Credendo has revised upwards the highest short-term political risk rating for CFA franc zone members (see table) from 4 to 5 and downgraded Côte d’Ivoire to category 4. The reason lies in the deterioration of macroeconomic fundamentals and external liquidity (combining soared short-term external debt and tumbled foreign exchange reserves) within the West African Economic and Monetary Union (WAEMU) and particularly the Central African Economic and Monetary Community (CEMAC). CFA countries have indeed been negatively hit by the substantial fall in commodity prices, especially oil, and regional insecurity (especially within the CEMAC), putting extreme pressure on liquidity and rekindling the possibility of a CFA franc devaluation.    

Impact on country risk

Credendo’s maximum short-term political risk rating for CFA-countries – not applied when high war risk justifies a higher rating – is motivated by the mitigation of non-transfer and foreign exchange shortage risks thanks to the CFA monetary arrangement. The recent lifting is justified by an access for each country member to much-reduced foreign exchange reserves that are pooled at the two regional central banks. The reserves’ import cover is currently at 3 months within the WAEMU but barely around 2 months within the CEMAC which seems an incompatible buffer for defending the Euro-CFA franc parity. Therefore, given the rising risk of a regional liquidity crisis, devaluation pressures are increasing. 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 as well. 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. Moreover, CEMAC countries without IMF programme (Cameroon, Republic of Congo, Gabon and Equatorial Guinea) pledged to negotiate one in order to launch coordinated policy reforms, find a regional solution to the liquidity crisis and allow 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 reserves. In this context, the CFA franc devaluation is likely to remain a hot topic in the coming months and years.

Analyst: Raphaël Cecchi, r.cecchi@credendo.com