Benin’s economic outlook improves to positive, Moody’s affirms B1 rating

Investing.com -- Moody’s Ratings has reaffirmed the Government of Benin’s local and foreign currency long-term issuer ratings and foreign currency senior unsecured ratings at B1, while upgrading the outlook from stable to positive.

The revised outlook is an indication of steady improvements in Benin’s economic, institutional, and fiscal strengths. These enhancements have the potential to bolster the resilience of this small, agriculture-dependent economy, which is vulnerable to geopolitical risks from the Sahel region. Benin’s economy has shown strong growth, increased diversification, and rapidly rising income levels, starting from low points.

Efforts to improve governance and transparency have boosted the country’s investment appeal and the development of stronger institutions. Fiscal consolidation under the current International Monetary Fund (IMF) program has started to yield results, with the deficit estimated to have fallen to around 3% of GDP by 2024. Revenue intake, however, remains low compared to peers. Proactive and innovative debt management has helped contain government liquidity risks.

The B1 ratings affirmation balances the economy’s strong growth prospects, the government’s moderate debt burden, and the macro-financial stability derived from participation in the West African Economic and Monetary Union (WAEMU) against regional geopolitical risks and still weak, albeit improving, government revenue and household incomes.

Benin’s local currency (LC) and foreign currency (FC) country ceilings remain unchanged at Baa3 and Ba1. The LC ceiling remains four notches above the sovereign rating, considering the small footprint of government in the economy, the improving institutional framework, and the mitigating impact of Benin’s WAEMU membership on external risks. The one-notch gap between the LC and FC ceilings reflects Moody’s view of limited transfer and convertibility risks, due to the French Treasury guarantee of the peg between the CFA franc and the euro.

Benin’s economy has shown strong growth and resilience, with real GDP growth averaging 6.6% between 2021 and 2024 despite various shocks. The implementation of Government Action (WA:ACT) Programmes (PAGs) appears to have somewhat insulated Benin’s economy from its neighbors, leading to steady growth and a 59% increase in GDP per capita over the past decade, reaching an estimated US$4500 by the end of 2024.

The economy is also increasingly diversified, with significant contributions from services and industry. The latter is supported by the rapid development of the Glo-Djigbé industrial zone, which was established in 2021 as a special economic zone strategically connected with the Cotonou airport and the port of Cotonou.

Benin’s fiscal deficit is estimated to have been around 3% of GDP in 2024, meeting the WAEMU threshold and lower than the 3.7% initial objective set in the IMF program as well as the 4.1% deficit reached in 2023. Fiscal consolidation has been balanced between increasing government revenues and controlling expenditure growth, particularly operating spending and interest payments, thanks to proactive debt management.

Due to consistent consolidation efforts, Benin’s debt burden began to decline in 2024 down from a peak of 54.5% in 2023. Moreover, the interest payments-to-revenue ratio decreased to an estimated 11.9% in 2024 from 15.8% in 2021.

Continued improvement in revenue, estimated at 15.3% of GDP in 2024, which remains significantly lower than the B-rated and Ba-rated medians of 23% and 29.2%, respectively, would help the government solidify its finances, create fiscal space for financing its economic and social policies, and ensure a downward trend in government debt.

The affirmation of Benin’s ratings at B1 reflects expectations that the economy’s strong growth prospects, the government’s moderate debt burden and the country’s macro financial stability derived from participation in the WAEMU will continue, supported by the government’s commitment to structural reforms and renewed public investment in infrastructure.

This is balanced by the credit constraints emanating from Benin’s low incomes, a relatively weak, although improving, institutional and governance framework and a relatively low fiscal strength characterized by a narrow, albeit developing, tax base. The intensification of the terrorist threats and potential attacks from neighboring countries pose key geopolitical risks to Benin even though the government’s enhancing management capacity and international support help contain these risks.

Benin’s CIS-4 indicates that ESG considerations have a discernible impact on the current rating, which is lower than it would have been if ESG risks were not present. This score reflects the country high exposures to environmental (E) and social (S) risks, and weak governance that, together with low-income levels, reduce the country’s resilience to S and E risks.

On 24 February 2025, a rating committee was called to discuss the rating of the Benin, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s institutions and governance strength, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has materially increased. The issuer’s susceptibility to event risks has not materially changed.

Moody’s indicates that they would likely upgrade Benin’s ratings if upward pressure continues to develop, as a result of a combination of strong and broad-based growth that results in improved credit fundamentals exceeding expectations; a sustained and material reduction of the government debt burden and debt affordability driven by improved revenue generation capacity; or further material evidence of sustained improvement in Benin’s institutions and governance framework.

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