Cameroon’s Credit Profile Sensitivity to Climate Change

Keywords : Credit Profile, Cameroon, Central Africa, Climate Change

    Cameroon is undeniably significant in the Central African economic and monetary world, thanks to its strategic location as a natural entrance into the landlocked region of Central Africa (which includes Chad, the Central African Republic, and northern Congo). This is despite the fact that Cameroon’s economy, ranked as one of the least prepared to Climate Change, experienced recession brought on by a drop in oil prices and instability in the country. Cameroon’s Credit Profile might therefore be at a greater risk of degrading by the International Monetary Fund due to the economy’s exposure to climate change. This study analyzes Cameroon’s Credit Profile and how it is particularly sensitive to climate change by virtue of rating by International Credit Institutions. Moreover, it tries to impart its readers with knowledge on how the rating from these aforementioned international financial Institutions like World Bank, ostensibly affects the overall economic outlook of the country.

  According to a recent study done by researchers from Cambridge University, the University of East Anglia, and School of Oriental and African Studies (SOAS) in London who examined RCP 8.5, a “realistic scenario” in which carbon and other harmful emissions continue to rise in the coming decades, it emerged that rating downgrades typically increases a country’s borrowing costs in foreign markets; but, climate-related downgrades would increase yearly debt service payments by $137–205 billion by 2100.     

  Further analysis compiled by the Centre for Climate Finance & Investment at Imperial College Business School and the SOAS University of London Department of Economics, which incidentally, is the first of its kind to examine the relationship between climate change, sovereign credit profiles, and the cost of capital in developing countries, found out that Sovereigns which relied heavily on the Agricultural sector, which typically was not irrigated and thus rain-fed, and the undiversified Economies were the most susceptible to being disproportionately affected by the increasing frequency and severity of natural disasters impacting growth and causing lasting damage to infrastructure.

On 7^th January 2020, a report, prepared by the staff of the International Monetary Fund and the International Development Association (IDA) and approved by David Owen (AFR) & Marcello Estavio that tried to investigate the Credit Profile of Cameroon, was published. The report went on to release its findings of the analysis where it ranked Cameroon at a high risk of an external and overall public debt crisis but upgraded its debt as sustainable.

“Breaches of the two thresholds for external debt service under the baseline are due to the state oil refinery’s (SONARA) service of short-term supplier debt, while later breaches of the debt service to export ratio are caused by the Eurobond’s maturation from 2023 to 2025. The outlook has worsened compared to the previous DSA on the back of continuing security challenges and SONARA’s suspension of production, but fiscal consolidation and structural reforms, coupled with the increasing share of concessional new borrowing, would improve the debt profile over time.”(IMF, 2020, P.1)

  The report also found out that the debt perimeter of public debt had slightly expanded compared to the previous Debt Sustainability Analysis (DSA) which was specifically the 2017 DSA in which the debt stock primarily covered the Central Government, the expenditure float, contingent liabilities linked to some of the external debt of State-Owned Enterprises (SOEs), guarantees and Société National De Raffinage (SONARA’s) debt (it’s unguaranteed debt as well as its short-term supplier debt). Moreover, it found out that public debt had steadily increased at a worrying pace, preliminary studies showing that it had increased from CFAF 8,488 billion to around CFAF 9,429 billion.

The composition of external debt had, however, largely remained unchanged in which the external multilateral and bilateral Paris Club (PC) continued to hold one-third of the total debt, and the Bilateral Non-PC debt being largely dominated by China.

Cameroon: Public and Publicly Guaranteed Debt, 2016-17

(Percent of GDP)

According to International Monetary Fund (IMF) projections, real Gross Domestic Product (GDP) growth would average 4.3 percent of GDP, with a growing non-oil sector countering a sharp fall in oil production. There had been downward revisions to the growth rate relative to the previous DSA because of the continued security issues and decreased external demand. It was expected that in the medium term, annual inflation would hover around 1.6 percent, which was well below the Central African Economic and Monetary Community (CEMAC) convergence threshold of 3 percent. All of these assumptions, as the IMF speculated, was as a result of the debt service-to-revenue ratio breaching the threshold for the first two years by a magnitude of up to 6 percentage points, driven by the short-term supplier debt of SONARA, and then again slightly in 2023. This was mainly due to the result of the short-term debt aging from SONARA, which was significantly above the threshold from 2019 to 2022 (on average roughly 4 percentage points). Second, due to the maturing of the Eurobonds that would continue to break the threshold significantly between 2023 and 2025 (on average roughly 4 percentage points).

  This was further echoed on 6^th July 2021 when the Moody’s Investors Service (“Moody’s”) assigned a rating of B2 to the Government of Cameroon’s EUR-bond issuance. The Rating rationalizes that a variety of factors contribute to the government of Cameroon’s issuer rating, including its relative diversification and multiple growth sources, a public infrastructure investment strategy that will help further develop the country’s resources, and membership in CEMAC, which supports price stability and reduces balance-of-payment risk. In Cameroon’s issuer rating, the country’s credit challenges are primarily based on the fiscal situation. As a result of a lack of local non-oil revenue production capabilities, the government’s finances are vulnerable to variations in oil earnings. As a result, the government risks significant exposure to potential liabilities arising from financially troubled state-owned enterprises.

  However, on the flip side, the rating agency adduces that due to its significant exposure to environmental risks, Cameroon’s issuer profile score of E-4 should reflect this. Cameroon’s coastal districts face the world’s highest risk of flood-related death due to increasing sea levels. Moreover, the country’s public health and crops, which employ more than 60 percent of its population, are at risk due to extremely high and rising temperatures. Because of this, catastrophic weather events can have a major impact on the country’s important credit measures, such as GDP growth volatility and family incomes.  It is no wonder Moody’s has identified Cameroon as one of the countries whose credit profiles are most susceptible to climate change.

  Cameroon is particularly exposed to Climate Change because of its Sahelian lands, which are heavily afflicted by desertification, and its coastal territories, which are endangered by increasing sea levels. This can already be seen in abnormal recurrence of extreme weather phenomena such as high temperatures, violent winds, and heavy rainfall which may endanger public health as well as crops and cattle, sectors that employ more than 60% of the country’s workforce. This indicates that the severity and frequency of extreme weather events, such as GDP growth volatility, household incomes, and agricultural export earnings, can have a major impact on Cameroon’s key credit measure.

  Cameroon is ranked 143 out of 181 countries in the ND-GAIN Country Index, with very high vulnerability and low readiness ratings on the global Climate Readiness Scale. It is the 16^th least prepared country, with a score of 39 on the ND Readiness index, and the 59^th most susceptible, with a score of 0.473 on the ND Vulnerability index. Over the last two decades, the ND-GAIN ranking has relatively stayed stable, with a slight decline in a vulnerability being offset by a loss in readiness, notably economic readiness, as measured by a World Bank index of openness to external investment.

  Climate-related hazards are expected to decrease agricultural activity by around 3% annually through 2050, according to the World Bank. Moreover, Cameroon is the largest economy in the Central African Economic and Monetary Community (CEMAC) and the region’s breadbasket, according to Food and Agriculture (FAO), contributing roughly 52% of the sub-region’s Agricultural Output. It is thereby not implausible to conclude that due to its high exposure to climate-related risks, this might spell doom to the overall sub-region as well as endangering the food security of millions of locals.

  Despite all these factors, Cameroon’s Economy may be in a position to rebound, most especially post-pandemic. This is mainly thanks to its strategic location as a natural entrance into the landlocked region of the CEMAC Region that undoubtedly makes it influential in the Central African economic and monetary world. In 2021, growth should pick up to 3.4 percent, and the upward trend should continue in 2022. (4.3 percent), after a recent recession in 2020(-2.8%. according to IMF Estimates). Public investments in projects like the Lom-Pangar and Nachtigal hydropower dams, as well as the Kribi port, will also propel this success. Additionally, the Infrastructure being constructed for the 2022 African Nations Cup of Football might also act as a major contributor to Economic Recovery.

  Furthermore, the increase in global oil and gas prices will help the export of these commodities. Due to the restoration of supply chains, exports of soft commodities will also act as a rebound spring for the Economy. Coronavirus crisis aside, deficits and public debt have remained constant over the past few years. In large part, this was owing to the country’s conservative budgetary policy prior to the pandemic. As a result of the suspension of debt payments as well as the recent implementation of a modest recovery plan by the country, USD 226 million has been invested to fulfill the additional financial needs.

  Inflation will also fall from 2.8% to 2.3% by 2021. After a little increase in 2020 to 43.2 percent, the national debt-to-GDP ratio will drop slightly to 42.5 percent in 2021. The overall deficit is expected to reach 4.6 percent of GDP.

   It must be noted that the Government of Cameroon, in recognition to how the economy is particularly exposed to climate change, sought to ratify the United Nations Framework Convention on Climate Change and has regularly participated in International Conferences of Parties (CoP). Additionally, its recent implementation of Cameroon’s first National Adaptation Plan for Climate Change (NAPCC) seeks to pro-actively address any ramifications that the country may face in the long run from Climate Change. The NAPCC is also meant to serve as a “shopping document” that enables the country to organize and benefit from various private and global funds in order to help adaptation to climate change for the least.

  In summary, we can conclude that the Government of Cameroon has began steps of mitigating the effects of Climate Change on the country’s economy even though a move to more aggressive efforts may be required to address the gradual decline of oil exports exacerbated by the adoption of cleaner alternatives of energy.

Abbreviations & Acronyms

CEMAC             Central African Economic and Monetary Community

DSA                   Direct Selling Agent

EUR                   Euro

E-4                      Moody’s Country’s Credit Rating Issuers or transactions with a Highly

                            Negative E or S issuer profile score typically have exposures to E or S issues

                            that carry high credit risks.

GDP                    Gross Domestic Product

IDA                     International Development Association

IMF                     International Monetary Fund

ND-GAIN          Notre Dame Global Adaptation Initiative (project by University of Notre Dame)

RCP                     Representative Concentration Pathways

SOE                     State Owned Enterprises

SONARA             Société National De Raffinage (Cameroon’s Oil & Gas Exploration Company)

REFERENCES

African Development Bank, Afdb, 2021, From Debt Resolution to Growth: The Road Ahead for Africa

https://www.afdb.org/en/countries-central-africa-cameroon/cameroon-economic-outlook

Trading Economics, 2021, Cameroon’s GDP

https://tradingeconomics.com/cameroon/gdp-from-agriculture

Moody’s Investors Service, Moody’s, 2021, Moody’s Assigns B2 rating to the Government of Cameroon’s EUR Bond Issuance

https://www.moodys.com/research/Moodys-assigns-B2-rating-to-the-Government-of-Cameroons- EUR–PR_450130

World Economic Forum, WEF, 2021, Global Warming could cut 63 Countries’ Credit Ratings

https://www.weforum.org/agenda/2021/04/global-warming-countries-credit-ratings-economics/

International Monetary Fund, IMF, Cameroon

https://www.imf.org/external/pubs/ft/dsa/pdf/2020/dsacr2048.pdf

https://gain-new.crc.nd.edu/country/cameroon

Author : Samuel Hungi