RPT-Fitch: Franc Zone's 'BBB-' Country Ceiling Reflects French Guarantee

Thu May 1, 2014 8:00am EDT

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May 1 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says in a new report that the Country Ceiling of 'BBB-' on the two sub regions of the franc zone, Union Economique et Monetaire Ouest Africaine (UEMOA) and Communaute Economique et Monetaire d'Afrique Centrale (CEMAC) reflects the benefits derived from their monetary arrangement with France (AA+/ Stable). The Country Ceiling is markedly higher than the sovereign ratings of rated member countries - Gabon (BB-), Cameroon (B) and the Republic of Congo (B+).

Under the monetary arrangement France guarantees full convertibility of the CFA franc at a fixed rate with the euro. This rules out the risk of a balance-of-payments crisis and is a key external strength.

The monetary arrangement has supported macro stability in the form of low inflation, stable currency and budget discipline (due to an inability to monetise budget deficits). Had franc zone countries not been linked to a strong currency at times of recurrent political crisis (as in Cote d'Ivoire in 2011 or Mali in 2012), instability would have been aggravated by sharp depreciation of the currency, high inflation and increased dollarisation.

Foreign-exchange (FX) reserves have remained close to 100% of the monetary base in recent years, due to abundant oil-related FX inflows in CEMAC and debt cancellation, which has taken the form of retrocession of funds in foreign currency in UEMOA. If needed, the French Treasury would provide external liquidity through an unlimited overdraft on the central banks' account. However, an unsustainable drain on FX would likely trigger adjustment measures, as in 1994 when the currency was devalued by 50%.

GDP growth compares well with African peers'. Non-oil growth performance in the franc zone (5.5%) has been slightly below that of sub-Saharan Africa (SSA) (6.2%) over the last decade. Growth was lower in UEMOA (4%) than in CEMAC (7.1%) where oil receipts have financed vast infrastructure projects in countries such as Gabon and the Republic of Congo.

Public debt is moderate, at 30% of GDP on average. Almost all franc zone countries (except oil-rich Gabon and Equatorial Guinea) have benefited from external debt forgiveness from official creditors. Despite the involvement of the IMF and other development partners, public finance management is weak. Financing in UEMOA relies heavily on development aid and in CEMAC on commodities. The tax take is low and government arrears are high. Weak public finances are a key factor explaining the large gap between these countries' sovereign ratings and the Country Ceiling.

Structural indicators are also generally weak. The franc zone comprises countries with the lowest income per capita in the world. Their economies are undiversified, based on agriculture or commodity exports, which make them vulnerable to commodity price changes. The region is marred by political instability, as recently illustrated by the crisis in the Central African Republic (CAR). World Bank governance indicators and doing business indicators are well below the 'B' median.

Stronger economic development is hampered by the lack of efficient public services, infrastructure (eg, paved roads, electricity) and limited economic integration. The main barriers are tariffs (for certain goods), lengthy border controls and road blocks. The two sub-regional currencies are not convertible between each other. Financial depth is among the lowest in the world. Controls and delays on capital transfers between the sub-regions and the rest of the world are a key factor explaining the eight-notch difference between the Country Ceiling of the franc zone and the sovereign rating of the ultimate guarantor, France. Capital flows are free within each sub-region, as illustrated by the recent development of a regional local-currency debt market in UEMOA. A change in the monetary arrangement with France would prompt a review of the Country Ceiling. A change of several notches in France's rating could also affect the Country Ceiling. Fitch would not expect any development at member country level to lead to an improvement in the Country Ceiling, which is already high relative to sovereign ratings in the zone.

The report, Country Ceiling for the Franc Zone, is available at www.fitchratings.com

Link to Fitch Ratings' Report: Country Ceiling for the Franc Zone

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