A tale of two cities
We share two intriguing headlines from the past two weeks with our readers. The first suggesting “the Anglophone crisis may prolong…Q1-2017 GDP contraction” the second reading “Investors have an expensive habit of downplaying unquantifiable politics”. The first quote is culled from Bloomberg Intelligence’s brief on Cameroon while the second is a Financial Times comment on Spain and Catalonia.
Even using a broad spectrum the political parallels between Cameroon and Spain are thin and should not be overplayed (we will not)—still there are some important economic and financial market overlaps to consider. Data from both the Financial Times and Bloomberg intelligence estimate the contribution to national GDP from the two restive regions at 20%. This, among other considerations, is enough of a trigger for S&P to highlight imminent risks for Spain. These risks—the escalation of the conflict and tensions over Catalonia’s independence, according to the rating agency—have negative credit implications for the Spanish sovereign especially if they “start[ed] weighing on business confidence and investment, leading to less predictable future policy responses.”
Spanish 10-year bonds have reacted, as one would expect, to ongoing events in Catalonia with yields rising sharply on October 04, before reverting closer to their one year average as the rhetoric from the political playmakers eased. In contrast, Cameroon’s debut 10-year Eurobond, which has outperformed its peers since its launch in November 2015, remains well-bid suggesting investors remain relatively comfortable on Cameroon risk.
Risk of contagion
However, official data suggest the risk of contagion from domestic and regional developments should not be underestimated. Cameroon’s Q1-2017 GDP contracted by 1.3% quarter-on-quarter, partly on account of lower government spending. While this can be linked to the impact of lower commodity-derived revenue (oil and cocoa prices have been both structurally and cyclically weak) and a slowdown in construction activity, the quasi economic standstill in the North-west and South-west regions has done the economy no favours and risks significantly undermining the service sector.
BMI argue that the economic impact of the crisis in Cameroon could make the planned cut to the budget deficit, estimated at 6.4% of GDP in 2016, more challenging. But financial markets, aggressive and in search of yield, seem to be stoic with regard these developments, not least because of a lack of appropriate adjustment mechanisms—the CFA franc is pegged to the euro and the Douala Stock Exchange remains illiquid.
We agree with the view that a decline in Cameroon’s economy will add to pressure on foreign currency reserves and the country’s access to foreign liquidity may be further dented by the pooled nature of the reserve arrangement with the regional central Bank within which countries like Chad have already eroded their reserve positions. All suggest a greater range of possibilities about which investors should argue. “Ahead lie shocks to this quiet consensus”, as the Financial Times comments. We are inclined to agree.