LAGOS, Nigeria, Capital Markets in Africa: Côte d’Ivoire’s fundamentals to remain strong but growing external headwinds pose downside risks

Growth to remain strong over the short term, providing businesses with opportunities

Côte d’Ivoire’s short-term economic outlook appears good, reflecting successful reforms under the current administration. The country has come a long way from five years of civil war (2002-07) that damaged its infrastructure, and post-election instability in 2010 that left 3,000 people dead and thousands displaced. The economy has been growing at over 7.0% per annum since then, reaching 8.5% in 2015. This reflects the onset of stability since mid-2011, the successful presidential election that took place in October 2015 and growing efforts by the government to rehabilitate the country’s infrastructure that was damaged by the civil war. The latter forms part of the government’s four-year National Development Plan (NDP; 2016-20) that seeks to strengthen public institutions and governance, develop human capital; strengthen regional integration and international co-operation; and promote infrastructure development and job creation, while transforming Côte d’Ivoire into an emerging market by 2020. The government has so far been able to raise around 30% of total planned investment (USD15bn) and efforts to raise the remainder may be determined by global economic conditions and economic progress in the economy. With regard to the latter, we expect real GDP to remain in the positive growth trajectory in 2016 driven by strong public investment spending outlined under the NDP, 2016-20 and favourable export growth. Other drivers include consolidation of political stability following the successful presidential election in October, improvement in governance and institutional strength, and extensive financial support from donors/bilateral creditors. Plans to adopt a new three-year economic programme with the IMF will also help to cement ongoing progress in Côte d’Ivoire’s economic environment.

However, stronger growth is likely to increase inflationary pressures, reducing the scope of policy easing

Stronger growth will lead to a moderate acceleration of inflation to around 2.1% in 2016, up from around 1.2% in 2015; however, inflation will remain below 3.0% supported by the currency peg to the EUR that helps to anchor monetary policy and the low oil price environment. However, robust public spending plans, specifically planned investments under the 2016-20 NDP, are likely to see the budget deficit deteriorate over the short term, above the 3.0% convergence criteria for UEMOA member countries. This is despite a potential rise in corporate and trade tax revenues and lower fuel subsidies arising from the fall in global oil prices. The impact of lower oil prices on the budget will be slightly negative as direct taxes on oil  and gas fall in line with lower pump prices. Reducing the budget deficit to the 3.0% target will be challenging under the government’s investment plan; this will require expenditure restraint (unlikely under current planned investments) and significant rise in domestic revenue mobilisation including measures to reduce tax exemptions, broaden the tax base, improve tax administration. There are several efforts that we expect to see progress with in 2016-17: implementing a Treasury single account; strengthening the financial situation of the energy sector; finalising the clearance of domestic arrears; and strengthening procedures for the budgeting, execution and control of public expenditure with a view to avoiding above-budget spending. However, leakages are likely to continue undermining the country’s public financial position.


Given our expectation of a potential rise in inflationary pressures we expect the regional central bank, the BCEAO, to keep its policy interest rate steady/unchanged (the Repo rate, le Taux de prêt marginal, remains at 3.5%, the rate since September 2013; le Taux minimum de soumission remains at 2.5%) in the near term. However, there is an outlier of a concern lying ahead: there is a risk that the US Federal Reserve may hike interest rates in late 2016, and an orthodox policy response from the ECB would be to raise its policy rate to help support the EUR. However, with prices in the eurozone currently too low, the ECB has boosted its original QE programme resulting in a negative interest rate environment – a trend that is likely to remain in place for months. Due to the exchange rate peg, the BCEAO may be forced to cut its policy rate in 2016 to help maintain the peg, which would undermine the XOF. Average inflation in UEMOA decelerated to 0.9% y/y in June 2016, down from 1.5% in May, and from 1.3% in December 2015. Moreover, inflation has slowed in Côte d’Ivoire, the largest economy in UEMOA (from 2.3% y/y in May, to 0.9% y/y in June), increasing the scope of policy

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easing. However, we believe that the BCEAO is likely to maintain its tight policy stance in the months ahead, given growing concern over a possible US interest rate hike and uncertainty over Brexit effect on the EU.

The capital market will remain relatively illiquid, and short term yields are unlikely to shift significantly

Côte d’Ivoire’s capital market remains less liquid than other key markets such as South Africa and Nigeria. Developments in the primary market will continue to be influenced strongly by the monetary policy stance derived from the ECB and BCEAO liquidity management efforts. As a result, and given recent developments, yields are not expected to change significantly in the months ahead. However, money market rates have risen in recent months (the 1-month average in July was up to 5.20% from 4.60% in January 2016, and from 4.83% in May last year), reflecting the tight monetary policy stance, which has somewhat reduced liquidity in the economy.

Exchange rate risks will persist as the currency peg to the euro continues to face external headwinds

Although Côte d’Ivoire’s short-term growth outlook looks positive, the recent outcome of the Brexit referendum poses major downside risks to the XOF, which is pegged to the euro. Since the result of the vote was announced on 24 June, there has been a slight rise in EUR:USD volatility and hence XOF/XAF volatility increasing uncertainty for business planning. At the same time, the EUR and hence the XOF/XAF has weakened slightly against the USD and we expect this trend to continue amid ECB’s ongoing monetary stimulus and concerns over the Brexit impact on EU; this is specifically, the risk of it fuelling anti-EU sentiment and plunging the EU region into its own series of ‘in-out’ referenda. A possible rise in US interest rates later in the year could also undermine the value of the EUR. Better-than-expected US non-farm payrolls data in recent months increase the scope of at least one rate hike this year. If this happens, it will increase financing costs for the country, as well as bode ill for the XOF as capital flows out of the region into USD denominated assets.

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But the risk of currency devaluation is low

Despite increased global economic uncertainty, we believe that the BCEAO is likely to maintain the exchange rate peg to the euro for the foreseeable future. While export competitiveness has been undermined by a slight strengthening of the EUR against the USD year-to-date (by 3.2%; see Chart 1), there is a likelihood of a reverse in trend in the coming months given renewed concerns over a possible US interest rate hike, the Brexit effect on the Eurozone and ECB monetary policy stimulus. Moreover, EU demand for Côte d’Ivoire’s exports remain weak, negating any benefit of a currency devaluation. In addition, FX reserves held jointly by the BCEAO and by the French Treasury on behalf of the ECB are at comfortable levels (nearly USD10bn) and debt stocks across UEMOA (and specifically in Côte d’Ivoire) are also within comfortable levels and do not pose any major concerns – Côte d’Ivoire’s domestic debt equalled 34.7% of GDP at end2015, while external debt equalled 31.3% of GDP, below the IMF thresholds of high debt distress.

Strong government spending to increase current account pressures but positive cocoa outlook to mitigate risks

Meanwhile, higher government spending is likely to see the current account deficit come under increasing pressure over the short term. This is in addition to weaker-than-expected production in Côte d’Ivoire’s main export crop, cocoa, in the current 2015/16 season (October-September); total deliveries reached 1,428,000 tonnes by July 24th, 12% below the same point the previous season. The fall in production reflected the impact of El Niño which made the seasonal Harmattan winds the harshest in 30 years. The exceptionally dry weather stunted pod development, resulting in an unusually high proportion of small and low quality beans. This increased bean rejections at port, as well as crimping supplies to Ivorian grinders whose output is expected to have fallen. We expect the country to produce a total crop of 1.6mn tonnes in 2015/16, 9.6% lower than the record achieved in 2014/15, but still the third strongest outturn on

The outlook for the 2016/17 is mixed, given the likely switch of global patterns from El Niño to La Niña, which typically makes weather cycles more unpredictable. However, given that the last three La Niñas have driven an increase in West Africa’s cocoa crop, we expect Ivorian production to rebound, reaching a forecast 1.8mn tonnes in 2016/17, which if achieved would be a record. The strong production outlook should also support a rebound in grinding activity, cementing the country’s position as the world’s largest cocoa grinder. This will go some way towards supporting the current account, but sustained, robust import demand will add pressure to the trade account. Moreover, although Côte d’Ivoire’s status as a net oil importer should see the economy benefit overall from lower oil prices, a possible weakening of the EUR will be reflected in XOF depreciation, which will raise import prices and overall will add pressure to the current account. On balance, our broadly positive outlook on Côte d’Ivoire depends partly on: continued stability in the political climate, favourable terms of trade – the slowdown in China’s growth and subdued demand in the EU pose a risk to Côte d’Ivoire’s growth; and reforms aimed at improving the business climate. The government’s ability to secure adequate external financing to boost public investment to the level envisaged in the 2016–20 NDP will also be crucial to the country’s short term economic prospect.

Contributor’s Profile
Gaimin Nonyane Head of Economic Research desk and Project Manager for Local Knowledge Africa (LKA; an advisory arm at Ecobank Research) at the pan-African bank, Ecobank Group, based in London. Gaimin joined the bank in November 2012, and helped to launch the bank’s first ever Country Profiles, designed to give investors an insight into the operating environment in Middle Africa. Prior to that, she headed the sub-Saharan Africa desk on macroeconomic and political research at Dun & Bradstreet (D&B) UK Limited. Gaimin has an MSc in International Economics and Policy and a BA (Hons) in Economic Studies with Law.

This article features in the September edition of INTO AFRICA Magazine, which focuses on reviews of Africa’s economies in the first half of 2016.

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