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Fitch: Policy Adjustment, Support Key as CEMAC Pressures Build
January 6, 2017 / 10:08 AM / a year ago

Fitch: Policy Adjustment, Support Key as CEMAC Pressures Build

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Pressures Building in Central African Economic and Monetary Community (CEMAC) here LONDON/HONG KONG, January 06 (Fitch) Pressure on the Central African Economic and Monetary Community (CEMAC) zone's exchange rate peg is rising and devaluation can no longer be ruled out without a more effective policy response from members to low oil prices, although it would only be considered as a last resort, Fitch Ratings says. Our base-case expectation is that the zone's monetary agreement with France, recovering oil prices, potential IMF support, and the commitment of CEMAC members to avoiding devaluation - restated at an emergency meeting in December - will support the peg. The six-country CEMAC zone includes three Fitch-rated sovereigns: Cameroon (B/Stable), Gabon (B+/Negative) and the Republic of Congo (CCC). The French treasury guarantees the convertibility of the bloc's common currency (the CFA franc) into euros. The exchange rate is fixed. The agreement provides for member countries to receive unlimited (although temporary) foreign-currency credit if foreign exchange reserves run short. CEMAC members' international reserves, which are pooled at the regional central bank (Banque des Etats de l'Afrique Centrale, or BEAC), fell to EUR5.3bn at end-3Q16, from EUR9.5bn at end-2015. At an estimated 65% of short-term liabilities at end-3Q16, they are still well above the threshold of 20%, below which corrective measures would be required under CEMAC zone rules to reduce liquidity in the region and increase BEAC's FX holdings. The decline in reserves is the result of large twin deficits that emerged following the fall in oil prices and a rise in security spending. Rising financing needs have been met by deposit drawdowns, higher borrowing, and increased government arrears to the private sector. Liquidity constraints and falling fiscal and external buffers in the face of the oil shock reflect a weak starting point and/or the lack of a strong policy response from the Fitch-rated CEMAC members. Failure to address twin deficits could lead to further falls in reserves and increase pressure on the peg. Devaluation is not our base case, although it is permissible under the CEMAC zone rules, and has happened before (in 1994, following a prolonged period of commodity price weakness). But we think France would provide support to the bloc, and CEMAC member countries' leaders rejected devaluation when they met in Cameroon in December. The meeting may also signal a more robust policy response in 2017, with attendees making commitments to deficit reduction and structural economic reforms, but it remains to be seen and how effective these will be. Whether reserves pressures trigger devaluation will ultimately depend on the outlook for commodity prices and the ability of members to address fiscal and external imbalances. Political obstacles to economic adjustment are high, but support from the IMF is possible and a gradual recovery in oil prices would ensure a moderate improvement in credit metrics. In our view, the presence of the French Finance Minister, Michel Sapin, and the head of the IMF, Christine Lagarde, at the December meeting also shows support for the current monetary agreement. Fitch's sovereign ratings in the CEMAC zone reflect the sharp deterioration in fiscal and external positions and liquidity during 2016. Devaluation would have a significant negative impact on members' debt ratios as most of their public debt (77% in Cameroon, 83% in Congo, and almost 90% in Gabon) is foreign-currency denominated. Fitch published a Special Report 'Pressures Building in Central African Economic and Monetary Community (CEMAC)' today. It is available at or by clicking the link. Contact: Marina Stefani Associate Director, Sovereigns +44 20 3530 1809 Fitch Ratings Limited 30 North Colonnade London E14 5GN Jan Friederich Senior Director, Sovereigns +852 2263 9910 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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