Pricing Emerging Gabon: Non-traditional sources of financing are supporting necessary infrastructure work

Setting forth an ambitious infrastructure development plan expected to require some CFA17trn (€25.5bn) in investment by 2025, Gabon’s government expects public investment to cover a sizeable share of this – roughly 30%. Support from multilateral agencies, traditional investors and new foreign direct investment (FDI) – either in partnership with the state in a public-private partnership or standalone – is expected to help Gabon achieve its ambitions. Given the relatively centralised presidential political structure, a key factor will be setting up a clear institutional framework to drive implementation, something Gabon has started by setting up with new agencies reporting directly to the Office of the President. As work continues on refining the scope, scale, cost and order of priority of the planned infrastructure projects, the government is switching to fixed-income markets both regionally and offshore to finance a growing share of its public capital investment.

PROJECT LIST: The national infrastructure blueprint aims to develop three key corridors: one running east-west along the existing Trans-Gabon Railway, with extensions to the north-east to reach Belinga and south-central to Port-Gentil; the second running north to Woleu-Ntem; and a third to the south running through Mouila. At the national level, the planned projects include electricity production and transmission, the development of the road network and other transport infrastructures, special economic zones (SEZs), telecommunications, the development of the Belinga mine and associated processing complex, as well as urban development in key cities. In the power sector, the state is forging ahead with a number of projects including the eastern 160-MW Grand Poubara hydroelectric dam, the 84-MW Impératrice dam north of Mitzic and the 70-MW Alénakiri natural gas thermal power plant in Libreville – the government aims to double Gabon’s electricity output to 1000 MW under the long-term plan. The scaled-up five-year investment plan to 2016 earmarks roughly $11bn to these projects, according to the IMF. In Libreville the projects focus on urban development, including drinking and wastewater treatment projects, the development of transport infrastructure, social housing, urban regeneration projects, such as Champ Triomphal at Port-Molé, as well as reinforcing administrative capacities for the management of the greater Libreville area. The IMF estimates some $1bn in projects have been planned for the capital by 2016.

In all, the National Agency for Public Works (Agence Nationale des Grands Travaux, ANGT) has planned some 175 projects by 2025 of a combined worth of over $20bn, with the aim of sustaining the public infrastructure spending level of 10% of GDP that was included in the last three budgets.

GROWTH: The 74% year-on-year (y-o-y) increase in expenditure on investment and equipment to CFA1.11trn (€1.66bn) and CFA108bn (€162m), respectively, in the 2013 budget reflect this fiscal expansion, with road and housing developments in and around Libreville given priority in 2013.

The largest budgeted increases in capital expenditure (capex) are the 91% y-o-y rise in the Ministry of Industry and Mines’ budget to CFA499bn (€749m); the 270% rise for the Ministry of Petroleum, Energy and Hydroelectric Resources to CFA54bn (€81m); the Ministry of Education’s 53% increase to CFA92bn (€138m); the 40% rise for the Ministry of Health to CFA59bn (€88.5m); and a 128% bump for the Office of the President, which is responsible for the new agencies, to CFA74.6bn (€111.9m), according to data from the Economic Mission to the French embassy.

Social housing, in particular, has been prioritised, with the state aiming to develop some 32,000 new housing units by 2016. The government has started by developing a first tranche of 2000 units itself in 2013, contracting Turkey’s Rönesans Afrika to undertake the prefabricated work. India’s M3M has also been contracted to build 5000 low-cost homes on 4856 ha around Libreville, for a reported investment of €700m. But while social housing projects are being scoped by the ANGT, the state is seeking new private developers’ investment and is counting on banks to lower mortgage rates to finance acquisition. The state expects to sustain annual public capex at CFA1. 25trn-1.3trn (€1.88bn-1.95bn) from 2014 to 2017. It intends to attract private investment for specific projects, and thus, will have to prioritise developments.

“The government will have to do more work towards scoping and prioritising the list of infrastructure projects it has laid out in its 2025 vision,” Pascal Yembiline, the principal country economist at the African Development Bank, told OBG.

WEALTH MANAGEMENT: Gabon’s sovereign wealth fund, the Gabonese Strategic Investment Fund (Fond Gabonais d’Investissements Stratégiques, FGIS), is one means by which the government is seeking to catalyse more investment. Established in 1998 and restructured in January 2012, the FGIS is funded by a 10% levy on government oil revenues – receiving CFA104bn (€156m) in 2012 – and aims to support long-term investments in strategic projects. The fund has established a port development company to develop a third terminal at Port Owendo in partnership with Dubai-based Divers Marine Contracting, for instance. It is also investing in South African SFM’s multi-use Grande Mayumba Project, in the restructuring of fisheries processor Société Industrielle et Frigorifique du Gabon alongside Mauritius-based Ireland Blyth Limited Group and owns roughly 70% of the Gabonese Reinsurance Commercial Society. It is also working on a feasibility study for a greenfield rail line in a bid to attract private investment. The fund expects to report its investment figures in 2015, and it aims to yield net dividends for the government by 2017.

FINDING A BALANCE: Gabon’s fiscal expansion is eroding its overall fiscal balance, which has dropped from a high of 11.4% of GDP in 2008 to -1.2% in 2012 according to IMF figures, while its fiscal deficit has expanded from 13.3% of non-oil GDP to 28.5% in 2012. The state is shifting to public markets to fund this growing deficit, a trend likely to continue as the Ministry of Economy works to develop a mediumterm debt strategy. With a debt-to-GDP ratio that has fallen drastically – from 80% prior to its reimbursement of most of the Paris Club debt in 2008 to around 15.5% in 2013 – some say Gabon has room to issue more fixed-income securities despite its self-imposed 35% debt-to-GDP ceiling. “The government will need external financing for its infrastructure vision,” said Rick Tsouck Ibounde, the country resident economist at the World Bank. “This will be through short-term Treasury bill (T-bill) issues, bond issues on the regional exchange, Eurobonds and increasingly, direct equity investments by foreign investments.” While banks have been constrained in lending to the government by the 40% of the balance sheet single borrower limit, the state has reactivated the T-bill and government bond markets, through the regional Central African Stock Exchange. While the government can raise bank loans for as low as 5.5-6% (Gabon government debt is rated risk-free in the Economic and Monetary Community of Central Africa [Communauté Économique et Monétaire de l'Afrique Centrale, CEMAC]), it has started issuing 1.5% three-month T-bills and 5.5% government bonds in 2013. Since January 2013 the state has been issuing between CFA20bn (€30m) and CFA30bn (€45m) monthly in T-bills, for a total target of CFA240bn (€360m) in 2013, while it is conducting two bond issues of CFA120bn (€180m) each in July and October of the same year. A sign of over-liquidity among Gabonese and Cameroonian banks, the first T-bill issue in January was 237% oversubscribed, although three-year bonds had a 36% subscription rate. The total of CFA480bn (€720m) borrowed regionally accounts for nearly 16% of the 2013 budget.

ISSUES: Already active in the offshore fixed-income markets through its 10-year, $1bn Eurobond issue in 2007, Gabon aims to expand its US-dollar-denominated offerings from 2013. Although the government missed two $50m payments in 2010 and 2011 to the sinking fund on the Eurobond due in 2017, prompting downgrades in Gabon’s ratings outlook by ratings agencies Fitch and Standard & Poor’s, the arrears were paid in 2012, thus rectifying the situation.

“While there had been confusion for two years on the provisioning for the sinking Eurobond fund, the situation has now been corrected,” Tsouck Ibounde told OBG. “This should theoretically address the issues that prompted sovereign credit ratings downgrades.” International banks, including the US’s JP Morgan, Germany’s Deutsche Bank and France’s BNP Paribas, are eager to underwrite the planned Eurobond issue, which could range from $1bn to $2bn. Local banks have encouraged the government to raise funds regionally, although Gabon is likely to use a variety of fixed-income funding. “While Gabon could easily float further Eurobonds internationally, we are telling the government there is ample liquidity within CEMAC to raise financing within the region,” Christian Gondjout, the Banque Internationale pour le Commerce et l' Industrie du Gabon’s director of strategy, development and projects, told OBG. While the timing of the Eurobond issue remained uncertain in mid-2013 as emerging market bond yields rose sharply on concerns over the outlook for the US’s quantitative easing programme, Gabon is likely to go to market sooner rather than later. “It makes sense to raise a Eurobond in 2013 to deploy the capital next year, so the impact can be felt in the run-up to the 2016 election,” Alain Fazili Bula, vice-president of Citibank Gabon, told OBG.

NEW FDI SOURCES: While the main investors have historically been French in the sectors of oil and gas (Total), mining (Eramet), distribution (Compagnie Française de l'Afrique Occidentale), supermarkets (Géant Casino) and agro-industry (Groupe Castel), the government’s new investment plan has attracted a much larger range of investors. China, which has been active in timber since the 1990s, has expanded its interests in oil and gas (through the Sinopec Group’s Addax Petroleum), construction (with China Roads and Bridges Corporation, a subsidiary of state-owned China Communications Construction Company, SinoHydro and China Overseas Engineering Corporation), agriculture (through Sinochem’s acquisition of 35% of Belgium’s Société d’Investissement pour l’ Agriculture Tropicale in 2010) and forestry (with over 10 firms active) in the last five years. Meanwhile, the government’s social housing programme has attracted investments from Turkey, which just signed Gabon’s 13th bilateral investment treaty (BIT) in October 2012, through construction firms like Rönesans Afrika, and India through its property developer M3M.

Other investors led by Singapore’s Olam International have promised to support the Emerging Gabon plan. Already the sixth-largest foreign investor in 2012, with $408m invested since 2010, Olam’s plans make it the largest single foreign investor by 2015. Olam is promising funds to develop 48,000 ha of oil palm and 28,000 ha of rubber plantations, thus consolidating its timber operation, and the firm has stakes in the two SEZs of Nkok (60%) and Mandji (30%).

While Olam’s primary aim was to develop plantations and timber, the government’s backing of the SEZs is catalysing FDI from a range of sectors. India’s Abhijeet Group is the largest with its $1.3bn metallurgical and power project, but others like Timberwolf Tropical Hardwoods of the US and Malaysia’s BSG are also investing. South Korea’s Samsung is investing in a second refinery at Mandji, in partnership with the state. Bechtel, with its $60m-per-year technical assistance contract with the ANGT is the most visible sign of growing US interest in Gabon, which is moving beyond imports of raw materials to active investment. ExxonMobil and Chevron placed bids for deepwater offshore blocks in June 2013, while VAALCO Energy is already drilling, and a number of US universities have signed cooperation agreements under the Emerging Gabon plan. The US is also working on a BIT with Gabon.