We are receiving calls from market participants worried about financial market developments in the CFA franc zone and the impact on their trade activities. The overriding interest hovers around two interrelated possibilities (i) whether the CFA franc can be devalued and the principal drivers in favour of this option (ii) how imminent a devaluation of the CFA franc currency is.
Yes it can!
We believe the CFA franc can be devalued especially in light of recent currency market developments in peer countries and the disappointing trend in key macroeconomic variables in mainly oil-exporting CFA franc countries previously discussed here. Last week’s Franctrade chart on the foreign reserve position of countries in the CFA zone attempted to illustrate the volatility of foreign reserves in countries like Chad, Equatorial Guinea, Congo and to some extent Gabon, which are hugely reliant on oil revenues, although in countries with more broad-based economies, like Cameroon, the fallout has been less severe. Additionally, IMF data showed that foreign currency reserves in the West African CFA region (UEMOA), which is less exposed to oil exports revenues, remain traditionally weak and less volatile. Still, the sharp fall in cocoa prices (which we have covered extensively see: Cocoa Markets: it never rains, it pours and pours and Cocoa: West African farmgate prices at the mercy of...) and the cyclical decline in phosphate prices, have undermined foreign currency reserves for top cocoa producer Côte d’Ivoire and leading phosphate exporter Senegal. But to support our thinking on the range of possibilities for the CFA franc, we highlight a number of recent currency developments in commodity exporting countries in Africa and juxtapose them with the status-quo in the CFA franc zone in the table below.
What emerges is that the sharp decline in commodity prices has undermined momentum in countries ranging from Angola to Zambia triggering significant changes in their exchange rates as a coping mechanism. The CFA franc zone is a conspicuous outlier and there are compelling reasons why this may be the case. That said, the near term outlook for the CFA franc is a challenging exercise. Opinions we sampled suggest monetary authorities have no other option but to devalue the currency. We are not convinced, partly because a CFA franc devaluation may only solve one of many problems and compound several others.