Rapid rebound: Recovery is well under way following years of uncertainty

A heavyweight within the West African Economic and Monetary Union (Union Economique et Monétaire Ouest-Africaine, UEMOA), accounting for 35% of the eight-member region’s GDP, Côte d’Ivoire’s growth is a bellwether for Francophone West Africa. Driven by rising public spending and public-private partnerships (PPPs) in infrastructure projects, economic growth has rebounded to high single-digits in the years since 2012.

While substantial debt relief and support from development finance institutions is underwriting fast-rising public investment, attracting both foreign and domestic private investment will be crucial to attaining the government’s goal of becoming an emerging economy by 2020 – an area where the government has seen some early successes, with a six-times oversubscribed eurobond and a rise in PPPs.

“The rebound now under way is based on Côte d’Ivoire’s strong fundamentals,” Pascal Yembiline, chief country economist at the African Development Bank (AfDB), told OBG. Eager to regain its position as the unrivalled economic hub for the region, the authorities are aggressively reforming the business climate to support private sector development.

Sharp Rebound

Recovery in economic growth following the end of a sustained period of turbulence in 2011 has been swift, even if the dividends of peace will take longer to share. Serious unrest curbed average annual growth at 0.1% between 1999 and 2007 and 1.6% in the five years thereafter, according to IMF figures. As a result of the violence following the disputed 2010 elections, the economy contracted 4.7% in 2011 while per capita income fell by 7.5%. As recovery efforts bore fruit, they gave way to long-term development planning. Public spending combined with deferred consumption drove a rebound in growth to 9.8% in 2012 and 8.7% in 2013, and the IMF forecast growth of 8.2% in 2014. GDP reached CFA14.13trn (€21.2bn) in 2013 according to the Ministry of Economy and Finance, which forecast 10% growth for 2014. This would mean aggregate real growth in the three years since 2011 will total 25%, compared to aggregate growth of 15% from 2000 to 2011.

Côte d’Ivoire’s traditional growth drivers – including cocoa, cashew nuts and oil – have also recovered strongly on improving soft commodity prices, aside from rubber. While the agricultural and mining sectors – which together account for around 33% of GDP, according to the AfDB – are recovering strongly with renewed investment, the growth drivers in the secondary sector, which accounts for 22% of GDP, remain construction, agro-processing and oil refining.

Meanwhile, rebounding domestic consumption is fostering rapid growth in the services sector – which makes up 48% of the economy – particularly in banking, telecoms and trade. Thus, while growth in the primary sector has slowed from 2.3% in 2012 to 2% in 2013, expansion of the secondary and tertiary sectors remained strong at 16.4% and 12.4%, respectively.

Inclusiveness

Real per capita income has started to rebound from its 7.5% contraction in 2011 to growth of 6.6% in 2012 and 5.6% in 2013, according to the IMF. This growth has subsequently translated into improved employment statistics, with around 530,000 new entrants to the job market in 2013, compared to the creation of 715,000 new jobs, resulting in a drop in total unemployment from 8.7% to 6.7%, according to the Agency for Studies and Employment Promotion.

While the recovery in aggregate figures has been sharp, the dividends have been unevenly distributed. For the population of 22.6m growing at 2.8% per year according to the World Health Organisation, the lost decade prompted a fall in living conditions. Per capita income, at 2005 constant prices, fell from $1973 in 1999 to $1642 by 2011, according to the World Bank. By 2013 the country had a poverty rate of 49%, measured as those living on under $1.25 a day. While the unemployment rate stood at 6.7% in 2013, the majority of unemployed (75%) are under the age of 35, where the jobless rate is 8.6%, with this increasing to 39% for university graduates, according to the AfDB.

Planning To Emerge

The National Development Plan (NDP) adopted in March 2012 aims to reduce poverty to 16% by 2015 and set the country on course to becoming an emerging economy by 2020. Through a series of reforms, including in the revenue-generating coffee and cocoa sectors, the plan includes a major increase in public investment in infrastructure, agriculture, and key social enablers like health and education. “We want to become the hub of the sub-region, the gateway to West Africa, a market of over 300m inhabitants,” President Alassane Ouattara told the Invest in Côte d’Ivoire conference in January 2014.

Meeting the objectives of the NDP – which also looks to ensure broad-based and inclusive growth, through improved employment and social welfare – requires bold efforts from the government, including stimulating double-digit growth from 2014.

Conscious of the limits on government spending, authorities expect growth to be driven by both public and private investment. While the government aims to boost the public investment rate to 9.7% of GDP by 2015, up from 3% in 2011, it expects 54% of the planned CFA11trn (€16.5bn) investment in infrastructure between 2012 and 2015 to flow from private investors through PPPs. As the state focuses its investments on infrastructure, good governance, law and order, and small and medium-scale industry, it expects private firms to invest in agro-industry and infrastructure PPPs, particularly in power and transport.

The plan is already yielding results in terms of the required spending, with aggregate (public and private) investment rising from 8.2% of GDP in 2011 to 13.7% in 2013, according to the regional central bank, the Central Bank of West African States (Banque Centrale des États de l’Afrique de l'Ouest, BCEAO). The economic recovery has also supported higher spending, with the aggregate savings rate falling from 19.9% of GDP to 17.4% in the same span.

Despite further expansion under the 2014 budget, the authorities expect to consolidate their fiscal position over the medium term. The immediate priority is to clear domestic arrears that are owed to government contractors, an issue which has emerged as a key brake on private investment (see analysis).

Debt Support

Execution of this bold programme has been aided through extensive international and donor support. Upon resolving the security crisis, in November 2011 Côte d’Ivoire signed a three-year extended credit facility with the IMF worth $616m. The facility is linked to strict limits on regional and international borrowing, the formulation of medium-term fiscal and debt strategies, and reform of key sectors.

With good progress in implementing these reforms, the cocoa producer completed the Highly Indebted Poor Countries initiative in June 2012 and benefitted from substantial debt relief, six years after other West African states. The Paris Club of creditors cancelled $6.5bn of bilateral debt, while the World Bank and the IMF led the cancellation of $4bn in multilateral debt, roughly halving the stock of external debt from 55% of GDP in 2011 to 31% in 2012 and 28% in 2013, according to the IMF. In parallel, the BCEAO led the restructuring of regional obligations – both Treasury bills (T-bills) and bonds – on which Côte d’Ivoire had defaulted during the crisis.

While the stock of regional CFA-denominated debt rose swiftly from 11.2% of GDP in 2007 to 18.6% by the end of 2012, according to the IMF, the central bank brokered agreements in November 2011 and March 2012 between the government and securities holders to restructure the CFA607bn (€911m) – 5.3% of GDP – in T-bills that it had rolled over during the 2010-11 crisis. These were converted into two-year Tbills and three- to five-year bonds, normalising relations with the regional market and allowing Côte d’Ivoire to restart issuance from 2012.

The gross stock of public debt thus declined from 74% of GDP in 2011 to 49% in 2012 and 43% in 2013, according to the IMF. International donors have gone beyond debt restructuring to concessional support for the government’s programmes, with the Paris Club of international lenders pledging $8.6bn in new loans for infrastructure and job-creating investments, while the International Finance Corporation committed $1bn in new investment in the three years to 2015. France has opted for an alternative form of debt relief, known as a debt relief and development contract, whereby it channels aid worth €2.9bn in exchange for repayment of the debt. Most encouragingly, given the challenges the country faced previously with its debt load, the recent eurobond issuance of $750m was a great success, coming in at a rate below that of Kenya and Ghana (at 5.6%) and six times oversubscribed, demonstrating a strong appetite by investors for Ivorian debt.

Monetary Stability

A stable macroeconomic environment is ensured through Côte d’Ivoire’s membership of the eight-member UEMOA. Under the region’s convergence criteria, member states aim to eliminate basic fiscal deficits and domestic arrears, cap total debt at 70% of GDP and maintain average inflation at under 3%, although compliance has been uneven.

The Dakar-based BCEAO conducts monetary policy according to a peg of CFA655.96 to the euro, with the convertibility guaranteed by the French Treasury, while institutions like the Togo-based West African Development Bank (Banque Ouest Africaine de Dé veloppement, BOAD) channel concessional financing to key development projects. Operation of the regional currency block – and that of a regional real-time gross settlement system for bank transfers – has encouraged greater intra-regional transaction flows than in the rest of Africa. Only around 10% of transactions are sent in dollars, compared to 69% in the East African Community, while the rest is handled in CFA and dominated by transfers between Côte d’Ivoire, Senegal and Mali, according to the Society for Worldwide Interbank Financial Telecommunication.

The central bank typically follows European Central Bank interest rate movements with a lag, though it also takes account of regional inflation. As annualised inflation eased from 2.8% in December 2012 to 1.7% in 2013 in UEMOA, and from 4.9% in 2011 to 1.3% in 2012, rebounding to 2.9% in 2013, for Côte d’Ivoire, the BCEAO eased interest rates in 2013. It cut its benchmark lending rate by 25 basis points twice, in March and September 2013, to 3.5%, while its minimum Tbill auction rate fell to 2.5%. However, given the abundant liquidity in the financial system, particularly in Côte d’Ivoire, with banks eager to buy government securities and lend to top-tier corporates, the impact of monetary policy on real lending rates remains highly diluted. “Monetary policy is inefficient because the transmission mechanism of interest rates on the real economy is weakened because of the relatively underdeveloped financial sector,” Amina Coulibaly, an economist at the IMF, told OBG.

Trade Pressures

Higher aggregate investment has driven a rapid rise in imports, which had fallen from 45.9% of GDP in 2010 to 37.9% in 2011 amid the crisis before rebounding to 47.6% in 2012 and 47.8% in 2013, according to the IMF. Although exports had remained strong during the crisis, accounting for 54.2% of GDP in 2010 and 57.7% in 2011, they fell to 52.8% in 2012 and 51% in 2013 as terms of trade for key commodities like rubber declined and as investments in cocoa slumped and the productivity of ageing plantations fell. Indeed cocoa production slumped from 1.51m tonnes in the 2010/11 growing season to 1.34m tonnes in 2011/12, before rebounding to 1.47m tonnes in 2012/13 and 1.74m tonnes in 2013/14, according to figures from Ecobank.

While these two trends created a current account deficit rising from 1.8% of GDP in 2012 to 3% in 2013, reform in the cocoa and coffee sectors, which together account for roughly 75% of agricultural exports and 25% of total exports, and a rebound in prices since 2013 should yield an improved export performance in coming years, according to research from BNP Paribas.

By January 2014 an estimated 932,000 tonnes of cocoa had arrived at Ivorian ports, a 30% rise year-on-year (y-o-y). Meanwhile, the government aims to expand oil production from 38,000 barrels per day in 2012 to 200,000 by 2018. The outlook for terms of trade is also good following a 25% appreciation in global cocoa prices in 2013, with further upside in 2014 given rising global demand, according to BNP Paribas. However, while exports are projected to rise by 11-12% per year over the next decade, they are likely to be overshadowed by faster growth in imports, expected at above 13% annually by the IMF.

Equipment and capital goods have been crucial drivers of import growth, with 25% y-o-y growth in the first half of 2013, according to BNP Paribas. “We have seen growing import substitution for basic foodstuffs, which led to lower agricultural imports, while better terms of trade for commodities other than rubber led to higher export earnings in 2013,” Yembiline told OBG. “However, capital goods imports should drive the current account deficit going forward.”

The IMF expects the current account deficit to widen to 4.7% of GDP in 2014, 6.3% in 2016 and 7.3% by 2018, although including aid inflows these figures will be a lower 2.6%, 4.5% and 5.8%, respectively.

Rising Foreign Investment

Inward foreign direct investment (FDI) flows recovered following the crisis, rising from $286m in 2011 to $478m in 2012, according to UN Conference on Trade and Development ( UNCTAD) figures. The stock of existing foreign investment is already significant relative to the economy’s size, reaching $7.65bn in 2012, up from $2.48bn in 2000. While this accounted for roughly 2.7% of GDP according to KPMG, the IMF expects it to rise to 3% of GDP from 2014, driven by rapid economic growth and the impact of recent government reforms aimed at improving the business climate (see analysis).

While Lebanon and France overwhelmingly dominate sources of FDI, accounting for 52.7% and 26.3% of new investment, respectively, in 2012, according to government figures, Italy and Japan also feature as prominent investors with 8.9% and 8.3% of the total, respectively. The cement industry was the single largest target for FDI in 2012, given large investment in a new cement plant by Nigeria’s Dangote Group drawn by the significant infrastructure build-out. Yet hydrocarbons, hospitality and food manufacturing are also major drivers of inward FDI, accounting for 18.5%, 14% and 13.4% of investment in 2012, respectively. The government’s promotion of investment, evident at events like the Invest in Côte d’Ivoire conference in January 2014, is helping to drum up interest. The newly established Investment Promotion Agency (Centre PROMOTION EFFORTS: de Promotion des Investissements en Côte d’Ivoire, CEPICI), reported CFA506bn (€759m) in investment intentions received in 2013 – a 131% rise over the CFA219bn (€329m) of 2012. Some CFA374bn (€561m) of the total was reported as commitments from foreign investors, a figure which reportedly rose to CFA443bn (€665m) following the January 2014 conference, although the actual number of projects executed has tended to lag.

“We think that the actual inward FDI flows are significantly lower than the stated intentions to invest,” Jean-Michel Lavoizard, CEO and co-founder of Advanced Research & Intelligence Services, a private intelligence firm, told OBG. “We think the conversion rate is below 10%, compared to 30% on average.”

Structural Reforms

The increase in FDI is in part a result of the government’s policy programme. Under the NDP, and aside from efforts to streamline investment procedures, the government has embarked on wide-ranging structural reforms that have helped boost quality and productivity in key sectors.

The earliest restructuring was in the traditionally opaque cocoa and coffee industry, a move upon which donor support was predicated. Starting in 2011 the CCC replaced the previous system of spot sales with a forward-auction market, whereby grinders and exporters bid for export licences for 70-80% of output, with the remainder sold on spot. These reforms are aimed at fixing sales prices in advance and improving the predictability of state revenues, and have been largely successful, with two-thirds of the 2013/14 harvest pre-sold in 2013, according to Ecobank.

The government has also been pushing ahead with reforms to its public finances. In early 2012 it enacted revisions to the public pension system administered by the two state-owned pension administrators, traditionally chronically in deficit. By raising the retirement age from 55 to 60 and increasing contribution rates from 8% of salary to 12% in 2012 and 14% in 2013, increasing the cost of retirement savings by 0.3% of GDP according to the IMF, the reform was key to reducing the fiscal burden of formal-sector pensions.

Building on these early successes, in December 2013 the prime minister announced a programme to restructure state holdings in commercial enterprises with a view to privatising several and enhancing the efficiency of key concerns like state-owned banks. Reviving the privatisation committee that had led state sales in the late 1990s, the government aims to make significant progress in 2015.

The government will pull back from the primary sector by selling stakes in gold miner Société des Mines d'Ity, oil palm producer Palmafrique, rubber producer Tropical Rubber Côte d’Ivoire, sugar producers Sucrivoire and SN Sosuco, as well as meat manufacturer SIVAC. Other companies in which the state holds a stake due for privatisation include engineering firms CI Engineering and Sonitra, industrial development agency IPS-WA and publishing house NEI-CEDA.

In the banking sector, the government contracted PwC to advise it on restructuring state-owned banks, and it is expected to sell 10% of BIAO-CI and 20% of SIB through initial public offering and an additional 29% of SIB to the existing majority investor, Morocco’s Attijariwafa Bank. While these sales should be relatively straightforward, the restructuring of its five majority-owned lenders will be more challenging given that all but Banque Nationale de l’Investissement (BNI) are net equity negative. While the government is expected to sell the three smaller state-owned banks – BFA, BHCI and Versus Bank – it is likely to retain control and merge BNI and the Caisse Nationale des Caisses d'Epargne (see Banking chapter).

PPPs

PPPs are also one of the key focal points for the government’s reform agenda. While Côte d’Ivoire has a long track record of such projects, particularly in port and airport management, the NDP includes roughly 60 PPP infrastructure projects. Having enacted a new Electricity Code in February 2014 that allows greater private investment through independent power plants (IPPs) and broader rural electrification, the National Committee in Charge of Promoting and Developing PPPs is steering investments with donor support.

“We have established a PPP centre to help member states identify and formulate projects where private participation is viable,” Oumar Tembely, BOAD’s chief of resident mission in Côte d’Ivoire, told OBG. “While the first priority is IPPs, we also see significant opportunities in transport, such as the €1bn urban train from Abidjan to Bouet Port.”

In power, the authorities expect to boost total generation capacity from 1600 MW in 2013 to 4000 MW by 2020, driven by expansions of existing IPPs and greenfield projects (see Energy chapter). Private investor Finagestion, majority owned by private equity fund manager Emerging Capital Partner, is investing €343m to expand capacity at the existing Ciprel IPP by 222 MW, to a total of 543 MW.

Meanwhile, fellow private equity fund Actis is backing a $450m expansion of the existing Azito IPP, adding 139 MW and bringing capacity to 427 MW on completion in 2015, through its holding in power plant operator Globeleq. Finally, China’s Sinohydro is developing the 274-MW Soubré hydroelectric plant in the southwestern Bas-Sassandra region, backed by a €572m concessional loan from China’s EximBank.

The transport sector offers a wide range of PPPs, including a second terminal at Abidjan’s port to handle containers and bulk cargo (see Transport chapter). The concession was awarded to a consortium led by Maersk subsidiary APM Terminals in 2013 with CFA300bn (€450m) investments planned, although competitor CMA-CGM is appealing the decision. A further container terminal at San Pedro is also being offered as a PPP, with investments of CFA178bn (€267m) planned. The other landmark project is the capital’s third bridge, developed as a toll-road concession at a cost of $300m by French consortium Socoprim, 49% backed by Bouygues alongside the government and the AfDB-led Pan African Infrastructure Development Fund. In rail, the government is tendering a CFA678bn (€1.02bn) line from San Pedro to Man and a CFA655bn (€983m) light urban line in Abidjan.

Job Creation

While such large-scale infrastructure projects are crucial to easing logistics bottlenecks, the authorities are aware of the pressing need to reduce the rate of unemployment – which stood at 6.7% in 2013 – ahead of presidential elections in late 2015. As such it is seeking to support the growth of the country’s 60,000 small and medium-sized enterprises (SMEs), which account for 80% of registered firms yet only 18% of GDP and 23% of employment.

In early 2014 the Ministry of Commerce unveiled its Phoenix plan aimed at doubling the number of SMEs to 120,000 by 2020, with the goal of generating 600,000 jobs and raising their weight to 35-40% of GDP. The first step came in February 2014, when parliament enacted an SME law establishing a dedicated government authority to support their growth. The broader Phoenix master plan aims to raise CFA200bn (€300m) from the budget and donors to address four key constraints on SMEs’ development: inadequate capacity, lack of access to finance, the business environment and entrepreneurial culture. Reforms of the business environment are starting to yield fruit (see analysis).

Equally pressing, however, is the issue of access to credit. “The single most important constraint on SMEs is access to finance: banks need to act as financial advisors,” Euloge Camara, officer at the African Growth and Opportunities Act Resource Centre, told OBG. “The majority of SMEs we deal with have developed based on retained earnings rather than debt.” While a number of both bilateral and multilateral donors have rolled out partial risk guarantee schemes targeting SMEs, the government is expected to roll out a programme of subsidised interest rate loans under the programme.

Outlook

With substantial public investment in infrastructure driving the country’s rapid economic rebound, Côte d’Ivoire looks set for at least high single-digit growth in 2015 and 2016. Significant donor support will ensure adequate fiscal space over the medium term, while the government’s structural adjustments should improve the public sector’s efficiency. The IMF forecasts over 7.5% average growth through to 2017, but attracting private investment both to large infrastructure developments and lower-profile industrial projects that will create employment will be key to ensuring social stability. Despite competition in the region from Senegal and Ghana in terms of investment attractiveness, Côte d’Ivoire is likely to regain its place as an economic centre if it can successfully implement reform of both its hard and soft infrastructure.

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The Report: Côte d'Ivoire 2015

Economy chapter from The Report: Côte d'Ivoire 2015