Democratic Republic of the Congo 'CCC+/C' Ratings Affirmed; Outlook Stable


OVERVIEW
  • In our view, the presidential elections and peaceful transfer of power should help reduce political tensions and end the political impasse the Democratic Republic of Congo has experienced since 2016.
  • However, uncertainties persist around the new administration's ability to lessen domestic tensions given accusations of electoral irregularities.
  • We are affirming our 'CCC+/C' sovereign credit ratings on DR Congo.
  • The outlook is stable.
RATING ACTION
On Feb. 1, 2019, S&P Global Ratings affirmed its 'CCC+/C' long- and short-term 
foreign and local currency sovereign credit ratings on the Democratic Republic 
of Congo (DR Congo). The outlook is stable.


OUTLOOK
The stable outlook balances our opinion that the transfer of power has ended 
the 2016-2018 political deadlock, against risks of domestic tensions over the 
next year given accusations of electoral irregularities.  

We could raise the ratings if the presidential transfer of power reduces 
domestic political tensions, and if the government meets its commercial debt 
repayment obligations.  

Conversely, we would lower the ratings if the government failed to meet its 
payment obligations on commercial debt.


RATIONALE
The ratings reflect our view that DR Congo is currently vulnerable and depends 
on favorable business, financial, and economic conditions to meet its 
financial commitments. In our opinion, the presidential election in December 
2018 puts an end to the political impasse the country has experienced since 
2016. However, risks of significant domestic tensions related to accusations 
of irregularities and the lack of transparency around the presidential 
election are high.

Institutional and Economic Profile: The presidential election ends the 
2016-2018 political deadlock but domestic political stability remains fragile 
  • The transfer of power to the opposition provides a way out of the political impasse the country has experienced since 2016.
  • However, accusations of irregularities and widespread doubts about the credibility of the result represent high risks to domestic political stability.
  • Favorable copper and cobalt prices will support real GDP growth through higher exports in the coming years.
Opposition leader Felix Tshisekedi was sworn in as DR Congo's president on 
Jan. 24, 2019, succeeding Joseph Kabila who came to power after his father's 
assassination in 2001. This is the first transfer of power via an election 
since independence in 1960. This follows about two years of political impasse 
where concerns that Mr. Kabila might seek to extend his rule had been rising, 
although DR Congo's constitution forbade him from running for a third term. 
Elections should have taken place in 2016 at the end of his official mandate, 
but they were repeatedly postponed.

The eventual election on Dec. 30, 2018 ended the 2016-2018 political deadlock, 
but widespread accusations of significant irregularities and lack of 
credibility regarding the result represent risks to domestic political 
stability, in our view. The other main opponent, Martin Fayulu, claimed he 
defeated Mr. Tshisekedi by a wide margin and has accused the latter of having 
concluded a deal with Mr. Kabila. The influential Catholic Church, which 
deployed observers on voting day, also announced that the results published by 
the electoral commission (CENI) did not correspond with its own voting tally, 
which implied Mr. Fayulu had won. The Constitution Court finally ruled on Jan. 
20 that Mr. Tshisekedi had won, but critics accused the body of lacking 
independence and being too close to outgoing President Kabila. President 
Tshisekedi's ability to lessen domestic tensions therefore remains unknown. He 
will also have to govern with the pro-Kabila party (Common Front for Congo) 
having won a majority in the legislative elections. 

Nevertheless, we believe the historic peaceful transfer of power could, over 
time, create an environment of improved political stability, providing support 
for more broad-based economic growth and stronger institutions and 
international relations. 

A gradual increase in both copper and cobalt prices and volumes in the medium 
term will be the main drivers of economic growth (see "Metal Price 
Assumptions: S&P Global Ratings Expects Mixed Outlook Amid Trade Tensions And 
Slowing Economic Expansion," Dec. 13, 2018). The mining sector represents an 
estimated 25% of DR Congo's GDP and 95% of its exports. It is the world leader 
in cobalt production, and with demand for battery production soaring, notably 
for electric vehicles, prospects for cobalt are strong.

We estimate GDP per capita at about US$600 in 2019. This is the second lowest 
of the sovereigns we rate, after Mozambique (see "Sovereign Risk Indicators," 
Dec. 13, 2018). We forecast real GDP growth will average 4.1% of GDP in 
2019-2022, compared with about 7.0% in 2011-2016. Our forecasts may 
significantly change depending on political developments.

Flexibility and Performance Profile: The end of the political impasse may 
enable access to more external and fiscal financing options 
  • DR Congo's debt management has historically been weak.
  • The transfer of power, if successful, could improve relations with international partners.
  • Mining prices will drive external and fiscal revenues.
We expect the general government balance will turn into a small deficit, as 
the new administration may need to spend more on both social welfare and 
infrastructure to limit domestic tensions. Two main factors have forced DR 
Congo to exercise quite hard budget constraints and to keep the fiscal deficit 
in check, cutting capital spending severely over the past few years. First, 
most donors were reluctant to finance DR Congo, owing to the political 
deadlock and perceived risks of misuse of funds. Second, the government has 
limited ability to substantially raise revenues via taxation because of the 
large informal economy and the state's weak administrative capacity. Revenues 
will mainly increase in line with copper and cobalt prices and production 
volumes.

Constrained fiscal balances have had the benefit of keeping debt stocks low 
ever since the country received debt relief in 2010 under the Heavily Indebted 
Poor Countries (HIPC) initiative. We expect net general government debt will 
gradually increase in value as the government improves relations with 
international partners, but it will remain broadly stable as a proportion of 
GDP out to 2022. Interest payments to revenues will also remain low, given 
limited access to commercial debt.

We forecast that DR Congo's gross external financing needs will average about 
105% of current account receipts (CARs) and usable reserves over 2019-2022, 
and narrow net external debt will remain well below 50% of CARs over the same 
period. The gradual increase in copper and cobalt prices will support export 
revenues. We expect foreign currency reserves to increase slightly as a result 
(following a decline between 2015 and 2017) but they will remain at less than 
one month of current account payments. Terms of trade have historically been 
volatile as the bulk of exports comes from the mining sector. Political and 
social risks will continue to weigh on foreign investment inflows. They should 
remain at about 3% of GDP, however, given the importance of DR Congo in copper 
and cobalt world production. On the other hand, imports will increase on the 
back of higher domestic demand and investments. We note that there are 
substantial shortcomings and gaps in the external data available from DR 
Congo. We may revise our data if updated statistics become available.

Most of the general government debt is external and in foreign currency. The 
government has guaranteed public infrastructure loans to Sicomines, the 
Sino-Congolese mining joint venture. However, as per the terms of the deal, 
the guarantee on any such infrastructure debt outstanding can only be called 
after 2034. The amount guaranteed is about US$1.2 billion.

DR Congo's debt management has historically been weak; it has been in 
significant arrears to its creditors for decades. The government still has 
domestic arrears, such as wages owed to past government employees; arrears to 
suppliers and contractors; and arrears from unpaid Treasury bills issued in 
the 1980s. It has also reported arrears to some external creditors, including 
some foreign commercial banks (London Club), dating from before the HIPC 
initiative. The original creditors sold their claims to distressed debt 
investors. In July 2014, a New York court upheld the claim of two U.S.-based 
investor groups (Themis Capital and Des Moines Investments) against the DR 
Congo's government and central bank for nonpayment of some of this debt. We 
understand that the two parties signed a legal agreement in early 2018. DR 
Congo has committed to pay $13 million to Themis Capital and Des Moines 
Investments by 2021. The first payment ($1.5 million) was made in June 2018. 
Next payment is scheduled for April 2019.

We expect the increase in export revenues, combined with lower domestic 
tensions, will partly fund foreign currency needs and thereby contain pressure 
on the Congolese franc and inflation. The transmission mechanism of monetary 
policy is weak, given the shallowness of financial markets and high 
dollarization (over 80% of deposits and 90% of loans). 

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