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Yaoundé - 02 December 2022 -
Finance

Cameroon’s corporate debt is worrying, but still offers opportunities

Cameroon’s corporate debt is worrying, but still offers opportunities
  • Comments   -   Friday, 15 July 2022 16:03

(Business in Cameroon) - The National Stats Institution (INS) recently issued a report on the financial and economic situation of the corporate world in Cameroon in 2021. The public entity found that there is a risk of unsolvability among the companies surveyed, mainly because the overall debt of the corporate world is now 6.77 times its equity, whereas the sustainability standard is 4 times.

This scenario "is quite worrying because it highlights the inability of companies to finance their capital expenditures solely through equity or medium- and long-term borrowing. To make up for these deficits, they resort not only to short-term bank financing, whose payment of related financial costs reduces their net results but also to supplier credits to make their operating cycle profitable," the INS explains.

In detail, INS says, strictly, financial debt represents only 1.37 times equity. Although this ratio is already high enough compared to the standard of only one time, it revealed the fact that the growth in corporate profits in Cameroon has been sustained mainly by the non-payment of bills to their suppliers, including small and medium-sized enterprises.

Using debt to finance operations is a common practice among companies around the world. But it is only relevant when the debt helps generate a higher margin. In 2021, the added value of Cameroonian companies increased by nearly 10% to reach a record CFA4,000 billion; 38.7% of this amount went to labor remuneration and 61.2% to capital remuneration (equity and debt).

Opportunities

Over the period, however, remuneration on debt seems to have been more important. Indeed, although the net profit of Cameroonian companies jumped by 271%, only one of them supported this improvement. That was the national refining company (Sonara), whose activity is supported by a price structure that sets predetermined margins. Also, despite this rebound, the consolidated net profit of the entities analyzed was just under CFA380 billion.

By the end of October 2021, the bank debt of public and private enterprises had reached the equivalent of CFA2,642 billion, or 63.17% of total outstanding bank loans. Considering that 15.8% of total bank credits at that date in Cameroon were outstanding receivable, the solvency of modern companies in the country must be closely monitored. This, in the absence of a local rating agency and a credit information system that is not very open and not very accessible to most of the economic agents.

But the situation can also quickly become an opportunity for the development of investment banking activities. As the debt market in Cameroon is built up, there are opportunities to create financial assets backed by that debt, via the securitization process. The ability to do factoring and similar mechanisms opens up a new era for finance in Cameroon. But this would require greater transparency by companies in their financial accounts.

Idriss Linge

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