The Newly Signed IMF Program Will Help The Country Address Important Vulnerabilities

On Dec. 18, 2019, the IMF board approved Equatorial Guinea's funding--a three-year arrangement under the Extended Fund Facility (EFF) that gives it 205 million in Special Drawing Rights (SDR; around US$283 million; 130% of the country's quota), with a first immediate disbursement of around SDR29.3 million (around US$40 million). This means all six CEMAC countries now have IMF-financed reform programs, three years after the Yaoundé Summit called for coordinated response to the regional economic crisis stemming from the drop in oil prices.

Several factors had delayed Equatorial Guinea's IMF funding. These included governance and transparency issues, unreliable statistical data, and opaque financial accounts--notably those of the state petroleum company GEPetrol.

The EFF program's main objectives for Equatorial Guinea will be to boost sustainable and inclusive economic growth, after several years of severe recession (see chart 1), to improve governance and transparency, address financial sector vulnerabilities, and fight corruption. It also aims to foster diversification in an economy overwhelmingly dominated by oil production.

Chart 1

Before the 2014 drop in international oil prices, Equatorial Guinea was a top contributor to CEMAC's pooled foreign-exchange reserves. Its imputed gross external assets dropped to just Central African CFA francs (XAF) 20 billion at end-2017. By contrast, in 2012 it had contributed XAF2,186 billion (of XAF8,871 billion total gross external assets). Therefore, S&P Global Ratings expects this IMF program to help lower external pressure in the region, by bringing external financing and acting as a policy anchor to Equatorial Guinea.

In Turn, Reform Implementation Backed By The IMF Will Support The Monetary Union

Given CEMAC's heavy reliance on oil and national authorities' slow policy adjustments, the 2014 drop in global oil prices hit the region particularly hard. Foreign-exchange reserves slumped (see chart 2). Between June 2014 and June 2017, before the implementation of the first IMF programs, CEMAC's gross external assets plunged by almost 70% to XAF2,625 billion from XAF8,587 billion. Growth and the twin deficits also deteriorated significantly (see table 1). Financial assistance from the IMF and donors--notably World Bank Group, African Development Bank, France, and the European Union--which has been much larger than in previous programs, was key to stabilizing CEMAC's external position and allowing a slight increase in international reserves, despite still-adverse underlying dynamics (see chart 2).

More recently, positive developments in the oil sector and the effects of reforms have supported an increase in CEMAC's reserves. They were XAF4,284 billion in August 2019, up 63% from June 2017. While reserves are estimated to reach 3.3 months of import coverage by end-2019, external buffers remain low.

Chart 2

Chart 3

IMF-supported reforms following the 2016 Yaoundé Summit have helped stabilize the region's macroeconomic situation and key economic policy buffers are being rebuilt. However, governance and policymaking remains weak amid the persistent risk of domestic conflicts. Security concerns and social protests will continue to reflect the lack of inclusive growth. Infrastructure shortfalls and public debt remain high, while efforts to diversify away from oil are slow. CEMAC's economies remain exposed to swings in international prices. Supporting the agricultural sector, one of the largest employers in the region and vulnerable to adverse weather patterns, remains a priority. In our view, the abovementioned vulnerabilities continue to weigh heavily on economic prospects and creditworthiness in Cameroon and Congo-Brazzaville.

Following IMF approval of Congo-Brazzaville's (July 2019) and Equatorial Guinea's (December 2019) programs, we believe other CEMAC members will negotiate two-year extensions to their programs, currently scheduled to run until mid-2020. If fully implemented, and given that financial support from donors is contingent on the IMF board's approval of semiannual reviews of agreed-upon reforms, the coordinated programs of all CEMAC members will help improve their budgetary and external positions and address lasting structural weaknesses. We note that, at this time, the IMF has postponed its first review of Congo-Brazzaville's program.

CEMAC Membership Still Supports Economic Stability

Regional institutions also have a key role to play to support economic recovery. The CEMAC Commission and BEAC are charged with ensuring macroeconomic convergence, notably on fiscal policy within the monetary union, and the stability of all member states. With this in mind, they have worked closely with the IMF to implement policies that support the objectives of individual IMF programs and increase CEMAC foreign-exchange reserves.

Although some economic commentators have questioned whether the current monetary arrangement is appropriate, especially at the onset of the crisis, we think there are strong arguments in favor of the union (see "Who's Most At Risk From A Devaluation Of Africa's CFA Franc Currencies?," Dec. 4, 2017). First, the pooling of foreign currency reserves at BEAC acts as a form of risk sharing in a region where member states are frequently exposed to disproportionate environmental, social, and governance risks (particularly drought and civil unrest). In addition, small economies--the entire CEMAC population is just 37 million or less than one-fifth of Nigeria's--can benefit from outsourcing monetary policy to a more arms-length institution, chiefly for improved credibility. Furthermore, the French Treasury remains committed to the euro convertibility of the CFA franc, which we view as important for economic stability.

On the other hand, CEMAC members have agreed to comply with macroeconomic conditionality monitored by the Commission and the IMF, as well as the requirement that regional central banks hold external assets that cover at least 20% of sight liabilities (short-term debt including current deposits). Under this agreement, half of BEAC's net external assets must be deposited in an operation accounts at the French Treasury. These assets are readily available for CEMAC's balance of payment operations and guaranteed against EUR-SDR depreciation and remunerated, with a minimum interest rate paid on deposits (this applies to the mandatory 50% but not any additional deposits). This framework and the French Treasury's guarantee of the convertibility of the CFA franc in both its monetary unions (the West African Economic and Monetary Union [WAEMU] and CEMAC) is unique among currency regimes in emerging markets. More typically, small economies will use the currency of another sovereign without a formal agreement. The price CEMAC countries pay for their membership is a loss of monetary and, to some extent, fiscal flexibility. We have seen in the past 10 years that this often generates tensions between politicians' economic ambitions and their ability to realize them without putting at risk economic and fiscal stability.

In this context, the CEMAC countries have announced their intention to analyze the potential evolutions of the monetary framework with France. Currently, the WAEMU is moving toward using the Eco, a new single currency pushed by the Economic Community of West African States. It has announced that this will first be introduced in the WAEMU in 2020, during French President Macron's visit to Ivory Coast in December (see "CFA Franc Reform Will Have No Immediate Effect On Sovereign Ratings In The West African Economic And Monetary Union," published Dec. 23, 2019, on RatingsDirect). Details and timing are uncertain--the commission and the Central Bank have been instructed by the members' heads of state to submit proposals. We expect the peg to the euro and the guarantee of convertibility will remain in place, however.