Jan Friederich, Head of Middle East and Africa Sovereigns, and Marina Stefani, Fitch Ratings writes for Banker Africa
The Central African Economic and Monetary Community’s (CEMAC) strengthening of its external buffers in 2017 supports our base case that there will be no break-up of the currency zone or devaluation of the CFA franc against the euro. But the region remains vulnerable to any renewed decline in oil prices, and fiscal adjustment to the commodity price shock is still challenging.
The regional central bank, Banque des États de l’Afrique Centrale (BEAC), has taken a critical role in efforts by the six-country bloc to adapt to lower oil prices since 2014. We think the capacity of national governments to respond will remain constrained by domestic politics and structural shortcomings, although IMF programmes for four of the six-member states are supporting adjustment.
BEAC reforms help reserves stabilise
International reserves appear to have bottomed in June 2017 at EUR 4 billion ($4.6 billion) after a sharp fall in 1H17 and were EUR 4.9billion at end-December 2017. IMF and other multilateral and bilateral disbursements, fiscal adjustments in 2H17 and import contraction helped arrest the decline in reserves.
A shift in monetary policy, including an increase in the policy rate by 50 basis points in March 2017 and additional administrative measures, has contributed to a decline in imports. BEAC has also stopped providing financing to CEMAC member governments. This had supported high public expenditure with a substantial import component, leading to reserve outflows.
BEAC aims to increase foreign exchange repatriation through stronger implementation of FX regulations. It has tightened requirements for private companies buying foreign currency for international business transactions, reducing imports and foreign-currency outflows.
External buffers should build up gradually as the regional current account deficit narrows further in 2018 to 4.3 per cent of GDP from an estimated five per cent in 2017 and 9.9 per cent in 2016, supported by further import contraction and a pick-up in oil prices. The IMF forecasts reserve coverage at 3.6 months of import cover in 2019 and 4.5 months by end-2021.
BEAC’s measures have cut excess liquidity in the banking system. Broad money fell by 5.4 per cent year-on-year in September 2017. A new, comprehensive monetary and liquidity management framework is being implemented with the aim of improving monetary policy transmission. An Emergency Liquidity Assistance framework came into force in January, helping BEAC to act as lender of last resort and reducing risks to bank liquidity, although its full legal framework and asset eligibility have yet to be finalised, and the zone’s euro peg restricts BEAC’s ability to provide unlimited funding to banks.
New monetary policy framework and BEAC measures also support fiscal adjustment
The regional central bank’s measures, also designed to compel CEMAC members’ fiscal adjustment, should force fiscal discipline as member countries’ financing options become more limited. BEAC has limited the amount of sovereign securities banks can use as collateral to 15 per cent of a member country’s fiscal revenues, and is considering additional haircuts if governments are not compliant with regional convergence criteria. In May 2017 it announced a reduction in the maximum amounts available for refinancing from BEAC for banks in countries with low or negative imputed reserves positions (CEMAC member countries’ international reserves are pooled at BEAC).
Domestic issuance is becoming more difficult and BEAC froze statutory advances after the December 2016 Yaoundé summit called to formulate a response to lower oil prices and pressures on the zone’s currency peg. BEAC decided in August 2017 to eliminate statutory advances by end-2027. We believe BEAC may take further disciplinary measures if member countries fail to consolidate their budgetary positions.
Adjustment remains large, lengthy and challenging
The process of regional adjustment is far from complete and faces significant challenges despite the progress in shoring up external buffers. These include oil prices still well below their pre-2014 levels, political risk, poor public finance management, and banking sector weakness.
This is illustrated by the status of Fitch-rated CEMAC members’ IMF programmes. These appear broadly on track, enabling the IMF to complete its first reviews under the Extended Credit Facility Arrangements for Cameroon and under the Extended Fund Facility for Gabon and approve second disbursements of $117.2 million and $101.1 million, respectively. But Cameroon required a waiver for non-compliance with the ceiling on new sovereign or sovereign-guaranteed non-concessional external debt, while Gabon accumulated new external arrears and received a waiver for non-observance of related performance criteria.
Overall, Fitch-rated CEMAC members are reducing deficits, but this may not ensure long-term debt sustainability. Governments in the region sharply cut capex by an estimated 2.2 per cent of GDP to 5.1 per cent in 2017 as growth and fiscal revenues were subdued in 1H17, due to lower oil production, weak commodity prices and sluggish external demand. This has delayed the repayment of BEAC advances, which was due to start in 2017 but was postponed by four years, and their repayment horizon was extended to 14 from 10 years.
Substantial risks to adjustment persist
A new oil price shock or further subdued growth would dampen fiscal receipts and hinder consolidation. Oil prices remained low in 2017 compared to historical averages, keeping growth in the zone weak at an estimated 0.5 per cent according to the IMF. This led to a strong underperformance of fiscal revenues. Fiscal adjustment could be hampered by political bottlenecks and Fitch also views public finance management as weak.
The IMF estimates external financing needs at $7.2 billion over 2017-2020 for the four CEMAC countries with IMF programmes, assuming expected fiscal adjustments are made. The IMF is set to cover 25 per cent of these financing needs, but only part of the rest would be covered by other official-sector external creditors.
Some regional financial sector reforms have been postponed or amended to avoid exacerbating liquidity constraints, such as the increase in risk weights on sovereign securities.
Low ratings reflect high risks
The stabilisation of external buffers since mid-2017 underscores our assumption that there will be no break-up of the CEMAC monetary arrangement and no devaluation of the CFA franc against the euro. Nonetheless, the risks associated with the oil price shock and subsequent adjustment challenges are reflected in Fitch-rated CEMAC member countries’ deeply sub-investment-grade sovereign ratings.