The African franc zone and other French-speaking economies in the region contain many of the world’s poorest countries and fragile post-conflict countries such as Democratic Republic of Congo and Côte d’Ivoire. But the economic upturn of sub-Saharan Africa is being reflected in a range of positive trends, such as an inflow of banks into the franc zone region – including a solid showing of Moroccan and other Arab institutions, as well as European banks – and the development of local markets.
Although in some respects the region has not performed as well as others in Africa – reflected in the negative current account balances shown in the table from the International Monetary Fund (IMF) – the franc zone is widely praised for its economic stability, generally low rates of inflation and potential for plenty more growth as economies reform.
International bankers who have invested in the region argue these fundamentals guarantee more attractive rates of return than the fixed income market’s favoured African plays of Egypt and Nigeria.
Key players deny it will happen, but there is once again talk of devaluation in the franc zone, whose ground-breaking 1994 devaluation even now still worries some potential investors. As franc zone enthusiast Steve Jennions of Morgan Stanley said earlier this year: “There is nothing foreign investors hate more than maxi devaluations.”
Currency pressures have clearly been building. According to the IMF’s October 2007 Sub-Saharan Africa Regional Economic Outlook: “Countries that peg to the appreciating euro (including Cape Verde and Comoros) have thereby imported downward price pressure. Real exchange rates have been appreciating substantially, especially in the oil-exporting Economic and Monetary Council of Central Africa (Cemac) franc zone.” (The Cemac countries are Cameroon, Central African Republic, Chad, Democratic Republic of Congo, Equitorial Guinea and Gabon.)
Devaluation worries
Viewed from the Francophone countries, where devaluation is on people’s minds, the situation is more dramatic. This has been sufficient for Banque de France governor Christian Noyer to go on the record saying that Paris – which underwrites the franc zone – was against another devaluation. Adding to the chorus of denial, the doyen of Francophone rulers, Gabon’s president, Omar Bongo Ondimb, has said that another devaluation would be so radical that franc zone countries would have to create their own currencies.
According to Abdoulaye Bio Techané, IMF Africa director, himself a former franc zone minister, “the issue is not on our agenda”. But the IMF is using it to push for countries to introduce reforms to increase their competitiveness.
Slight adjustments
“Central banks in the CFA franc zone have not been pursuing an active monetary policy, relying mostly on differentiated reserve requirements and adjusting official interest rates only sparingly,” the IMF observes. (The CFA countries include the six Cemac countries and the eight countries of the West African Economic and Monetary Union, including Benin, Côte d’Ivoire, Mali, Niger, Senegal and Togo.)
“While high liquidity is partly structural, caused by limited opportunities for banks to expand assets faster, there is always the potential for high liquidity to feed inflationary pressures.”
The IMF is advocating accelerated reform to counter the “recent loss of price competitiveness”. This “will require both a supportive fiscal policy and reforms to address long-standing structural obstacles, such as inadequate infrastructure, deterrents to doing business, and low productivity”. It concludes: “Recent progress in some member countries is encouraging, but overall a more concentrated effort is needed.”
More players
Big capital markets plays, including debt restructurings discussed below, are attracting investment banks, while the ‘real economy’ is bringing in other players. French banks have long dominated the market, in competition with growing regional players such as Arnold Ekpe’s Togo-based Ecobank.
Moroccan banks are registering a major surge into francophone markets, having led the North African kingdom’s efforts to become a major business force in the Sahel region, which consists of the countries in the savannah area bordering the Sahara. Among these countries are Senegal, Mauritania, Mali and Chad.
National carrier Royal Air Maroc – now headed by Driss Benhima – is serving routes across the region; Maroc Telecom is in Mauritania, Burkina Faso and Gabon; and Casablanca banks, notably Attijariwafa Bank (AWB) and BMCE Bank, are building up substantial portfolios of West African business.
Among recent operations, BMCE Capital, the investment banking arm of the Moroccan bank, has structured a $480m deal to build Senegal’s new Blaise Diagne airport, 45 kilometres outside Dakar (which the Senegalese government failed to implement as a build-operate-transfer project). BMCE’s London-based MediCapital subsidiary and BNP Paribas provided a €100m bridging loan, while BMCE Capital created a structure using a levy on each departure, called the Airport Infrastructure Development Charge, to pay off bank loans arranged by BNP for Saudi Binladen Group’s construction work.
Senegal push
BMCE has been busy in Senegal, where it opened an office in 2003. It is mandated to manage a third mobile network, working with Goldman Sachs, pointing to the potential for bulge-bracket players to work together with regional players.
BMCE has wider ambitions – this year taking a 35% equity position in African Financial Holding, which controls the Bank of Africa group, and planning new offices as far south as Angola. The group aims to have a presence in 20 countries by end-2008.
West Africa’s urgent need for regional projects that pool often meagre resources and reduce isolation in small economies that are often big countries, offers banks huge potential. As AWB director Karim Tajmaouti puts it: “Cross-border projects are a financing opportunity.” AWB is present in Tunisia, and has sought to bring Tunisian and Senegalese bankers together to promote projects in the region.
Rationalising debt
Local markets are emerging to help support business. In the West African Economic and Monetary Union area, local currency debt markets – comprising mainly government paper – continue to grow rapidly. According to the IMF: “Total annual gross issuance of publicly traded debt (public, private, and from regional institutions) has grown more than tenfold since 2000,” to reach CFA Fr383bn in 2006. “The elimination of central bank financing of the government [since 1998] has been the main catalyst for the growth of the local debt market,” the IMF said in October, with national treasuries turning to market financing of deficits, reducing excess liquidity in the system in the process.
As of mid-2007, total outstanding debt stood at CFA Fr905bn, equivalent to 3.5% of gross domestic product, which the IMF noted is much lower than in South Africa (47% of GDP) but comparable to Russia (3%).
Franc zone membership allows governments to feel more comfortable with domestic debt. According to Blé Lami, Côte d’Ivoire treasury director, whose administration raised CFA Fr200bn on the local market between 2002 and 2006, “CFA borrowing allows us better to manage our debt stocks, and to overcome exchange rate fluctuations”.
Côte d’Ivoire has become a substantial CFA franc domestic borrower despite the civil conflict that split the country. There has been months of market speculation that Côte d’Ivoire will soon come to the markets to help overcome debt problems, by taking advantage of bullish market sentiment to refinance. With neighbouring Ghana’s recent $750m Eurobond exciting interest, and other governments such as Kenya finding banks receptive to their plans to raise new loans on the capital markets, even problem debtors such as Côte d’Ivoire could exploit the trend with new borrowings.
This is despite the IMF and other donors lobbying to stop the Ivorians taking on new debt, with outstanding external debt issues still to be resolved. The IMF has warned President Lauren Gbagbo’s government it cannot borrow its way out of debt, but the Ivorians have been touting $600m of local CFA debt to clear $422m of World Bank arrears and meet other short-term needs. Among the institutions involved in talks about this has been Merrill Lynch.
Less problematic is Gabon, which has mandated Citigroup and JP Morgan to structure a sovereign bond solution for the buyback of Paris Club official debt, now it has virtually completed its London Club restructuring. Gabon recently received a 15% reduction in its Paris Club deal (with main creditor France showing francophone solidarity by giving 20%), which becomes applicable on 2 December; Libreville had demanded a 30% ‘haircut’.
Debt data
The Paris Club forgiveness is worth $350m – which is a good amount but pales into insignificance when considering the following statistics, presented by finance minister Paul Tongui to bankers in Washington: Libreville still has payments of CFA Fr1600bn to make, having already repaid CFA Fr1200bn for some CFA Fr326bn-worth of official debt raised mainly in the 1980s. Oil-producing Gabon is seen as a relatively attractive credit risk by fixed income investors, and Libreville is expected to obtain a commercial solution to retire its most extensive debt.
A new segment for non-regional issuers has emerged with the so-called Kola Bond Market, which was kick-started with a CFA Fr22bn, AAA rated five-year bond issued by the World Bank’s International Finance Corporation in late 2006, to support long-term local-currency financing for local companies. More instruments will follow.ECONOMIC PERFORMANCE (ANNUAL % CHANGE)
