Posted by: Armel | July 19, 2011

CAMEROON and the RISK OF SOVEREIGN DEFAULT


Given the current climate of Sovereign debt default crisis all over Europe and the U.S, it’s only fair to assess whether Cameroon could possibly face a similar situation on their recent XAF 200bn treasury bond sale. Can Cameroon default on it’s sovereign debt ?

Looking at the structuring of ” ECMR 5,60% net 2010-2015 ” the first bond of its kind for Cameroon, it appears that contrary to what Ghana, Senegal or other African countries did, the country did not price this issue in a foreign currency. It makes it therefore somewhat insulated from big currency fluctuations in the markets. Given the current volatility in FX, those swings would not directly have an impact on the net debt service.  The indenture clearly mentioned that the interest and tranche repayments are coming from a direct withholding on the state global revenue pool. So, there is a special reserve made from deductions on the government Treasury account at the Central Bank (BEAC) that will be set aside for that purpose. Payments are set to resume in 2012 and the bulk of subscribers will be credited trough the Bank of Settlement via the CAA (Caisse Autonome d’Amortissement).

What you would not find anywhere on the marketing doc are ratings. The reason is simple, ratings agencies in general did not rate the cusip ” ECMR 5,60% net 2010-2015 “. However, if you care to know some of the methodologies applied to risk monitoring in fixed income investment such as sovereign debt, in the absence of a rating on securities sale by a specific government, the sovereign rating already assigned to the country itself will be used instead. In any scenario, the rating of any private entity or debt instrument cannot be higher than that of the Country.  Moody’s does not rate Cameroon, but Fitch does. Fitch rated the Republic of Cameroon Long-term foreign currency Issuer Default Rating (IDR) at ‘B’ with Stable Outlook and Short-term foreign currency IDR at ‘B’.  However, they rated Cameroon’s local currency IDR at ‘B-‘ with Stable Outlook. There is indeed a relationship between these sovereign ratings and the implied risk for the local T-bills holders:

-To begin, Fitch rated the foreign currency IDR at ‘B’. According to data at their disposal, Cameroon has the ability to meet its international financial commitments (debt repayment in any foreign currency) on a timely basis. Taken in context, that foreign currency IDR rating is irrelevant from the standpoint of  ” ECMR 5,60% net 2010-2015 “. In fact, what we have here is a local currency instrument, and the rating assigned to local currency commitments of the government of Cameroon is downgraded to ‘B-‘. More importantly, some private subscribers might not be aware that Cameroon actually defaulted before. Seven years ago, the republic of Cameroon was unable to fulfill it’s financial obligations towards paper holders (mostly local banks) and defaulted !

Of course at the time in 2004, the state budget was overly stressed to allow for foreign debt repayment which swallowed 41% of GDP in 2005 ! The situation is much better now with the GDP to public debt ratio of 13.2% in 2010 ( revised to 15.2% post new debt).

Overall, my assessment is that Cameroon has a much lighter balance now, and will meet all its obligations in regards to ” ECMR 5,60% net 2010-2015 “.  Thus, the security should get a high rating. The country cannot afford any missteps; The risk of not being able to find strong investor appetite for future funding needs is too great. Even if the fiscal situation deteriorates, the money will be there at the end as scheduled. On top of that, the rating agencies are watching closely as Fitch hinted at the possibility of a rating  upgrade should the government maintains a short history of repayment and further successful issuances.

Armel Njeunou

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Responses

  1. About time the governement takes active part in the financial future of the country.


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