S&P report says Africa's CFA Franc Zones are feeling the heat
According to a study by S&P Global Ratings published today, the two monetary unions in Africa using the CFA franc are facing stiff scrutiny of the long-term sustainability of their currencies, which are pegged to the euro.
Of the two currency zones, the Central Africa franc used in the Central African Economic And Monetary Community (CEMAC) is under more pressure than in the West African Economic and Monetary Union (WAEMU).
The study also found that of the 14 member states of the two currency zones, the Republic of Congo (CCC+/Stable/C) is the most vulnerable to a devaluation, should it occur. The largest economies in each zone—Cameroon and Gabon in CEMAC, Côte D'Ivoire and Senegal in WAEMU--would see their debt burdens increase significantly.
Despite these pressures, a sudden and significant drop in the value of the two currencies--the Central Africa CFA franc (XAF) and the West African CFA franc (XOF)--is not currently expected, says the report Who’s Most At Risk From A
Devaluation OF Africa’s CFA Franc Currencies?.
"A drop in oil prices, stalling integration efforts, and renewed political opposition have raised concerns about the long-term future of the CFA franc currencies used by Africa's two monetary unions," the report author and S&P Global Ratings credit analyst Remy Carasse said.
"It's an appropriate moment therefore to examine the vulnerability of both currencies to devaluation," he added.
"First, we should stress that devaluation is not S&P Global Ratings' base case scenario and that our ratings on governments in the region have stable outlooks," Mr. Carasse said.
A combination of factors, including the IMF debt programs, revitalized economic activity in some countries, plus the relatively weakness of the euro, have all helped to hold back pressure on the Central Africa CFA franc and the West African CFA franc, which are both pegged to the euro.
Nevertheless, the level of the exchange rate is not guaranteed. Should devaluation occur, this would have repercussions for our ratings.
The major findings of the report are:
· A drop in oil prices, stalling integration efforts, and renewed political opposition have raised concerns about the long-term future of the CFA franc currencies used by Africa's two monetary unions: CEMAC in central Africa and WAEMU in west Africa.
· Our analysis suggests currency pressure is greater in CEMAC than WAEMU, while of the 14 countries in these currency zones Congo is by far the most vulnerable to devaluation.
· If devaluation were to occur, the largest economies in each zone--Cameroon and Gabon in CEMAC, Côte D'Ivoire and Senegal in WAEMU--would see their debt burdens increase significantly.
· Despite the pressures, our ratings on countries in the franc zone have a stable outlook because currency devaluation is not currently our base case scenario.
· In CEMAC, we believe the recently concluded IMF programs could ease external and fiscal tensions.
· In WAEMU, we expect relatively strong economic activity in Côte d'Ivoire and Senegal should contain pressure on the current exchange rate.