(Repeat for additional subscribers)
May 1 (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
Link to Fitch Ratings' Report: Country Ceiling for the Franc Zone