Financing Costs and the CFA Franc:
a Promise yet to be Fulfilled
Nicolas Pinaud
"Macroeconomic Policy in the Franc Zone: What can the
European Central Bank learn from Africa?"
February 21, 2006
Paris
OECD Development Centre
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Cost of Capital in the CFA Area:
Expected Benefits
 A peg is conducive to a more stable real effective
exchange rate (REER)
– Fixed nominal exchange rate
– Lower inflation
OECD Development Centre
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Cost of Capital in the CFA Area:
Expected Benefits
 Reduced currency mismatch & lower solvency risk
The bulk of ODA provided to UEMOA/CEMAC countries, and therefore the
greater part of their external debt, are denominated in SDR, € and $
OECD Development Centre
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Cost of Capital in the CFA Area:
Expected Benefits
 A lower (if not zero) currency-risk premium on localcurrency denominated financing
Breakdown of debt cost for a borrower in local currency on the local bond market
Zero CFA / Euro
Currency
Premium
OECD Development Centre
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Cost of Capital in the CFA Area:
Expected Benefits
 A lower (if not zero) currency-risk premium on localcurrency denominated financing
 Fixed nominal exchange rate supp. of foreign investment
(esp. from euro-zone investors in the CFA Zone) in LC
denominated assets: no currency risk
 Low inflation theoretically conducive to higher domestic
savings
OECD Development Centre
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Cost of Capital in the CFA Area:
Expected Benefits
 A limited “transfer risk” (principle of free transferability)
– Lower the solvency risk premium charged to non-sovereign entities
– Makes it easier, in principle, for WAEMU / CAEMC corporations to
"pierce" the sovereign ceiling
– Transfer risk is usually a strong deterrent to foreign investment
OECD Development Centre
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Cost of Capital in the CFA Area:
Expected Benefits
 Potentially, since 1999, an even larger capital pool
accessible to CFA-zone entities: the Euro-zone
– Quasi local-currency financing for CFA zone entities: no currency
mismatch, i.e. lower solvency risk and default premium
– One of the world broadest and deepest financial centre: high liquidity
(no liquidity premium) and high appetite for risk
– Top legal standards: no jurisdiction premium
OECD Development Centre
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Cost of Capital in the CFA Area:
Mixed Outcome
 UEMOA countries' sovereign short term bond issues are
gaining in importance (together with declining coupons)
 State-owned companies: BOAD, Port Autonome de
Dakar, Communauté Electrique du Benin
☞ Average maturity of 7 years, 5.35% - 6.5% coupons
 Large UEMOA corporations are also issuing debt at
relatively low cost: Nestlé (Ivory Coast), TELECEL
(Burkina) and SHELTER Afrique (Senegal):
☞ Average maturity of 5 years and coupon between 6 and 7.25%
OECD Development Centre
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Cost of Capital in the CFA Area:
Mixed Outcome
 However, local financial systems remain
extremely shallow
– Low domestic saving rates
– Limited competition in the banking sector, limited role in the
financing of the local economy
OECD Development Centre
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Cost of Capital in the CFA Area:
Mixed Outcome
 However, local financial systems remain
extremely shallow
– Illiquid financial markets
• BRVM: very small Market Cap’
• Velocity of circulation on the BRVM equity market is the lowest in
Africa (1.8% in 2004 / 47% in the JSE)
• Hardly any bond trading, no real secondary bond market
OECD Development Centre
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Cost of Capital in the CFA Area:
Mixed Outcome
 However, local financial systems remain
extremely shallow
– Illiquid financial markets
USD million, end-2004
Market Cap'
Share
trading
JSE South Africa
442525
101126
Namibian SE
92229
488.8
Cairo & Alexandria SEs
38533
5486
Casablanca SE
25064
4354
Ghana SE
10846
72.88
Nairobi SE
3890
283.9
Mauritius SE
2102
100
BRVM
2082
50.2
Lusaka SE
1650
7.1
OECD Development Centre
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Cost of Capital in the CFA Area:
Elements of Explanation
 Is the peg really credible?
– On the face of it, yes it is (guarantee of the French
Treasury, de facto currency board)
– However recurrent rumours of devaluation: the 1994
devaluation has set a precedent
– Is there an implicit currency premium? Apparently
not…
OECD Development Centre
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Cost of Capital in the CFA Area:
Elements of Explanation
 WAEMU & CAEMC sovereign still perceived as
fragile obligors by foreign investors
– Poor track record
– Structurally flimsy public finances (limits of the HIPC initiative)
and low ratings (Fitch & S&P’s)
• From CCC (Cameroon)
• to B+ at best (Senegal / Benin)
• No investment grade
– High country risk in general (Ivory Coast as a case-in-point)
OECD Development Centre
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Cost of Capital in the CFA Area:
Elements of Explanation
 Little developed corporate sector
– Limited liquidity of debt instruments / preeminence of
commercial loans
– The very few bond issuances can be underwritten locally
– Poor legal and business environment in the WAEMU and CAEMC:
high jurisdiction premium requested by foreign investors
– Poor corporate governance / Stringent listing requirements and
expensive fees in the euro-zone for bond issues
OECD Development Centre
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Cost of Capital in the CFA Area:
Conclusion
 The peg is potentially a useful instrument
to reduce capital costs in the CFA franc
zone
 Yet, the other components of the country
risk premium tend to nullify the benefits of
the peg
The CFA peg is no "magic bullet" to deepen WAEMU
and CAEMC financial systems and to reduce capital costs
in the region
☞
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