Highly rated: The outlook has improved thanks to the sovereign note’s performance

In April 2012 Fitch Ratings revised Gabon’s outlook to positive from stable, affirming its long-term rating at BB- and its short-term one at B. While the positive outlook was welcome news, it should not have come as a surprise to the international investors who have been following Gabon’s sovereign note since it was issued in late 2007, even if Standard & Poor’s revised the country’s outlook downward in September 2012. The bond has consistently traded above par except for a brief period during the global financial crisis. The rarity of African sovereign debt and Gabon’s relatively strong macroeconomic fundamentals have contributed to robust demand.

PIONEER: When Gabon issued its first sovereign note it became only the third sub-Saharan country, after South Africa and Ghana, to enter the international debt market. It issued the $1bn, dollar-denominated instrument as a part of a plan to offer early payment of outstanding debt. In 2007 Gabon negotiated an early repayment discount of 15% on the market value of its debt, which amounted to $2.33bn, with the Paris Club. Along with the sovereign note, Gabon issued a CFA-denominated bond on the Central African Stock Exchange, which raised $180m, as well as contributing around $300m of its foreign exchange reserves to pay down the debt.

J.P. Morgan and Citibank were the joint lead managers on the issue, which was oversubscribed by around 150% of the bond’s value at closing. As an added measure of security, Gabon agreed to contribute $50m a year into a sinking fund in an offshore account held at the Central African Development Bank and managed by the World Bank.

Ratings agencies Standard & Poor’s and Fitch both rated the bond as BB-, based on Gabon’s solid fiscal and macroeconomic position, its efforts at economic diversification and its reputation for political stability. Beginning in 2003, Gabon embarked on a comprehensive and relatively successful economic reform programme as part of its 14-month standby agreement with the IMF, restoring macroeconomic stability, eliminating external payment arrears and introducing reforms to foster non-oil growth.

TRADING: Trading of the bond on secondary markets has been robust, with the note commanding a premium through most of its history. It fell below par during the global financial crisis that began in 2008, which corresponded with the threats of political instability surrounding the death of President Omar Bongo Ondimba, who had ruled the country for more than 40 years. Rates have since rebounded.

Gabon has missed two coupon payments. The first, in 2008, was due to a complaint levied against Gabon by a Dutch firm and stemming from a dispute in 1990 regarding the state railway company. The payment was made, however, during the contractual grace period and the issue was resolved by the courts.

The second delay was the result of a dispute with South African conglomerate Aveng. An agreement was subsequently reached in 2012 to settle the issue out of court. Despite these hiccups, investor interest has been strong. Bond trading giant PIMCO has positions in Gabon, and the country has also been included in the J.P. Morgan EMBI Index.

BENEFITS: Gabon’s successful international foray has brought more than just a reduction in foreign debt. “Listing on international markets helps build trust in the country with international investors,” said Alain Fazili Bula, the vice-president of global markets at Citibank. In addition to raising Gabon’s profile among global investors, the sovereign note exerts a degree of fiscal discipline, as it acts as a feedback mechanism for bad policy decisions or rising debt levels. The results have been positive so far. Investors have reacted favourably to economic and political developments, and have shown interest in sovereigns from other countries in the region, such as Nigeria. If Gabon can maintain its current rating, there is no apparent reason why it would not return to international financial markets in the near future.

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