Risk drivers and outlook

Côte d’Ivoire has made significant headway since the end of the civil conflict in 2011. Nevertheless, post-war reconciliation is moving too slow and poses a significant risk. Indeed, patronage networks from the civil conflict are still apparent in the inner circles of the state and could increase political tensions. In early 2017, soldier mutinies and civil unrest exposed simmering discontent and damaged the image of the government. Indeed, such instability could endanger future investments and disable long-term economic progress. Albeit that a return to a full-blown civil war remains unlikely, Credendo cautiously classifies the country’s medium- to long-term political risk in category 6/7 for the time being. Nonetheless, macroeconomic indicators have improved and the outlook is on the upside since Côte d’Ivoire became one of Sub-Saharan Africa’s fastest-growing economies. A revival of household consumption together with large public investments and a rush in foreign direct investments are important growth drivers.

However, being the world’s largest cocoa exporter, Cote d’Ivoire’s fiscal and export returns were hit by the drop in international cocoa prices during the 2016-17 season. Due to a global oversupply, cocoa prices are expected to remain subdued over the medium term. Besides shocks in terms of trade, adverse weather conditions could also pose a strain on the agricultural economy. Consolidation efforts and good policymaking under the IMF programme should help sustain a confined twin deficit. Credendo currently classifies the short-term political risk in category 4/7, reflecting a moderate liquidity risk compared to the country’s regional peers. The CFA franc zone is going through a crisis period. Regionally held foreign exchange reserves are under pressure, rekindling the discussion on a possible devaluation. In addition, issues such as corruption, legal uncertainties and a difficult business climate (despite improvements) explain the systemic commercial risk classification in C (on a scale from A to C).

Facts & figures

Pros

  • Leading global cocoa exporter
  • Political stabilisation
  • Sound growth projections
  • International support

Cons

  • Slow post-war reconciliation
  • Exposed to terms-of-trade and climate shocks
  • Weak public-debt management (although improving)
  • Social discontent

Head of State

  • President Alassane Ouattara

Description of electoral system

  • Presidential elections: latest October 2015, next 2020
  • Parliamentary elections: latest December 2016, next 2021

Population

  • 23.7 million

Income per capita

  • USD 1,520

Income group

  • Lower middle income

Main export products

  • Cocoa beans and products (44.5% of current account receipts), hydrocarbons (12.8%)

Country risk assessment

Leaving behind a decade of civil war… 

Rivalry between Laurent Gbagbo of the FPI (Ivorian Popular Front) and Alassane Ouattara of the RDR (Rally of the Republicans) already surfaced during the 1999 elections, in which Ouattara was disqualified and Gbagbo was elected president. After a coup attempt, the country slipped into a civil war that lasted from 2002 until 2011. For a decade, Côte d’Ivoire was divided, with the largely Muslim and Ouattara-supporting north under rebel control and the south under government control. The disputed November 2010 election struggle between Gbagbo and Ouattara gave rise to a violent upsurge of civil war that raged for four months and left 3,000 people dead, one million displaced and the economy in ruins. The international community imposed economic and financial sanctions, while a coalition of UN, French and rebel forces helped Ouattara to take over power. Gbagbo was arrested and sent to stand trial at the International Criminal Court (ICC) in The Hague.

Being a former deputy managing director at the IMF, President Ouattara enjoys international support and infuses investor confidence. He got re-elected in 2015 in absence of a credible opposition candidate, and ever since the parliamentary elections of December 2016, the ruling coalition holds a 65% majority in parliament. Moreover, the adoption of a new constitution in October 2016 added more certainty to the political environment by introducing a Vice-President position and a senate. Yet most importantly, it amended the Ivorian nationality provision for presidential candidates, a noteworthy grievance during the civil conflict. In 2020 Ouattara should step down after the presidential elections and pave the way for a new generation of leaders, something that might not go as smoothly as desired.

… but paying the price for slow post-war reconciliation 

The security situation obviously improved significantly since 2011 and the UN’s 14-year peacekeeping mission ended in late June 2017. However, the slow process of reintegrating rebel soldiers in the army and the substantial amount of weaponry in circulation pose important risks. The internationally supported Security Sector Reform (SSR) to rebuild the national army and merge loyalists and rebel forces, disappointed. Consequently, patronage networks from the civil conflict are still apparent in the inner circles of the army and the state in general. These divisions could increase political tensions in the run-up to presidential succession of Ouattara in 2020.   

In early 2017, soldier mutinies exposed simmering discontent over bad conditions and an old unresolved conflict between army factions. The poorly integrated army was able to hold the country hostage and severely damaged the image of Ouattara’s government. Mutinies were eventually ended after the government agreed on paying outstanding bonuses. Likewise, civil servants and cocoa farmers are frequently protesting about wage arrears and poverty. In fact, the poverty rate reduced only marginally over the past few years, to 46.3% of the population. Henceforth, the government’s failure to generate more inclusive growth could scatter social unrest.

One of Sub-Saharan Africa’s fastest-growing economies

Following its independence from France in 1960, Côte d’Ivoire had a flourishing economy as the global leading cocoa exporter. Prosperity was quashed by the decade-long civil war. Yet, ever since the return to political stability in 2012, Côte d’Ivoire has become one of Sub-Saharan Africa’s fastest-growing economies. After reaching GDP growth rates of around 9% for three consecutive years, projections are likely to balance around 7%. Obviously, Côte d’Ivoire still outpaces the regional average.

Economic growth is driven by investments in infrastructure, agriculture and mining, while household consumption is experiencing a real revival. Nonetheless, consumption figures very much rely on weather conditions as roughly two thirds of the population depend on agriculture for their livelihood. The government targeted huge investments from 2016 till 2020 in its National Development Plan (NDP), dominated by private investments and supported by a 2016-2019 IMF programme. Indeed, gross investment rates have surged since 2012 and are expected to continue to grow to up to 21.3% of GDP by next year. As the rise in national savings rates proves to be somewhat slower, investments are increasingly financed abroad and especially foreign direct investments (FDIs) are experiencing a rush. Investors are encouraged by political stabilisation, a growing middle class and the implementation of reforms enhancing the business climate. Indeed Côte d’Ivoire moved from number 177 (out of 189 countries) to 142 on the ‘World Bank Doing Business ranking’ between 2013 and 2017 (and ranks 18th out of the 48 Sub-Saharan African countries).

Drop in global cocoa prices impairs leading sector

Côte d'Ivoire being the world’s biggest cocoa producer, the cash crop makes up for about 45% of the country's export revenues. The 2012 cocoa sector reform replaced the spot-buying system with a fixed government-guaranteed price. Ever since, farmers receive 60% of the average price, agreed in future auctions run by the Coffee and Cocoa Board (CCC). As a result, cocoa production was boosted and quality improved. However, international cocoa prices were dragged down by a global cocoa supply surplus in the 2016-17 season, coupled with a slower-than-anticipated rise in emerging-market consumption and flattening demand from Western countries. Although weather conditions are a foremost price determiner, global oversupply makes a rebound in cocoa prices in the medium term rather unlikely, putting an important strain on Côte d’Ivoire’s outlook.  

The CCC sells about 80% of the crop before the season starts, yet some domestic exporters bought a contract without securing buyers. When prices dropped, domestic exporters defaulted and thousands of tonnes of cocoa beans were stockpiled and have rotted at the ports since the end of 2016. The CCC took in large losses and will demand compensation from the defaulters. In the meantime, it is tapping stabilisation funds held at the regional central bank (Central Bank of West African States – BCEAO) to ensure farmers receive the guaranteed price (about 36% lower than last season). Low cocoa prices do not only impact export returns, depressed farmers’ proceeds affect the general economy as about a third of the population depends on the crop and is forced to temper their consumption. Consequently, growth projections somewhat moderated as of 2017, although they remain solid.

The volatile balances of a (soft) commodities exporter 

The fact that Côte d’Ivoire is less oil-dependent then its regional oil-exporting peers helped protect it against the crash in international oil prices. As a matter of fact, Côte d’Ivoire is no longer classified as a ‘net fuel exporter’ since 2014, meaning that its fuel imports are larger than its fuel exports. Besides cocoa and hydrocarbons, Côte d’Ivoire also produces rice, cotton, coffee and palm oil, which furthermore contributes to the comfortable surpluses on its trade balance. The current account balance (including official transfers) does, however, display a deficit owing to the negative services balance and the outflow of private transfers resulting from significant labour immigration (especially from Burkina Faso into cocoa-producing areas). In 2016 the current account deficit reached a moderate 1.1% of GDP, yet this year it is expected to jump up to 3.8% of GDP (almost 15% of current account receipts) due to the lower cocoa export revenues and mounting consumption and investment imports. With low-for-long cocoa price projections, the current account deficit is expected to balance around 3% of GDP for the coming years. Côte d’Ivoire taps into several sources for financing its deficits. Firstly, FDIs have been following an impressive growth path since 2012 and are projected to continue to rise. Secondly, official project loans are on the rise, while the IMF programme also provides financial support. Nonetheless, 2016 financing fell short and the foreign exchange reserves held at the regional central bank were tapped to fill the gap.

Liquidity squeeze rekindles discussion on CFA franc devaluation

Côte d’Ivoire is member of the CFA franc zone, a monetary union with a currency pegged to the euro, regionally pooled foreign exchange reserves and guaranteed convertibility by the French treasury. Price stability is an important ambition of the common monetary policy; hence inflation is expected to remain stable around 2%. However, macroeconomic fundamentals and external liquidity deteriorated within the West African Economic and Monetary Union (WAEMU1) – of which Côte d’Ivoire is a member – and particularly in the Central African Economic and Monetary Union (CEMAC2).

Member countries were negatively hit by the substantial fall in commodity prices, especially oil, and regional insecurity putting severe pressure on liquidity. The CEMAC in particular is experiencing a deep crisis, comprising mainly oil-exporting countries and some regions in conflict. The WAEMU on the other hand experienced years of strong growth, although fiscal imbalances increased and public debts are rising. Consequently, foreign exchange reserves pooled at the two regional central banks dipped, putting the WAEMU’s reserves’ import cover at 3.5 months of import, an appropriate level still, while they barely reach 1.5 months for the CEMAC. Low reserves levels might prove an incompatible buffer for defending the euro-CFA franc parity and raised devaluation pressures.

The last time the CFA franc was devalued was through a sharp 50% cut in 1994. Since then, devaluation talks have sporadically reappeared among CFA countries. Any devaluation would subdue economic activity in the region through its impact on consumers (inflation and higher import costs) and debtors (with debt denominated in hard currency), raising the commercial risk. In the longer run, it could nonetheless improve the region’s international competitiveness. However, the memory of the painful post-devaluation shock for households’ purchasing power and fears of macroeconomic instability have until now prevented any consensus on the issue. Last December, CEMAC country leaders met and reaffirmed their wish to see the currency peg maintained at its current level (also applying to WAEMU). Moreover, CEMAC countries pledged to launch coordinated policy reforms and find a regional solution to the liquidity crisis, allowing a return to macroeconomic stability. For sure, those adjustments promise to be very challenging with probably lower-for-long oil prices and also weak foreign exchange reserves. In this context, the CFA franc devaluation is likely to remain a hot topic in the coming months and years.

1 Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo
2 Cameroon, Central African Republic, Chad, Congo-Brazzaville, Equatorial Guinea and Gabon

Lower public revenues at times of intensified government spending needs 

The government’s revenue collection capacity has been stable over the past decade, balancing around a limited 18-19% of GDP. Recently, low cocoa prices have taken their toll on the fiscal side, accounting for more than 40% of the government’s earnings. Lower tax receipts (from oil, income and VAT) and spending demands in the context of rising social and military unrest, formed an additional strain on the 2016 and 2017 budget, leading to accumulation of domestic arrears. Some public investments are being scaled back in order to appease increased current spending and cope with the loss in public revenues. The government cut its 2017 budget and the fiscal deficit is expected to grow from 4% of GDP in 2016 to 4.5% for 2017. Nonetheless, fiscal consolidation should help modify it back to the WAEMU norm of 3% of GDP by 2019.

Sustainable debt stock but elevated servicing burden

The HIPC (Highly Indebted Poor Countries) Completion Point was reached rather recently in 2012. Subsequently, debt relief was granted and Côte d’Ivoire’s debt profile improved significantly. The 2017 total public debt stock is projected at 48.7% of GDP (coming from 44.8% of GDP at the end of 2014) and should start moderating as of next year. It includes about one third of domestic debt, mainly consisting of bonds issued by the regional central bank and marked by relatively short maturity structures. In 2017, the proportion of domestic debt is expected to drop in favour of more external debt. The increase in external public debt originates largely from new official bilateral debt issued mainly by non-Paris Club countries and the successful June Eurobond issue that attracted almost USD 10 billion. In 2016, (non-concessional) commercial financing already made up for 56% of external government debt, yet the proportion is likely to increase. Public interest payments are expected to absorb about 10% of total public revenues in 2017, coming from 7% in 2014. So even though public debt ratios are under control, the stock is becoming less concessional and public-debt servicing costs are rising. Total gross external debt ratios (including public and private external debt) are also sustainable and projected to remain relatively stable around 42% of GDP or almost 160% of export receipts over the next three years. The burden of servicing these external debts has increased, peaking at 18.8% of export revenues in 2016 yet anticipated to drop to 14% in 2018. Effective debt management will be essential to maintain a sustainable external position and avoid large refinancing spikes.

An upbeat outlook is achievable through sound policymaking, despite downside risks

The recent adverse shocks in terms of trade (especially cocoa prices) have depressed achievements and could continue to be a strain. Adverse weather conditions also pose a traditional risk through impacting both hydro-energy and agricultural output. The outlook will be partially shaped by the compliance with the IMF programme, serving as an important motion for policy ambition. In fact, sound policymaking will be needed to prevent fiscal pressure, preserve investor confidence and secure strong economic growth. Over the past few years, Côte d’Ivoire made significant economic progress, yet not the entire population experienced benefit from it. Promoting more inclusive growth is therefore another important key for long-term stability. Yet the foremost risk to Côte d’Ivoire’s outlook is related to political stability. Persistent military upheavals as witnessed over the course of 2017 could prompt a violent political transition in 2020, although a return to a full-blown civil conflict remains unlikely.