West African countries of the eight-nation economic and monetary union are struggling to raise funds on the regional capital market, as investors demand higher interest rates amid tightening liquidity, financial market sources said.
Ivory Coast failed to issue local currency debt in March, while Senegal, Mali, Niger and Burkina Faso have cancelled or postponed bond issuance in recent weeks.
The failure to raise much-needed funds from the regional market may force states to look for alternative, cheaper financing sources such as the International Monetary Fund (IMF) to avoid budget shortfalls, the sources told Reuters.
“There is currently a serious liquidity crisis for states on the regional financial market. The interest rates offered do not reflect the reality of the market,” said Isidore Tanoe, director of Abidjan-based financial services firm Majoris Financial Group.
Tanoe said interest rates should be between 6.5% and 6.80%, instead of the 5.80% to 5.95% offered by governments currently.
Ivory Coast, the biggest economy in the West African Economic and Monetary Union, failed to raise 85 billion CFA francs ($142 million) through bonds issued at an interest rate of around 5.5%. It returned to the market to raise the funds at an interest rate above 6%.
Ivory Coast plans to raise 3.1 trillion CFA to finance its 2023 budget, with 2.5 trillion CFA expected to come from the regional market, according to the finance ministry.
The country could also seek bilateral aid and funding from a consortium of banks, an official at the finance ministry told Reuters. He requested anonymity because he is not authorised to speak to the media.
“When market conditions are not favourable at a given time, we withdraw to come back with a better offer,” he said, adding that the next bond issuance will take into account the realities of the market and interest rates will be adjusted.
LIQUIDITY
Mali, Benin, Burkina Faso and Senegal have all had to postpone debt auctions. Senegal returned to the market to raise over 201 billion CFA at an interest rate above 6%, the finance ministry said in a statement on March 31.
Commercial banks, which make up more than 80% of the investor base for government securities, have seen their liquidity positions deteriorate, said London-based economist Emmanuel Kwapong at Standard Chartered Bank.
West Africa’s regional central bank, the BCEAO, raised its main lending rate to 3.00% from March 16 to bring inflation within its target range of 1-3%. Inflation was around 6% in January, it said.
“With the BCEAO tightening monetary conditions to contain elevated inflationary pressures and preserve FX reserves, the cost of funds for banks has increased,” Kwapong said.
Kwapong said financing needs were greater given the deterioration in the region’s fiscal position following global external shocks, forcing more countries to turn to the regional debt market.
“As a result, sovereign demand for financing on the regional debt market rose significantly, putting pressure on it,” he said.
Countries will have to seek bilateral assistance to avoid budget deficits and continue to finance projects, said Soualiou Fadiga, executive director of the regional stockbrokers association.
“There will be a scarcity of financing and the solution for the states is bilateral resources such as from the IMF,” Fadiga added.
Ivory Coast, Senegal and Benin have international sovereign bonds, for which yields have soared as developed country central banks have hiked interest rates, making new foreign currency bonds unaffordable for many small emerging markets.
Ivory Coast reached an agreement with the IMF earlier this month for a $2.6 billion loan, while Senegal will start negotiating for new programme at the IMF spring meetings next month.
