OREANDA-NEWS. Gabon's contested presidential election increases political uncertainty while the country is still adjusting to lower oil prices, Fitch Ratings says. Implications for the country's sovereign credit profile will depend on the duration of the dispute between the incumbent and his closest challenger, whether social unrest persists and whether the impasse has any impact on economic policy making.

Violent protests followed the electoral commission's declaration that Ali Bongo Ondimba of the Gabonese Democratic Party had secured a second seven-year presidential term by winning 49.8% of the votes cast in the 27 August election against 48.2% for the runner-up, Jean Ping, who has challenged the result.

While the violence appears to have subsided, partly as a result of a police crackdown, the dispute over the election result continues. Ping called for a general strike, the justice minister resigned, and EU observers requested publication of results by polling station. The African Union said on Tuesday that it would mediate between the two sides.

We identified political instability, particularly if it had an adverse impact on economic policy making, as a negative rating sensitivity when we revised the Outlook on Gabon's 'B+' sovereign rating to Negative in May.

Adjustment to lower oil prices remains the key economic policy challenge. The Outlook revision reflected the deterioration of Gabon's fiscal and external position following the fall in oil prices. Reduced revenue will lead to a further rise in general government debt in 2016 and could pose financing challenges, although consolidation is ongoing. It could also lead to a further erosion of international reserves.

The fiscal policy response to lower oil prices chiefly consisted of a large cut in capital spending that contained deterioration (the 2015 deficit was smaller than expected, at 1.1% of GDP). We think the authorities remain committed to fiscal consolidation, but this may weigh further on GDP growth, which we forecast to slow to 3.2% this year from 4.0% in 2015.

A recovery in some minerals prices, improved performance in the wood processing industry, and completion of large agribusiness projects offer some near-term support to the economy. But domestic arrears could hamper lending by putting pressure on the banking sector through its exposure to contractors executing public projects.

Reducing capex has meant delays or reprioritisation of investment projects under the USD12bn Plan Strategique Gabon Emergent to fix infrastructure bottlenecks and diversify the economy away from oil.

There may be little alternative to further consolidation as Gabon's financing options are limited. Deposits at the regional central bank have declined, and lending by the central bank to the government is indexed to the previous year's fiscal revenue. There is limited capacity in the capital market of the Central African CFA franc zone to finance the deficit. Multilateral and bilateral lenders are a source of infrastructure funding, but at the cost of increased external debt.

The recovery in oil prices from their early-2016 lows will support the fiscal balance. Fitch revised its 2016 oil price forecast to USD42 per barrel in July from USD35. This revision implies a 2016 deficit of 3.0% of GDP, compared with our May expectation of 3.8% of GDP (incorporating a proportionate increase in refinery subsidies).

Prolonged energy price weakness could force the government to further erode fiscal buffers or accumulate more arrears to the private sector. Both would be negative for Gabon's sovereign credit profile. Strengthening the sovereign balance sheet would be credit positive, as would development of non-oil sectors of the economy and non-oil government revenues.