By Charlie Robertson
THUR, JANUARY 19 2017-Indeed, reading this report on army mutinies in Ivory Coast (and related tweets about Burkino Faso) nearly encouraged me to pull the release. That article concludes “ Soldiers in Ivory Coast have mutinied in 1990 (twice), 1993, 1999, 2000 (twice), 2002, 2003, 2008, 2014 and now 2017. They are the most mutinous military in the region, and likely the continent. Their history of revolts precedes the country’s civil war. Resolutions that go far beyond payments will be needed for Ivory Coast to break this cycle.” When I was in Abidjan last week, the initial mutiny of 6-7 January seemed to have been resolved. But in the last few days, two soldiers are reported to have died, and the gendarme temporarily seized a port. The noise is calming down in the afternoons according to one Reuters journalist when Africa Cup matches are televised, but this does look serious.
But we are frank about the political risk, and I think we correctly identify the likely macro threat stemming from these mutinies – which is fiscal.
It seems that the numbers an economist loves – stable, strong, sustainable growth – are not what a population likes. Despite the incumbent winning the 2015 presidential and then the 2016 parliamentary elections (just last month), there are big demands for more pay across the country. It reminds me a little of Zambia in 2011 and arguably the US in 2016 – growth is not good enough unless the population feels real incomes have risen substantially.
None of this is a great way to encourage interest in this piece – which focuses on what is the best macro in Africa – and suggests investors who can stomach illiquidity ($1m trading volume a day) should look at the country.
In a world convinced that Africa Rising is no longer a theme – this country has been acting as a strong economic challenge to that pessimism (indeed many in Africa are doing well – but the theme has been under assault by problems in the top three economies, Nigeria, SA, and Egypt until recently, as well as Mozambique). If Ivory Coast can manage what looks to be a growing challenge to state authority – this bullish story will encourage investors in.
There has been little reaction to the mutiny in the past 10 days or so.
The numbers are pretty amazing – across the board improvements over the last five years, from the Ease of Doing Business to a 52% rise in GDP, to new IPOs, a double of the banking sector, low inflation, a stable currency, a small current account deficit and a budget deficit of just 4% of GDP. Read this and weep, rest of the world. This new arrival in the MSCI African equity universe has a lot going for it, including the right conditions for a banking sector boom. We outline the risks and opportunities in an economy which the IMF estimates is on course to double every decade.
The best macro in Africa
The World Bank reckons Ivory Coast will grow at 8% this year, the second-best figure in Africa after Ethiopia, while the IMF estimates GDP will have risen 118% between 2011 and 2021. This would push per capita GDP up from $1,500 in 2016 (the same as Ghana) to $2,000 by 2021. Meanwhile inflation is at developed market (DM) levels – helped by the stable XOF which has been fixed to the FRF and EUR since 1948 with no devaluation since 1994. Soaring economic growth is neither pushing up consumer prices, nor creating a large C/A deficit – this sits at just 2% of GDP. We think the currency is at fair value. It is easy to argue Ivory Coast has the best macro in Africa.
Many factors behind this success; the banking sector has great potential
There have been multiple drivers of this success. The government has made better progress than most in improving the corruption score and what was a woeful Ease of Doing Business Score (EODB). It has prioritised infrastructure spending that means that at least Abidjan (another ‘Paris’) feels more like Morocco or South Africa than many other countries in SSA. With a three-year IMF deal signed in December, and a focus on developing the financial markets (Ivory Coast joined the MSCI Frontier index in November), there should be a growing number of opportunities for investors.
Perhaps the most interesting from our perspective will be the banking sector expansion. Private sector credit has jumped from 16% of GDP in 2010 to 23% of GDP in 2015, but remains far below Kenya’s 35% or Morocco’s 64% (using identical methodology, or 92% using a broader figure). With mortgages offered around 8%, there is room for the banking sector to double in size as a percentage of GDP, even as the economy also doubles in size.
Ivory Coast is addressing the three areas it needs to, to reduce political risk
All agree that politics is the primary risk for Ivory Coast. A small army mutiny did not deter us from our productive visit last week, but this does support economist Paul Collier’s work highlighting relapse risk in post-civil war countries. Our work suggests there is a base 87% chance of regime stability, a 6% chance of a shift towards autocracy and a 1% chance of Ivory Coast becoming a failed state, but Collier’s work implies the negative risk is higher than 7%.
Fortunately, the country has advanced political reform, with a new constitution and vice-presidential position this month, and political backing for the authorities was shown in the government’s December 2016 parliamentary victory, and the president’s re-election in 2015. Military reforms are also under way. Most important of all, the economy has rebounded strongly since 2011 – and maintaining this is the best way to reduce political risk in the medium term.
Fiscal slippage could create medium-term macro risks, but Ivory Coast can afford it
Where politics might create medium-term risk for the economy is via the budget. The deficit is estimated to have risen to 4% of GDP in 2016, and no deficit has been higher since at least 1998. This is less than half Kenya’s 9% of GDP 2017 deficit target for Kenya or the 10% or so in Egypt, but could become a problem. The army mutiny was purportedly over pay, and buying off the mutineers might cost 0.4% of GDP. Their success has led the civil servants out on strike, and there are reports of discontent in the gendarmerie and police. We can imagine a scenario of twin deficits becoming significant by late 2018.
Today, Ivory Coast can afford some fiscal slippage, given the current enviable macro backdrop. We believe investors should consider investments in the country, as an alternative to riskier macro options elsewhere in SSA.
Charlie Robertson, Global Chief Economist| Twitter @Rencapman| CRobertson@rencap.com
If you have any questions or comments regarding this report, please contact Charles Robertson, Yvonne Mhango or Vikram Lopez @ Renaissance Capital
