In late January 2024, Burkina Faso, Mali, and Niger jointly announced their withdrawal from ECOWAS in response to sanctions that ECOWAS imposed on the three countries following a series of coups d'états. The three countries announced that their departure from ECOWAS would be immediate, but the withdrawal protocol requires them to remain in the regional bloc for up to a year after giving notice. In this context, it is still unclear whether the announced departure will go ahead (see "Burkina Faso's Decision To Leave ECOWAS Highlights Funding Risks And Political Fragmentation In Western Africa," published Jan. 30, 2024).

Leaving ECOWAS doesn't mean leaving WAEMU, and the economic implications of leaving ECOWAS would not be of the same magnitude as leaving WAEMU as Burkina Faso, Mali, and Niger are much more economically and financially dependent on WAEMU than on ECOWAS. However, the heads of the military regimes in Burkina Faso and Niger recently raised the possibility of introducing a new common currency for the Alliance of Sahel States (AES) that Burkina Faso, Mali, and Niger formed in September 2023. Creating a new common currency would mean moving away from the West African CFA franc that the eight WAEMU sovereigns share, and hence leaving the monetary union. Burkina Faso's finance minister has stated that the country will remain a WAEMU member.

ECOWAS currently includes 15 countries: Cape Verde (B-/Stable/B), The Gambia, Ghana (SD/SD), Guinea, Liberia, Nigeria (B-/Stable/B), Sierra Leone, and the eight WAEMU members, Benin (B+/Positive/B), Burkina Faso (CCC+/Stable/C), Cote d'Ivoire (BB-/Stable/B), Guinea-Bissau, Mali, Niger, Senegal (B+/Stable/B), and Togo (B/Stable/B). ECOWAS was founded in 1975 as part of negotiations codified in the Treaty of Lagos. It is a political and customs union of West African states that guarantees the free movement of people and goods between the states. Despite these ambitions, trade and labor integration between member states has remained modest, particularly for the smaller and less prosperous states, some of which have expressed their intention to exit the bloc.

The Decision To Leave ECOWAS Highlights Political Fragmentation In Western Africa

We believe that the announced departure signals growing geopolitical fragmentation in Western Africa, and that this will likely weaken regional and international cooperation, including with other members of WAEMU. Burkina Faso, Mali, and Niger formed the AES following the July 2023 coup in Niger, against which ECOWAS threatened to intervene militarily. The main goal of the AES is to strengthen the three countries' political legitimacy and authority.

At the same time, we don't expect the potential departure of Burkina Faso, Mali, and Niger from ECOWAS to have a substantial economic impact, either on the remaining members or on these three countries, since they are only weakly integrated into ECOWAS. Together, Burkina Faso, Mali, and Niger account for 8% of ECOWAS' GDP, whereas Nigeria alone accounts for more than half (see chart 1).

Chart 1

Generally speaking, ECOWAS members have relatively poor economic and financial interconnections. The trade restrictions that ECOWAS has imposed on the AES will have some economic impact due to Burkina Faso, Mali, and Niger being landlocked countries, but part of their trade remains informal and bypasses sanctions due to porous borders.

We believe that a departure from ECOWAS risks delaying elections and weakening regional and international cooperation in improving the security situation in Western Africa. We think that this could undermine traditional bilateral and multilateral partners' willingness to extend lending to the exiting countries.

Mauritania is the only country to have left ECOWAS (in 2000). Its departure from ECOWAS had a relatively limited impact on its economy and that of the other member states. On the other hand, the impact of Mauritania's exit from what was then the West African Monetary Union (WAMU) in 1973--and therefore its abandonment of the West African CFA franc--was much more significant. Inflation reached double digits, and the new national currency--the ouguiya--has been devalued several times since.

We Don't Expect Any Member State To Leave WAEMU, Nor Any Fundamental Changes In The Monetary Arrangement

We don't expect Burkina Faso, Mali, or Niger to exit WAEMU, the monetary union. This is because, in our opinion, the costs of leaving the fixed exchange-rate area in terms of lost foreign-reserve buffers and protection against currency and interest rate volatility would far outweigh any perceived benefits.

Moreover, these countries' priority is to deal with the threats to their security from significant terrorist activity in their territories. In our view, an exit from WAEMU and the introduction of a new currency, with all its economic, financial, and operational implications, do not present a palatable option for the authorities. Nevertheless, while we assess the risk of an exit from WAEMU as low in the medium term, we don't see it as nonexistent in light of Mauritania's exit from the monetary union in 1973 and Mali's in 1962 (although it rejoined in 1984).

Membership of WAEMU provides an important buffer against external pressures and allows access to the monetary union's capital market

This is particularly relevant in times of political turmoil and security risks, as is currently the case. The 2019 WAEMU currency reform maintained two key elements of the monetary arrangement: the fixed exchange rate with the euro and France's guarantee of unlimited convertibility (see "The Eco Era: What Will West Africa's New Currency Mean For The Region?," published Feb. 17, 2020). The reserves of WAEMU's eight member states are pooled at a regional level at the Banque Centrale des Etats de l'Afrique de l'Ouest (BCEAO). This creates a buffer against country-specific balance-of-payment shocks, especially for smaller economies.

As a member of the monetary union, all members have full access to the pooled foreign reserves at the BCEAO. France's guarantee of unlimited convertibility has long supported confidence in the West African CFA franc's peg to the euro. This, in turn, has helped contain rising inflationary pressures in member countries, even during political crises and commodity price shocks, unlike in most other sub-Saharan African economies.

For example, in 2022-2023, when hydrocarbon and food prices soared, inflation averaged 7.7% in Burkina Faso, 7.4% in Mali, and 4.4% in Niger. During the same period, inflation averaged 37.0% in Ghana, 31.5% in Ethiopia, 17.3% in Angola, 14.2% in Congo-Kinshasa and Rwanda, and 10.9% in Zambia (see chart 2). In addition, the WAEMU economies, especially the largest economies that contribute most to the pooled foreign-exchange reserves, are among the fastest growing in Western Africa (see chart 3).

Chart 2

Chart 3

We have stable outlooks on most of our sovereign ratings on WAEMU members

This reflects our expectation that we don't expect any departures from the monetary union, a devaluation of the West African CFA franc, nor any fundamental changes in the monetary arrangement. Benin has a positive outlook on the back of a strong economic growth forecast and easing external and budgetary pressures.

The Three Sovereigns' Hypothetical Exit From WAEMU Would, In Our Opinion, Test The Monetary Union's Stability

This would raise questions about the long-term future of the West African CFA franc zone. The three WAEMU sovereigns account for 30% of the union's GDP, versus Greece's 1.5% share of euro area GDP when it intended to leave the eurozone (see chart 4).

Chart 4

We do not believe that an exit would, in and of itself, result in other WAEMU sovereigns exiting the monetary zone. However, the three WAEMU sovereigns' departure could initially reduce the other WAEMU members' access to capital markets, especially that of the most fragile members, with negative implications for funding costs and economic growth.

Cross-border financial holdings within the union mean that a lack of confidence in one member could spread to the other members. A country's exit from WAEMU could, in our view, increase near-term volatility in its government bond markets. The spectacle of one WAEMU member being unable to finance basic imports or to prevent bank runs would have a sobering effect on the markets. Contagion risks in WAEMU are significant due to the common investor base and mutual exposure to private and sovereign borrowers, including cross-border investments in other member states' debt securities. For example, according to UMOA-Titres, Burkina Faso, Mali, and Niger issued 30% of the regional debt held by Benin. On the other hand, WAEMU member states excluding the AES issued half of the regional debt held by Burkina Faso (see table 1).

Table 1

At the same time, investors seem to differentiate between WAEMU member states. While Burkina Faso cancelled its bond auction on the regional capital market a few days after the AES announced its departure from ECOWAS, Benin managed to issue debt on the international market with great interest from investors (see "Benin's Reforms Pay Off As Debut U.S. Dollar Issuance Sees High Demand Despite Regional Tensions," published Feb. 7, 2024). This followed Cote d'Ivoire's first Eurobond issuance in Sub-Saharan Africa for two years (see "Cote d'Ivoire's Eurobond Issuance Marks Return To Market For Sub-Saharan Africa After Two Years," published Jan. 24, 2024).

According to data from the Bank for International Settlements, global gross exposure to Burkina Faso, Mali, and Niger is less than $1 billion per country as of September 2023 (see chart 5). The WAEMU banking sector is largely funded by customer deposits and has limited external exposures. Nevertheless, there is a high degree of interconnectedness in the banking sector because of the prevalence of pan-African banking groups. The share of capital stemming from WAEMU is material, accounting for 40% of total banking capital in Niger, 30% in Mali, and 20% in Burkina Faso.

The combined size of the banking sector in the three countries represents one-third of WAEMU's total banking assets. Credit growth largely exceeds deposit growth in Burkina Faso and Mali, which requires them to access the BCEAO refinancing facility. While the deposit insurance scheme is operational but has not reached its target level, other resolution-funding mechanisms, including banks' own bail-in capital or emergency liquidity assistance, are not in place. Given the size of the regional private banks, we would expect the authorities to prioritize a market-led solution to resolution.

Chart 5

Leaving WAEMU Would Have Much Greater Economic Consequences Than Leaving ECOWAS

Burkina Faso, Mali, or Niger giving up the West African CFA franc would likely have the following repercussions, among others:

The creation of a new currency that would probably be much weaker than the West African CFA franc

In 1962, Mali decided to replace the West African CFA franc with a new currency, the Malian franc. Mali rejoined WAMU and readopted the West African CFA franc in 1984. The Malian franc had a value equal to that of the West African CFA franc when it was introduced in 1962, but it was devalued in 1963 and again in 1967. This period was marked by foreign-exchange outflows and persistent high inflation, alongside large-scale fiscal monetization.

The new currency would most likely not be pegged to the euro and would not benefit from France's guarantee of convertibility

We believe that any member of the monetary union that reintroduced a national currency would likely precede such reintroduction with capital controls and bank-deposit withdrawal limits to mitigate a potential capital flight. The exiting cash-strapped government could issue IOUs to pay employees and suppliers. This would very likely be contentious, especially with respect to the salaries of military personnel. These IOUs may circulate as a secondary means of exchange, and, over time, lead to a national currency. The latter would operate as sole legal tender in the country after the government had legislated to redenominate financial contracts wherever legally possible.

The outgoing sovereigns would no longer have access to the BCEAO's pooled reserves

These are currently of more benefit to the members that contribute the least, including Burkina Faso, Mali, and Niger. Access to BCEAO's pool of reserves has boosted investor confidence and provided protection against heightened external pressures in recent decades. This has also been the case in the Central African Economic and Monetary Community (CEMAC), which benefits from a similar monetary arrangement. We believe that the exiting sovereigns' share of foreign-exchange reserves would not be immediately reimbursed to them. This would be a liability for WAEMU, which it is likely to resolve at a later stage, once the initial financial uncertainties triggered by the exit have settled.

Exiting sovereigns would lose access to the regional sovereign bond market, most likely resulting in them defaulting on their commercial debt

Member states' presence in regional financial markets has been growing as they increasingly rely on them for funding, issuing debt in West African CFA francs. We believe that a country exiting WAEMU in a distressed state would likely default on its obligations, both to its official and commercial creditors. Under our criteria, only a payment default or distressed debt exchange affecting commercial creditors constitutes a default. In this context, it is worth recalling that Mali and Niger defaulted on their commercial debt in 2021 and 2023, respectively, following WAEMU's decision to ban them from accessing the regional financial market. Niger defaulted again on Feb. 19, 2024.

A distressed exit from the monetary union would likely provoke a significant and possibly prolonged recession, making the exiting sovereign's debt burden unsustainable

This would be all the more likely if the value of its foreign-currency-denominated debt (including the West African CFA franc), as measured in the new national currency, increased as it depreciated against foreign currencies. In Burkina Faso's case, most of its sovereign debt is denominated in West African CFA francs, and, under our criteria, we would view any unilateral decision to change the denomination of payments as a default.

Furthermore, Burkina Faso, Mali, and Niger are highly dependent on importing energy, food, and medicine, among other necessities. With a shortage of West African CFA francs, even short-term trade financing might dry up, putting further pressure on economic prospects and living conditions. We also envisage a wave of litigation following any redenomination of contracts. An overwhelmed justice system could lead to prolonged economic and investment paralysis while these cases were being heard. Political logic would likely preclude the sovereign from continuing to pay capital market creditors if they are unlikely to extend near-term credit to the government.