Moody’s on WAEMU: Lower reserves raises external vulnerability risk

Moody’s, a renowned credit rating agency, recently highlighted significant challenges facing sovereigns in the West African Economic and Monetary Union (WAEMU), primarily due to a decline in external reserves and a heightened debt service profile. Mickaël Gondrand, Assistant Vice-President Analyst at Moody’s, discussed these issues and shared insights on the region's outlook for 2024. Gondrand pointed out a notable shift in the region's foreign exchange reserves, emphasizing a substantial decrease over the past two years. This decline was attributed to a widening regional current account deficit and a slowdown in capital inflows, which collectively exerted pressure on the reserve pool. Such a prolonged drop in reserves is unprecedented in recent decades for WAEMU, a currency union operating under a fixed exchange rate regime. Gondrand emphasized the critical role of FX reserves in facilitating transactions, financing imports, servicing foreign debts, and serving as a buffer against economic shocks. The diminishing reserve coverage signaled an increased risk of external vulnerability according to Moody's assessment. Despite these challenges, Gondrand acknowledged the strength of the region, underscoring the stability and resilience of the currency union, supported by the guarantee from the French treasury. The involvement of the French treasury offers a layer of protection against balance of payments crises for WAEMU countries. Looking ahead, Moody’s anticipates a gradual recovery in the region's reserves throughout the year. Moving on to individual countries within the region, Gondrand highlighted specific factors impacting their economic outlook. He mentioned the oil producers like Senegal and Niger, noting upcoming oil and gas projects that are poised to improve their current account deficits. The commencement of operations of the pipeline in Niger and the entrance of new oil projects in Senegal are expected to contribute to more favorable current account dynamics compared to recent years. Gondrand also pointed out additional factors supporting the rebound in reserves, such as a potential return of market access, IMF support through funding programs, and proactive measures by the regional central bank to safeguard reserve coverage through various policy tools. The recent re-entry of Cote d'Ivoire, the largest economy in the zone, to the Eurobond market serves as a positive indicator of growing investor confidence. Gondrand addressed concerns about inflation across the region, attributing the rise to global commodity price hikes since 2022. In response, the central bank implemented monetary policy tightening measures, including rate hikes and liquidity adjustments. Despite inflationary pressures, the nature of the currency union has helped mitigate inflation levels compared to other African economies. When queried about the likelihood of a balance of payments crisis or devaluation, Gondrand expressed optimism that these scenarios are improbable. He highlighted the convertibility guarantee provided by the French treasury, offering a safety net for the regional central bank in times of low reserves. The historical rarity of devaluations in the zone further supports Moody's confidence in the stability of the exchange rate peg. In conclusion, Gondrand reiterated Moody’s expectation of a gradual recovery in regional reserves, fueled by factors like market access, IMF support, and improved current account dynamics from oil projects. Despite the challenges posed by lower reserves and heightened debt profiles, Moody's maintains a positive outlook for WAEMU in 2024, emphasizing the region's resilience and potential for economic recovery.