S&P: Waemu sovereigns less directly exposed to geopolitical tensions & tariffs

S&P Global Ratings has indicated that escalating global geopolitical tensions, uncertainties surrounding U.S. policies, security challenges, climate-related events, and volatile commodity prices are posing financial and economic risks to African countries. However, S&P notes that sovereigns within the West African Economic and Monetary Union (WAEMU) appear to be less directly exposed to these risks compared to their peers. Sebastien Boreux, Sovereign Analyst at S&P Global Ratings, provided insights to CNBC Africa on the factors that could buffer WAEMU countries against these challenges. WAEMU has several strengths that could help them navigate through uncertain times. The region experienced a significant increase in foreign exchange reserves last year, enhancing their financial stability. With a coverage ratio of 4.7 months, WAEMU has shown resilience compared to the 3.3 months recorded in 2023. Additionally, WAEMU has been one of the fastest-growing regions in Africa, with robust growth, declining twin deficits, and low inflation rates compared to other regions on the continent. The support from international donors and the benefits of WAEMU membership also contribute to the macroeconomic stability of the region. While some WAEMU countries heavily rely on hydrocarbon exports to fund their budgets, Sebastien highlighted that the region, as a whole, is less dependent on oil and other commodities than countries like Nigeria. Despite the potential impact of falling oil prices on budgetary performance, WAEMU countries maintain diversified export baskets, reducing their vulnerability to external shocks. Sebastien projected that hydrocarbon projects in countries like Senegal and ongoing industrialization in Benin and Cote d'Ivoire would drive economic growth. The stability of the currency, strengthened by WAEMU membership, is expected to attract foreign investments and promote growth in the region. Sebastien acknowledged that the sweeping tariffs imposed by key trading partners could slow down trade for WAEMU sovereigns, impacting their economies. The uncertainties surrounding these tariffs pose downside risks to the economic outlook not only for WAEMU but globally. However, Sebastien expressed confidence that WAEMU's buffers and economic fundamentals would enable them to outperform and adapt to the evolving global trade landscape. Despite the positive outlook for WAEMU as a whole, Sebastian emphasized that individual member countries face unique challenges. Senegal, the only WAEMU country with a negative outlook, grapples with fiscal slippage and debt issues. To improve its rating, Senegal must implement reforms to reduce deficits, engage with the IMF for support, and strengthen its fiscal position. Sebastien believes ongoing negotiations with the IMF could lead to a program by the second half of the year, setting Senegal on a path to financial recovery. As WAEMU countries navigate through uncertain times, continued reforms, international support, and prudent fiscal management will be key in ensuring their resilience and sustainability in the face of global challenges.