Why invest in emerging markets: the “case” of Ivory Coast

How come Ivory Coast prospered and other countries did not? It is one of the questions from which the analysis of begins Leo Morawiecki, Investment Specialist of abrdn, who reflects on the African economic dynamics of Côte d'Ivoire and on investment opportunities from a bond point of view. Like many West African countries – explains the expert – the Ivory Coast has had its share of social unrest in recent decades. Among these, a bloody civil war that ended in 2011. Now, however, the country is a bastion of stability in an otherwise turbulent region

Why invest in emerging markets

On the one hand, “we can attribute this prosperity to the country's remarkable economic success. Lwith average annual growth of 7.2% over the last decade, making it Africa's fastest-expanding economy, according to International Monetary Fund (IMF) data. However, economic well-being alone cannot bring peace to a country. So, to what do we owe the credit for all this? Ivory Coast is one of the world's leading exporters of cocoa. In the 1980s, when demand for this commodity experienced a strong surge, the country experienced a very prosperous period. But then global prices collapsed, sparking an armed conflict between the generally wealthy southern landowners and the poorer northern landowners. The cocoa market remains characterized by volatility. According to expectations, Ivory Coast exports would have suffered a decline of around 28% in 2023, due to a particularly intense El Niño towards the end of the year. Certainly, the increase in price of cocoa helped offset some losses, however, this drastic decline in production has accentuated the government's need to diversify its revenue stream.

The Ivory Coast “case”.

From a debt service perspective, “the main fear for the Ivory Coast it does not concern overall indebtedness, which amounts to a modest 56% of GDP, nor the possibility of a devaluation of the national currency, which is pegged to the euro. The key issue instead is the country's ability to withstand another shock, such as a sharp increase in food and energy prices, given the low ratio between tax revenue and GDP, which is equal to 12.7% (World Bank/Haver Analytics 2023 data).

One shock of this nature could push the government to intervene, reintroducing huge subsidies. Implementing such a measure could undermine the country's effort to reach the West African Economic and Monetary Union (WAEMU) target of a 3% budget deficit by 2025.

There is also good news, underlines Morawiecki, explaining that the recent discovery of the Baleine offshore field for oil and gas extraction, which could produce up to 150,000 barrels per day in the medium term, will lighten the energy import bill. Furthermore, the continued development of the country's long-neglected mining sector will further support the current account. Finally, there is the African Nations Cup which temporarily stimulated domestic economic activity.”

Opportunities in bond markets

For the bond investorsi, “Ivory Coast represents a potentially interesting investment case. There is a clear fiscal consolidation plan, economic growth remains high and the debt-to-GDP ratio is low. The political framework is relatively stable and the authorities are streamlining the tax exemption system. These aspects are widely recognized as positive, even by the Democratic Party of Côte d'Ivoire (PDCI), which is in opposition. However, a PDCI member I spoke to was much more critical of the National Development Plan, the flagship of the current government: in his opinion, in fact, the government gives priority to spending on infrastructure at the expense of other programs, such as education.”

Undoubtedly, the National Development Plan is bearing fruit, thanks to the development of inter-urban connections between Abidjan, in the south, and Korhogo, in the north, with a network that extends to rural areas of the country, including a diversion to Kong. But it is difficult to turn a blind eye to the shortcomings that all this creates elsewhere. As PDCI supporters have pointed out, only 56.7% of children have completed primary education, despite compulsory schooling (Teaching at the Right Level Africa data).

The return of bond issues

After the pandemic, like other emerging markets, Côte d'Ivoire received €3.5 billion from the IMF in May 2023, and continues to meet the conditions of the program established by the monetary fund. It is encouraging to note that “the Ivory Coast was the first Sub-Saharan African (SSA) country to return to the primary bond market, with a USD 2.6bn Eurobond issue in January. Prudently, the government has allocated part of the funds to managing liabilities and rationalizing the amortization profile. At the same time, it earmarked approximately $1.1 billion for sustainability-related projects, as part of the country's sustainability framework for 2023. The issuance of debt failed to satisfy demand, confirming the renewed confidence of investors in the region. Benin followed suit with its first dollar issue. These operations could be the first step to revive the market more generally, after two years marked by the absence of emissions”.

“Ivory Coast's rating is currently BB, but government officials hope for an upgrade to investment grade by rating agencies in the next two years. It is no surprise that this country's government bonds, whose spreads fall well within the SSA average, remain among the most sought after by investors.” concludes the expert.