bond incurred no loss and that the government liquidity position, as well as its institutional ability to ensure debt payments are made on time, are consistent with a B3 rating. 

GDP per capita (PPP basis, US$): 6,722 (2015 Actual) (also known as Per Capita Income) 

Real GDP growth (% change): 2% (2015 Estimatted) (also known as GDP Growth) 

Inflation Rate (CPI, % change Dec/Dec): 2.2% (2015 Actual) 

Gen. Gov. Financial Balance/GDP: -11.1% (2015 Estimated) (also known as Fiscal Balance) 

Current Account Balance/GDP: -10.5% (2015 Estimated) (also known as External Balance) 

External debt/GDP: 34.7% (2015 Estimated) 

Level of economic development: Very Low level of economic resilience 

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983. 

On 01 August 2016, a rating committee was called to discuss the rating of the Government of the Republic of the Congo. The main points raised during the discussion were: a missed payment of interest and capital on the ROC's international bond. Other views raised included; the issuer's institutional strength/ framework have not materially changed nor has the issuer's susceptibility to event risks. 

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings 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.