West Africa’s Delicate Debt Dalliance

As Cote d’Ivoire began a formal proxy campaign with bondholders to devise an interest arrears repayment plan after winning HIPC relief and Mali succeeded it in civil war in the French West African UEMOA zone, the IMF circulated a paper urging accelerated regional debt market development after a decade of mixed results, with the goal of long-term funding mobilization still elusive. The area central bank oversees Treasury bill issuance dominating the market as governments can no longer rely on overdraft facilities to cover budget deficits. Along with sovereigns, the regional development lender BOAD is a benchmark source, and the World Bank’s IFC arm and other donor agencies have placed local currency “kola bonds.” Auctions are the typical primary channel with occasional syndication and all instruments along the curve out to 7 years are open to foreign investors. At the start of 2010 before the Cote d’Ivoire conflict re-erupted gross bond activity was CFA Franc 1.2 trillion accounting for almost one-fifth of member country public and private flows. Commercial banks are the main buyers for immediate liquidity and capital adequacy purposes with a zero-risk weighting. Abidjan took 70 percent of the action with the remaining 30 percent in Benin, Burkina Faso, Mali and Senegal. Three and six-month maturities were most frequent, and subscription rates were near 200 percent. Twenty private companies floated bonds over the period keyed to the BOAD yield at 5-7 year tenors, but even with the pegged exchange rate and 5 percent-plus coupons emerging market investor interest was “marginal” according to the Fund. In the past two years initiatives to secure credit ratings and harmonize tax treatment have aimed to reverse the trend, with Benin, Burkina Faso and Senegal carrying B grades from Fitch and S&P. Their assessments have contributed to lower interest rates, and yield curves are generally upward sloping, but illiquidity with scant secondary trading continues to impose a cost premium. Banks for their part may be overexposed to short term government paper at an average 25 percent of total assets.

The “shallow buy-side” of institutional investors like insurance, pension and social security funds is an additional obstacle, the report comments. Debt statistics and strategies are unreliable and unavailable to the public, and bidding procedures are uncertain and erratic, Banking system stability risks were underscored with Cote d’Ivoire’s threatened default on local as well as external debt in the aftermath of disputed elections. New demand and supply bases will lay a stronger foundation for the future and capital controls should be “revisited” to attract overseas investors. National treasuries are to reveal cash flow and medium-term borrowing plans under current reforms, and a West African Monetary Union securities body has just been created to work with the central bank on fixed-income promotion as Abidjan again talks up a restructuring deal.