(Ecofin Agency) - Moody’s has affirmed Benin’s sovereign rating at B1 with a stable outlook but warned of possible downgrades if reforms slow or economic growth weakens. The message came on August 30 after the agency reviewed the country's economic and political situation, particularly noting recent diplomatic tensions with some neighboring countries.

In its assessment, Moody’s highlighted that Benin benefits from macroeconomic stability, supported by its membership in the West African Economic and Monetary Union (WAEMU) and an ambitious government development plan, the Government Action Program (PAG), which has driven economic growth in recent years. However, the agency also pointed out that "Benin's credit profile reflects the small and relatively undiversified economy, which is vulnerable to shocks," especially from Nigeria and the Sahel region, including Burkina Faso and Niger, both facing geopolitical turmoil. All of these neighboring countries, except Togo, now have credit ratings ranging from Caa1 to Caa3, reflecting heightened risks and instability that could eventually impact Benin’s economy, Moody’s warned.

Resilient Growth but Persistent Challenges

Moody’s expects Benin to continue experiencing robust economic growth, with real GDP projected to grow between 6% and 7% over the next five years. This growth is largely attributed to strategic infrastructure investments and reforms supported by the International Monetary Fund (IMF). At the same time, inflation, which peaked in early 2023, has significantly decreased, averaging 0.9% in the first seven months of 2024, well below WAEMU's 3% target.

However, even with positive indicators, vigilance is necessary. Moody’s emphasized that weak governance and institutions remain a significant barrier, calling it a long-standing constraint on Benin’s credit profile. The agency warned that if Benin fails to broaden its tax base or maintain fiscal discipline after the 2022 shock, a downgrade could be unavoidable.     

“We would consider a downgrade of Benin's rating if fiscal metrics were to deteriorate markedly against our current expectations,” the agency cautioned, particularly if borrowing needs rise or reform efforts falter. The country also faces external challenges, including the closure of borders with Niger—Benin's primary customer at the Port of Cotonou, the economic lifeline of the country—terrorist threats that have slowed trade with Burkina Faso, and unprecedented volatility in the Nigerian currency, which disrupts trade with its eastern neighbor. “Nevertheless, we expect fiscal strength to remain low for the foreseeable future by the narrow tax base and relatively weak fiscal metrics associated with it, despite the government's efforts to widen it,” the rating agency said.

But Moody’s opened the door to a possible upgrade "if there is a sustained and material reduction of the government debt burden and debt affordability would occur beyond our current expectations, particularly if accompanied by evidence of a sustained improvement of Benin's institutions and governance framework”.

Another key focus is on environmental, social, and governance (ESG) risks. Moody’s noted that Benin's credit rating would likely be higher if these risks were not present. The country is highly exposed to environmental and social risks, and its governance remains still weak, especially on social issues, according to the agency. These factors weigh on Benin's resilience to external shocks and, consequently, on its credit rating.