On March 9, 2021, Moody’s agency upgraded Benin’s rating from B2 to B1. On April 11, this member country of the West African Economic and Monetary Union (UEMOA) held elections which will see President Patrice Talon re-elected in the first round with 86% of the vote. Does the vote marked by the call for a boycott by part of the opposition have an impact on the country’s rating? Here are the answers from Aurelien Mali, vice president of Moody’s and sovereign ratings analyst.
What is your comment after the elections in Benin? Are there any consequences on the country’s rating?
No consequence because President Talon was re-elected, which means a certain continuity in the reform program. Nonetheless, Benin’s credit problems persist and include political and social tensions, a relatively low per capita income, and a relatively undiversified economy that still struggles to attract significant foreign direct investment.
What were the main reasons that led to Benin’s rating being raised from B2 to B1 on the Moody’s scale?
In March, Moody’s effectively upgraded the rating of Benin’s long-term issuer from B2 to B1 and changed the outlook from positive to stable. The drivers of the appreciation were the track record of fiscal consolidation and improving debt structure on the one hand, and the growing economic resilience of the country on the other, supported by a strong economic outlook and structural reforms underway. The stable outlook reflects our expectation that the economy will remain resilient in the face of the impact of the pandemic, as indicated in 2020, and return to robust growth rates above 6% by 2022. It also reflects our expectation that the the public debt burden stabilizes and gradually decreases from 2021.
These elections were boycotted by much of the opposition. Could we see in the case of Benin that democratic and economic trends are not going in the same direction?
Benin has experienced growing political tensions since the 2019 legislative elections in which opposition parties were unable to run. This contrasts with the past when the country was seen as a stable democracy in West Africa – illustrated by the fact that President Talon, a man from the private sector, won the presidency in 2016 as an independent candidate. We believe that the current disenfranchisement of the opposition increases the risk of social unrest and public protests against the government, but we do not expect these tensions to prevent further economic development in the country.
What are your expectations vis-à-vis the Benin noted at the end of the coming years?
We could raise Benin’s score if a lasting and significant reduction in the public debt burden and debt affordability occurs beyond our current expectations, especially if there is evidence of lasting improvement. institutions and governance framework in Benin. We could lower Benin’s score if fiscal measures deteriorate significantly from our current expectations of steady and structural improvement in the aftermath of the pandemic. An increase in outstanding borrowing needs and refinancing risks due to the inability to sustain the reform effort would be particularly negative. Likewise, failure to return to robust growth rates, as we currently expect, would also be negative in terms of credit, especially if motivated by weaker than expected policy outcomes.
Is Benin’s public debt sustainable in the long term?
Moody’s expects Benin’s public sector debt-to-GDP ratio to stabilize at around 46 percent in 2021 and slowly decline thereafter. The risk of the debt of public enterprises crystallizing in the state’s balance sheet remains low, with the debt of public enterprises and public guarantees representing less than 1% of GDP in 2020. Overall, the public debt of Benin by GDP ratio increasingly compares favorably to B-rated peers. Nevertheless, there are weaknesses that will limit the rating for a few years. On the income side, the debt burden and debt accessibility ratios have deteriorated significantly over the past five years (estimated debt / income at 327% and interest payments on income at 15.6%). % in 2020 respectively) and remain above B-rated peers. Their deterioration reflects both the narrowness of Benin’s tax base and the growing reliance on commercial borrowing. However, structural reforms aimed at broadening the tax base, as well as the support provided by the economic recovery, should halt and eventually reverse the deterioration somewhat.
