GDP growth: still strong, but normalising
We expect real GDP growth to average at 7.5% y/y over the next 2-y, despite political concerns over the 2020 presidential elections and military agitation. Net exports have shown positive movements: cocoa prices have risen, which will incentivise agricultural activity. The agro-processing sector continues to develop, with many investments announcement made in recent months.
Balance of payments: stable C/A deficit
We expect the C/A deficit to narrow to USD1.1bn (2.5% of GDP) this year, before rising towards USD1.6bn (3.0% of GDP) next year. We expect FX reserves to rise, potentially reaching USD6.2bn by the end of this year and USD6.7bn by the end of next year. The potential cocoa production coordination agreement between Côte d’Ivoire and Ghana should prove supportive. Despite losing the case against Ghana over disputed waters, the country has other smaller proven oil reserves which should attract investments. Tourism income in Côte d’Ivoire continues to rise. The Eurobonds will continue to receive an outsized share of portfolio flows, compared to the domestic market. This is to be expected, given the lower yields on offer in the domestic market. Indeed, the authorities may issue more euro-denominated bonds in coming years as EUR-based investors find these attractive due to limited FX risk.
Monetary policy: still a holding pattern
The BCEAO is unlikely to change its monetary policy stance any time soon. We expect headline inflation to average 0.7% y/y this year, as food inflation pressures subside due to improved weather conditions. Headline inflation was 0.1% y/y in April, indicating that price pressures remain subdued. As expected, money supply grew modestly in Q1:18 rising to 15.4% y/y, from 5.1% y/y in Jan 17.
FX outlook: still managing EUR/USD
We are happy to keep our long 2-y USD/XAF NDF position. For investors and corporate treasurers who require XOF locally, the commission charged by banks can vary depending on the point-in-time during the cocoa exporting cycle. With the external environment improving, rumours about a potential devaluation or a total depeg of the XAF and/or XOF from the EUR have died down. We think this will remain so over the course of the next 12-m. In any case, any currency movement will come with sufficient warning.