Fitch Ratings has upgraded Benin’s long-term foreign currency issuer default rating (IDR) to ‘B+’ from ‘B’ with a stable outlook.

This new rating action reflects the resilience of Benin’s economy to the Covid-19 pandemic and the hit from the Nigerian border closure. This follows Fitch’s assessment that the probability of downside scenarios associated with these shocks have declined.

More to the point, Fitch’s 2021 and 2022 projections of Benin’s fiscal deficit are worse than previously expected, but the government debt projections are likely to stabilize at roughly 50 per cent of GDP.

“Benin’s economy has shown considerable resilience to the pandemic with growth in 2020 of 3.8%, a slowdown from previous years but one of the highest among Fitch-rated sovereigns.”
Fitch Ratings

With a bird’s eye-view, this reflects targeted containment measures, government fiscal support, a good cotton harvest and continued execution of government’s investment programme.

Despite the moderate waves of Covid-19 infections in recent months, amid a still low level of vaccinations, Fitch believes that “possible further waves will not derail the recovery.”

Per Fitch’s observations, Benin’s government and economic agents seem to have enhanced their capacity to adapt to an evolving public health environment.

The closure of the Nigerian border in 2019 was a huge blow to Benin’s economy than initially expected. The re-opening of the border at the end of 2020 will continue to give a boost to the recovery in 2021, which will also be supported by strong public capital expenditure.

Growth to remain elevated

According to Fitch Rating, efforts to strengthen and diversify the agricultural sector and boost foreign direct investment would keep growth at around a forecast of 6.1 per cent.

Also, the ‘B+’ rating is supported by strong potential growth, a government debt to GDP ratio that is expected to remain below that of peers and proactive economic policies that have proved effective throughout the pandemic. However, the rating is constrained by low government revenue and the risks associated with a development model that relies in part on significant public investment to drive growth.

After experiencing an exceptionally small fiscal deficit in 2019, the deficit widened to 5 per cent of GDP in 2020 owing to a recovery in capital spending and the government response plan to the pandemic. All of which amounted to a total cost of 3.7 per cent of GDP over 2020-2022.

Furthermore, strong investment spending plans warranted the revision of the fiscal deficit target for 2021 of 6.5% (from 4.5% previously) as evidenced in the government’s supplementary budget passed in September 2021.

Government debt to rise in 2022

The draft budget for 2022 projects a deficit of 4.5 per cent, a departure from the target of bringing the 2022 deficit to below the West African Economic and Monetary Union (WAEMU) convergence criterion of no less than 3 per cent.

Fitch expects government debt to rise to 51.4 per cent in 2021 from 41.2 per cent in 2019, largely due to the economic fall-out of the pandemic. In addition to this, Fitch expects a stabilisation of debt at around 50 per cent of GDP in 2022.

According to Fitch, contingent liabilities from the broader public sector are very small, with debt of state-owned entreprise sector as only 1.7 per cent of GDP. The banking sector’s asset quality is weak, with high non-performing loan ratios. However, the risks to Benin’s economy are contained by the small size of the sector and a high share of foreign ownership.

Meanwhile, the government is in the process of finalising its five-year action plan, which would clarify its medium-term vision, and its intention to seek a new IMF programme should help anchor economic policies.