Event

Anti-corruption investigations in France, the United States and Spain are increasing pressure on the ruling Obiang family and further worsening diplomatic ties. At the end of September, a Spanish court issued a warrant against a Russian businessman charged of laundering oil money on behalf of the president of Equatorial Guinea, two years after the family’s Paris mansions got seized by the French authorities and an arrest warrant was issued for the president’s son and possible successor. The regime’s bad international reputation together with the financial crunch as a consequence of reduced oil revenues, have raised the risk of non-payment by public debtors. Moreover, GDP is expected to contract by 9.5% in 2015 and to remain in recession over the coming years.

Impact on country risk

Equatorial Guinea is Africa’s most oil-dependent country. In a context of falling hydrocarbon production since 2013 and a severe negative oil price shock since mid-2014, the country’s massive capital spending in wide-ranging infrastructure and prestige projects, is being compromised. To restore fiscal sustainability in a low oil price reality, authorities agreed to curtail and reprioritise public investments by targeting a reduction of domestically financed investment by 57% in their 2015 budget. However, weakness in public financial management and the tradition of spending slippages make it unlikely for budgetary projections to be realised. Since 2013, continued public deficit diminished the country’s buffers by around two thirds. To finance last year’s budget deficit of 6.8% of GDP, central bank financing was required and for 2015 and beyond, Chinese loans will be the most important financing source. Still, early September, a large number of infrastructure projects were temporarily halted as a result of power shortfalls and payment defaults to constructors by a major public works government agency. Subsequently, bridge loans have to be found, though this gets complicated by emerging local banking sector weaknesses due to rising non-performing loans and high construction sector concentration. The risk for non-payment and abrupt project adjustments is mainly contingent on the availability of Chinese loans, as western financing became troublesome since the fall-out with the Obiang regime over aforementioned corruption charges.

Analyst: Louise Van Cauwenbergh, l.vancauwenbergh@credendogroup.com