Ivory Coast – Africa’s best macro story?
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 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 US$1,500 in 2016 (the same as Ghana) to $2,000 by 2021. Meanwhile inflation is at developed market 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 current account 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. It has prioritised infrastructure spending that means that at least Abidjan feels more like Morocco or South Africa than many other countries in sub-Saharan Africa.
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 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 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 sub-Saharan Africa.
Charles Robertson is global chief economist at Renaissance Capital.