Abstract
Rising global interest rates are generating tighter financial conditions which are particularly affecting sovereigns. At the same time, WAEMU countries have seen a rise in debt levels in recent years, which is increasing their fiscal vulnerabilities. This annex looks at the local regional financial market, in particular at the related interest rate and maturity risks, and the interplay between fiscal, financial, and external risks. A strong market segmentation between regional and external borrowing has served the region well in sheltering the region from rising global rates, but not be able to insulate the regional market for long time, if global rates remain persistently high. Despite a decent average maturity in the local market, about one third of local debt is coming due in the next two years, when appetite is likely to be low. Larger WAEMU countries have been benefitting from lower borrowing cost than smaller countries, in the regional market; this may imply an indirect adverse effect on the ability to borrow of smaller countries when global financial conditions deteriorate and access to external market weakens, even if smaller countries do not borrow on external markets. Despite some protection being provided by its exchange rate and monetary framework, WAEMU countries need to urgently revamp the credibility of their fiscal framework, given upcoming interest and roll-over risks, as well as rising global uncertainty. This will urgently require reintroducing and upgrading their fiscal rule and push forward with domestic revenue mobilizations in order to strengthen debt sustainability and rebuild buffers in the medium term. This would need to be accompanied by prudent debt management operations and further development of local financial markets, especially to promote activity in secondary markets.
The Waemu Regional Market for Government Debt in a Period of Tightening Financial Conditions1
Rising global interest rates are generating tighter financial conditions which are particularly affecting sovereigns. At the same time, WAEMU countries have seen a rise in debt levels in recent years, which is increasing their fiscal vulnerabilities. This annex looks at the local regional financial market, in particular at the related interest rate and maturity risks, and the interplay between fiscal, financial, and external risks. A strong market segmentation between regional and external borrowing has served the region well in sheltering the region from rising global rates, but not be able to insulate the regional market for long time, if global rates remain persistently high. Despite a decent average maturity in the local market, about one third of local debt is coming due in the next two years, when appetite is likely to be low. Larger WAEMU countries have been benefitting from lower borrowing cost than smaller countries, in the regional market; this may imply an indirect adverse effect on the ability to borrow of smaller countries when global financial conditions deteriorate and access to external market weakens, even if smaller countries do not borrow on external markets. Despite some protection being provided by its exchange rate and monetary framework, WAEMU countries need to urgently revamp the credibility of their fiscal framework, given upcoming interest and roll-over risks, as well as rising global uncertainty. This will urgently require reintroducing and upgrading their fiscal rule and push forward with domestic revenue mobilizations in order to strengthen debt sustainability and rebuild buffers in the medium term. This would need to be accompanied by prudent debt management operations and further development of local financial markets, especially to promote activity in secondary markets.
A. Composition of Debt
1. The composition of WAEMU debt is tilted towards external debt, but domestic debt is sizable.2 As shown in Figure 1, approximately 60 percent of the debt is external, either official or issued in financial market. Domestically financed debt—defined as debt issued within the WAEMU region—accounted for almost 40 percent of total debt in 2021 and had been growing in previous years, both in levels and as a share, reflecting both the gradual financial deepening in the region and the need of country authorities to rely also on regional financing for rising borrowing needs. The discussion below will indicate that domestic debt has represented a relatively expensive source of financing. At the same time, the recent tightening of global financial conditions has reduced countries' ability to raise funds outside of the region. The primary focus below is therefore to assess developments and characteristics of the local financial market, including the segmentation versus external markets, trends in issuances, and the cost of borrowing in the region.
Composition of WAEMU Public Debt (CFAF bn)
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: IMF staff calculations.Note: Number for Mali domestic debt missing in 2019. Domestic amount for 2019 calculated as total debt minus external debt.Composition of WAEMU Public Debt (CFAF bn)
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: IMF staff calculations.Note: Number for Mali domestic debt missing in 2019. Domestic amount for 2019 calculated as total debt minus external debt.Composition of WAEMU Public Debt (CFAF bn)
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: IMF staff calculations.Note: Number for Mali domestic debt missing in 2019. Domestic amount for 2019 calculated as total debt minus external debt.2. Within the domestic market, debt issued in the regional auction market represents a significant source of funds for most WAEMU members. Locally or regionally issued debt includes instruments issued in two markets, auctions and syndication, which—as mentioned in the main text of the Staff Report—are significantly segmented. Figure 2 below shows that debt raised in the auctions market accounts for about one fifth of total debt at the union level, ranging between 10 and 50 percent for individual countries. Notable extremes are Côte d'Ivoire (approx. 12 percent) where large external financing lowers its dependence on the auction market, and Togo (approx. 48 percent), which has limited access to external debt. The rest of domestic debt is due to debt raised in the syndication market as well as other avenues of local financing, such as bank loans. UMOA Titres offers detailed information on individual instruments issued via auctions, including principal amounts, interest rates, issuance date, and maturities. Hence the rest of the paper will leverage on this dataset to mainly investigate aspects of the auction market.
Estimated Auction Market Debt in Percent of Total Government Debt
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: UMOA-Titres, Haver, IMF staff calculations.Note: Total government debt as projected at year-end 2022. Auction market debt amounts as of November 2022.Estimated Auction Market Debt in Percent of Total Government Debt
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: UMOA-Titres, Haver, IMF staff calculations.Note: Total government debt as projected at year-end 2022. Auction market debt amounts as of November 2022.Estimated Auction Market Debt in Percent of Total Government Debt
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: UMOA-Titres, Haver, IMF staff calculations.Note: Total government debt as projected at year-end 2022. Auction market debt amounts as of November 2022.B. Segmentation of Domestic and External Markets
3. Given WAEMU's extensive capital controls and limited capital mobility, there is likely considerable segmentation between domestic and external debt instruments that WAEMU members issue. In particular, a subset of WAEMU countries issued Eurobonds in the last decade, and the terms of these issuances may exhibit dynamics that are determined to a greater extent by global financial conditions rather than local ones, also in light of extensive capital controls.
4. To look at such segmentation, we focus on four different sets of financial indicators: 1) spreads over international benchmarks of international bonds issued by some WAEMU countries, 2) yields on regional debt issuance within WAEMU, 3) interest rates on loans issued by banks to various counterparts,3 4), the weekly average interbank rate (which recently has been close to the BCEAO minimum bid rate). In Figure 3 below, we plot the average of 12-month rolling pairwise correlations between the various instruments for the period available, as well as the 25th and 75th percentiles. As can be seen, the average correlation is not far from zero although there is a steady pickup in co-movement during the early period of the Covid recovery, before global interest rates started to rise.
Pairwise Rolling Correlations Between Interest Rates in WAEMU
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: BCEAO, Bloomberg, IMF staff calculations.Note: Solid line represents average and dotted lines 25th and 75th percentiles. Series show rolling 12M pairwise correlations between 10 different interest rates on external bonds, local bonds, local loans, and policy rates.Pairwise Rolling Correlations Between Interest Rates in WAEMU
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: BCEAO, Bloomberg, IMF staff calculations.Note: Solid line represents average and dotted lines 25th and 75th percentiles. Series show rolling 12M pairwise correlations between 10 different interest rates on external bonds, local bonds, local loans, and policy rates.Pairwise Rolling Correlations Between Interest Rates in WAEMU
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: BCEAO, Bloomberg, IMF staff calculations.Note: Solid line represents average and dotted lines 25th and 75th percentiles. Series show rolling 12M pairwise correlations between 10 different interest rates on external bonds, local bonds, local loans, and policy rates.5. For a more focused look at the co-movement of interest rate developments, Figure 4 shows the results of a simple Principal Component Analysis (PCA) on the same instruments as above. The first two components of the PCA appear non-trivial, accounting for 63 percent of the observed variation. Furthermore, the component loadings, shown in the right-hand side panel of Figure 4, present an interesting split between markets. The first component, which explains 37 percent of the total variation, is heavily tilted towards the domestic portion of financial markets (bottom right group of rates in right panel), which is intuitive given their high proportion in terms of number of available series. However, the second component is closely related to the international series (top left group in the right panel), namely the spreads on Eurobonds of the three countries that issue internationally, which exhibit very different behavior with limited importance of the first component but significant of the other. This suggests that the local and international markets are indeed segmented to some extent. Going forward, however, the effectiveness of capital flow measurement tools may be reduced if the interest rate differential between local and global markets increases.
PCA Results for WAEMU Interest Rates
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: BCEAO, Bloomberg, IMF staff calculations.PCA Results for WAEMU Interest Rates
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: BCEAO, Bloomberg, IMF staff calculations.PCA Results for WAEMU Interest Rates
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: BCEAO, Bloomberg, IMF staff calculations.6. Simple correlations between rates on local and external markets confirm significant segmentation between the two markets. Figure 5 looks at the extent to which local conditions correlate with external conditions for the three countries that have issued bonds internationally, i.e., Benin, Côte d'Ivoire, and Senegal. Each series shows the rolling correlation of each country's external spreads with local interest rates.4 The three countries show similar behavior: for each country there is limited co-movement between local rates and external spreads. However, the co-movement appears to rise at periods of tightening global financial conditions, as per early 2021 and during the recent tightening of monetary policy in advanced economies. Table 1 in turn shows pairwise correlations between spreads on the three countries' external debt: the elevated numbers show how closely linked spreads on different countries' external debt are. And such correlation on external spreads is higher than the correlation between local and external markets. This also suggests that idiosyncratic country risk, as reflected in the local market pricing, has a limited role to play in determining financing costs in external markets for the three countries.
Correlations Between Local and External Interest Rates
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: Bloomberg, UMOA-Titres, CBEAO, IMF staff calculations.Note: The series for each country is the average rolling 12M correlation between the country's external spreads with interest rates on bank loans to the state in that country and the interbank rate in WAEMU,Correlations Between Local and External Interest Rates
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: Bloomberg, UMOA-Titres, CBEAO, IMF staff calculations.Note: The series for each country is the average rolling 12M correlation between the country's external spreads with interest rates on bank loans to the state in that country and the interbank rate in WAEMU,Correlations Between Local and External Interest Rates
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: Bloomberg, UMOA-Titres, CBEAO, IMF staff calculations.Note: The series for each country is the average rolling 12M correlation between the country's external spreads with interest rates on bank loans to the state in that country and the interbank rate in WAEMU,Correlations Between Spreads on External Debt
Correlations Between Spreads on External Debt
| Benin | Cote d'Ivoire | Senegal | |
| Benin | 0.90 | 0.93 | |
| Cote d'Ivoire | 0.90 | 0.95 | |
| Senegal | 0.93 | 0.95 |
Correlations Between Spreads on External Debt
| Benin | Cote d'Ivoire | Senegal | |
| Benin | 0.90 | 0.93 | |
| Cote d'Ivoire | 0.90 | 0.95 | |
| Senegal | 0.93 | 0.95 |
7. Going forward, it will be challenging for WAEMU countries to maintain favorable financing conditions amid a sharp turn towards tighter global financial conditions. So far, the tightening of monetary policy has been considerably greater in systemic advanced economies than in WAEMU. This is most notably the case in the US, but also in the eurozone where the policy rate has been raised by 200 bps as of December 12 2022, compared to 75 bps in WAEMU. Developments in the eurozone may be particularly relevant, given the peg to the euro, particularly if the European Central Bank tighten policy materially more than it already has and the wedge between local and global financial conditions increases.
8. The limited removal of policy accommodation has been accompanied by a continuation of relatively easy financial conditions. Figure 6, left-hand side, shows a composite measure of financial conditions, measured as a z-score index for the average of seven local interest rates: bank loans to the state, bank loans to individuals, bank loans to financial customers, bank loans to private enterprises, housing loans, the three year-yield on the regional market, and the average weekly interbank rate. The figure shows that local financial conditions remain relatively easy, in contrast to the tightening in many other regions. The right-hand side shows the interest rates themselves over time.
Local Interest Rates
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: BCEAO, Haver, UMOA-Titres, IMF staff calculations.Note: Index constructed as z-score of average interest rates. See main text for details. Local interest rates include various rates on loans provided by banks as well as regional yields and interbank market rates.Local Interest Rates
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: BCEAO, Haver, UMOA-Titres, IMF staff calculations.Note: Index constructed as z-score of average interest rates. See main text for details. Local interest rates include various rates on loans provided by banks as well as regional yields and interbank market rates.Local Interest Rates
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: BCEAO, Haver, UMOA-Titres, IMF staff calculations.Note: Index constructed as z-score of average interest rates. See main text for details. Local interest rates include various rates on loans provided by banks as well as regional yields and interbank market rates.9. Local financial conditions developments differ at times from global ones, especially recently. Figure 7 shows the different developments in local and global financial markets. The figure compares the previous index of local financial conditions, in blue, with an index, in green, where the z-score consists of a narrower set of local interest rates in addition to an average of spreads on external market debt.5 Adding the external spreads leads to a sizeable tightening during both the initial stage of Covid when global financial markets experienced outsized volatility, as well as more recently where financial conditions have tightened sharply. The red series, in turn, summarizes this narrower set of local series, by averaging the different interest rates on loans (to individuals, firms, financial institutions and governments) in order to reduce their impact. The resulting narrow series is somewhat more volatile than the wider one but exhibits similar trends. Finally, the right-hand side chart in Figure 7 shows two of the underlying series in the z-scores to illustrate the different developments of local and external financial conditions. As can be seen, the yield on the regional market has been relatively steady in recent years with a gradual decline over the whole period. This contrasts to a rapid tightening of conditions externally during the initial stages of the pandemic as well as more recently as risk aversion has increased.
Local and External Financial Conditions
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: BCEAO, Haver, UMOA-Titres, Bloomberg, IMF staff calculations.Note: Indices constructed as z-score of average interest rates. See main text for details. Local yields computed as monthly averages of rates at issuance for all securities emitted by WAEMU countries at 3-year maturity. The external series is constructed using spreads rather than yields and is therefore more directly a measure of financial conditions than financing costs.Local and External Financial Conditions
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: BCEAO, Haver, UMOA-Titres, Bloomberg, IMF staff calculations.Note: Indices constructed as z-score of average interest rates. See main text for details. Local yields computed as monthly averages of rates at issuance for all securities emitted by WAEMU countries at 3-year maturity. The external series is constructed using spreads rather than yields and is therefore more directly a measure of financial conditions than financing costs.Local and External Financial Conditions
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: BCEAO, Haver, UMOA-Titres, Bloomberg, IMF staff calculations.Note: Indices constructed as z-score of average interest rates. See main text for details. Local yields computed as monthly averages of rates at issuance for all securities emitted by WAEMU countries at 3-year maturity. The external series is constructed using spreads rather than yields and is therefore more directly a measure of financial conditions than financing costs.C. Borrowing Costs: Likely to Increase Especially for Smaller Countries (Size Matters)
10. The interest rates paid on debt raised in the regional auction markets are quite high, generally in the region of 5-7 percent. The distribution of interest rates on local bonds, with maturity ranging from a few months to fifteen years, shows that the range of interest rates paid by countries is relatively narrow, with most rates occurring within the 5 to 7 percent range (see Figure 8, left-hand side). Differences in the rates would reflect traditional characteristics such as the issuing country, maturity, and conditions at the time of issuance.6 Recently, local yields have increased from their pandemic lows but remain below pre-pandemic levels, as visible in Figure 8 right-hand side panel, which shows the yield over time for the average issuances at the three-year maturity (such a yield, in November 2022, was close to the middle of the distribution on the left panel).
11. External rates can also be high, but in particular they are much more volatile, indeed reaching at end-2022 levels which make borrowing prohibitive. Three WAEMU countries that have so far issued on external markets (Benin, Cote d'Ivoire, and Senegal) face rates that fluctuate more wildly than on the domestic regional market. Indeed, yields on these external bonds, as plotted in the left on Figure 9, have increased substantially in recent months, reducing the incentives, and potentially the possibility, of these three sovereigns to borrow further on the external market (a similar picture is offered by the spreads on these issuances as visible in the Staff Report, Figure 2). This likely reflects both the general tightening of financial conditions as well as the perceived credit risk of these issuers. The right-hand chart in Figure 9 compares the three-year yield on the regional market, from Figure 8, to an average of external market bonds with a similar maturity of 3.2 years. As can be seen, bonds of similar maturity in the external market fluctuate significantly more than those in the regional market. They are therefore a cheap source of financing during times of loose global financial conditions but expensive when conditions are tight, as they are now.
Local Market Borrowing Costs
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: UMOA-Titres, IMF staff calculations.Note: The histogram includes instruments outstanding as of November 2022 on a non-weighted basis.Local Market Borrowing Costs
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: UMOA-Titres, IMF staff calculations.Note: The histogram includes instruments outstanding as of November 2022 on a non-weighted basis.Local Market Borrowing Costs
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: UMOA-Titres, IMF staff calculations.Note: The histogram includes instruments outstanding as of November 2022 on a non-weighted basis.
Yields on External Issuances 2019-2022
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: UMOA-Titres, Bloomberg, Haver, IMF staff calculations.Note : The left-hand side shows yields-to-Maturity on outstanding Eurobonds for the three countries issuing such instruments. Issuances with missing or erroneous data are excluded. The regional yield in the right-hand side chart is the same as in Figure 8. The external bonds series is an average of those instruments issued by the three countries with maturity under six years. It consists of six bonds with an average maturity of 3.2 years, as of January 2023.Yields on External Issuances 2019-2022
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: UMOA-Titres, Bloomberg, Haver, IMF staff calculations.Note : The left-hand side shows yields-to-Maturity on outstanding Eurobonds for the three countries issuing such instruments. Issuances with missing or erroneous data are excluded. The regional yield in the right-hand side chart is the same as in Figure 8. The external bonds series is an average of those instruments issued by the three countries with maturity under six years. It consists of six bonds with an average maturity of 3.2 years, as of January 2023.Yields on External Issuances 2019-2022
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: UMOA-Titres, Bloomberg, Haver, IMF staff calculations.Note : The left-hand side shows yields-to-Maturity on outstanding Eurobonds for the three countries issuing such instruments. Issuances with missing or erroneous data are excluded. The regional yield in the right-hand side chart is the same as in Figure 8. The external bonds series is an average of those instruments issued by the three countries with maturity under six years. It consists of six bonds with an average maturity of 3.2 years, as of January 2023.12. Overall interest payments costs have been manageable so far, despite high regional and external market rates, owing to concessional components. Figure 10 compares four estimates of interest rates: the effective interest rates on total government debt based on the fiscal accounts (interest payment component of the fiscal balance divided by total debt); the average interest on auction debt (average marginal yield of instruments outstanding); the weighted average coupons and yields on external market debt for the three countries that have issued such instruments. Compared to the effective rate on government debt (blue column), the auction market (yellow column) can be seen as a relatively expensive way of financing government expenditure, in part due to countries' generally wide access to concessional debt. External market debt, in turn, has been financed at rates (green) quite close to auction market interest rates.7 However, yields on external market debt (orange) are very volatile and are now considerably above their coupon rate at issuance, following the recent tightening of global financial conditions. Rollovers or new issuances in external markets would therefore currently be much more expensive than historically. This is somewhat mitigated by the fact that the average maturity is quite high for external bonds, or 12 to 14 years for the three countries.
Estimated Interest Rates in 2022
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: UMOA-Titres, Bloomberg, Haver, IMF staff calculations.Note: The fiscal series divides total interest payments per country over general government debt. The auction interest rate is an average per country for outstanding instruments. The coupon on external debt is a weighted by amount outstanding average across issuances by country. The yield is calculated the same way as the coupon with yields as of 12/9/2022.Estimated Interest Rates in 2022
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: UMOA-Titres, Bloomberg, Haver, IMF staff calculations.Note: The fiscal series divides total interest payments per country over general government debt. The auction interest rate is an average per country for outstanding instruments. The coupon on external debt is a weighted by amount outstanding average across issuances by country. The yield is calculated the same way as the coupon with yields as of 12/9/2022.Estimated Interest Rates in 2022
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: UMOA-Titres, Bloomberg, Haver, IMF staff calculations.Note: The fiscal series divides total interest payments per country over general government debt. The auction interest rate is an average per country for outstanding instruments. The coupon on external debt is a weighted by amount outstanding average across issuances by country. The yield is calculated the same way as the coupon with yields as of 12/9/2022.13. Going forward, it is likely that sovereign interest payments will increase. Normalization of monetary policy in WAEMU, in a global environment with higher interest rates, can be expected to push rates up on the local market. Externally, global monetary policy tightening and reduced risk appetite are also making external market debt a more expensive option for WAEMU countries. Finally, over time, the strong growth performance of WAEMU countries will move them up the ladder of economic development and will gradually reduce their access to concessional financing, which will in turn contribute to raising the effective interest rate on the stock of government debt. Taken together, these developments may complicate access to financing for all three segments, i.e., local market debt, external market debt, and external concessional debt, further highlighting the importance of prudent debt and fiscal policy management, within a medium-term strategy.
14. In addition to having greater access to international financial markets, the larger member countries also enjoy more favorable borrowing costs in local markets. So far, the three countries that have issued internationally enjoy rates on the regional market which are in part related to their relative sizes compared to other members (see Figures 11 and 12). Figure 12, in particular, shows that rates on the regional auction market are inversely related to country size. This is the case for issuances in general, as well as when focusing only on longer or shorter maturities. The slope is considerably steeper for long-term bonds (defined as those bonds maturing in 2025 or later), although it is clearly negative for all figures.8 The reason for this negative correlation between country size and borrowing costs may be due to a number of factors beyond purely size, including macroeconomic fundamentals, strength of institutions, credit risk, and debt levels. However, irrespective of the underlying reason for the relationship, decreased access to regional finance could exacerbate such differential borrowing costs and lead to crowding out of smaller members. Furthermore, a negative shock to global financial conditions may diminish access to international markets by larger members. While external rollover needs are not outsized in the next two years, loss of external market access could lead the issuers to be more reliant on local markets, and possibly crowding out smaller members. This could have indirect effects on smaller members, rendering them vulnerable to global conditions despite not being issuers in international markets themselves.
Weight in WAEMU Region’s GDP
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: Haver, IMF staff calculations.Weight in WAEMU Region’s GDP
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: Haver, IMF staff calculations.Weight in WAEMU Region’s GDP
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: Haver, IMF staff calculations.
Country Sizes and Borrowing Costs
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: Haver, UMOA-Titres, IMF staff calculations.Note: Long-term bonds defined as those maturing in 2025 or later.Country Sizes and Borrowing Costs
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: Haver, UMOA-Titres, IMF staff calculations.Note: Long-term bonds defined as those maturing in 2025 or later.Country Sizes and Borrowing Costs
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: Haver, UMOA-Titres, IMF staff calculations.Note: Long-term bonds defined as those maturing in 2025 or later.D. Rollover Risks
15. The vulnerabilities to short-term volatility will heavily depend in coming quarters on the maturity structure of countries' debt. As shown in the table below, the average maturity of local bonds, weighted by principal, is above two years for all members although there is considerable heterogeneity across countries. Cote d'Ivoire has the lowest average maturity, at just under 29 months, while Togo has the highest average maturity at approximately 47 months. While the averages are relatively favorable, some countries may still have non-trivial amounts of debt maturing in the short-term which could leave them vulnerable to both interest rate risk—as new debt is generally financed on less favorable terms—and rollover risk—whereby countries may face difficulties in refinancing if they enjoy limited or no market access.
16. About one-fourth of regional debt on the auction market is coming due in the next year and one-third within two years. Figure 13 shows the distribution of debt issued on the auction market by amounts. The first figure shows the maturity profile for the region as a whole. It shows that despite the relatively long average maturities (discussed above), the region has a large amount of debt (at least one fourth) maturing within twelve months. The second figure shows the same results on a country level. While there are substantial differences between countries, all members have at least 15% of their debt maturing in the next twelve months, and as high as roughly 30% in the case of Cote d'Ivoire and Niger. Finally, the third figure shows the cumulative nominal amount maturing for the region within the next two years. More than 2.5CFA trn (or about 23 percent of the total) is due within 12 months, while almost 4.5 CFAFtrn (or 6.5 EURbn, about 35 percent of the total), is due within the next 24 months. This is equivalent to 4.1% of estimated 2022 GDP, suggesting a non-trivial amount but likely manageable under unchanged regional financial market conditions, as banks may be willing to roll-over such debt.
WAEMU Maturity Profiles for Auction Market Debt
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: UMOA-Titres, IMF staff calculations.Note: Each bar includes amounts for the period shown and the preceding 12 months. E.g., 2Y includes bonds maturing between 12 and 24 months.WAEMU Maturity Profiles for Auction Market Debt
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: UMOA-Titres, IMF staff calculations.Note: Each bar includes amounts for the period shown and the preceding 12 months. E.g., 2Y includes bonds maturing between 12 and 24 months.WAEMU Maturity Profiles for Auction Market Debt
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: UMOA-Titres, IMF staff calculations.Note: Each bar includes amounts for the period shown and the preceding 12 months. E.g., 2Y includes bonds maturing between 12 and 24 months.E. Conclusions
17. The persistent rise in public debt, coupled with the recent surge in inflation and subsequent tightening of global monetary policy is adding to debt risks for WAEMU members. The sharp rise in public debt, both prior to and following the Covid pandemic, has increased member countries' sensitivity towards interest rate developments. In recent months, financial conditions have tightened noticeably, though more in global markets than in the regional WAEMU market.
18. The paper documents the evident segmentation between local and external markets in terms of dynamics of borrowing costs, likely associated with capital controls. This segmentation, together with ongoing greater reliance on tapping local markets for financing needs, have partially shielded member countries from the global rise of borrowing costs. However, it is not reasonable to expect that domestic rates would remain insensitive to global rates for a long time, should the global rates remain persistently high.
19. While the average maturity of local debt exceeds two years for all members, about one third of members' debt matures within the next two years. Coupled with the broad-based rise in global interest rates, as well as tightening monetary policy locally, this implies that a sizable share of debts will be coming due at a time of diminished appetite for bonds and rising borrowing costs.
20. The paper also shows that larger member countries appear to pay lower interest rates on debt issued within the region. This may lead to crowding out of smaller countries if financing conditions become difficult. Hence, although smaller members do not issue internationally, they may be indirectly exposed to global financial conditions if larger members lose access internationally and need to borrow more in local markets.
21. Overall, interest payments are likely to increase over the next few years, affecting, in particular, the smaller countries. While external market access rates and spread may decline somewhat from the current levels, financial conditions are likely to remain tighter than pre-pandemic. Should global financial conditions and monetary policy remain tight for some time, it is unlikely that local financing condition and monetary policy would not tighten as well. In that case the segmentation would no longer serve to shelter WAEMU members, at a time where a large amount of debt will be maturing. This would likely adversely affect the ability to roll over debt in the short term as well as regional debt dynamics in the longer term with the effects much larger for the smaller countries in the region.
22. A revamped fiscal rule, within the context of a well-crafted fiscal strategy, is essential to preserve debt sustainability. To contain interest rates and rollover risk, it is essential to restore the credibility of the fiscal strategy. This will require securing fiscal consolidation over the medium term (including by managing the so-called Stock Flow Adjustments) and ensuring that debt ratios remain within the debt ceilings of the expired fiscal rule, eventually placing public debt on a downward trajectory, as discussed in the SIP on “Revamping the WAEMU Fiscal Framework". And it should be accompanied by the reintroduction of the fiscal rules, revamping some of the elements. These actions would help contain interest expenses as a proportion of government expenditure, thus limiting the exposures to interest rate and rollover risks highlighted in this paper. Furthermore, improvements in debt management operations can support financial development and enhance the attractiveness of government debt. Most notably, deepening of secondary markets would improve liquidity and allow for greater price discovery, including by facilitating the emergence of more traditional yield curves and thus aiding both monetary policy implementation and transparency.
Annex I. Country Yield Curves on the Auction Market
1. This annex provides simple estimates of the yield curves on the auction market.1 The shallow nature of local financial markets, coupled with a severely limited secondary market which reduces price discovery and liquidity, complicates the construction of traditional yield curves. As shown in Figure 14 below, transactions in the secondary markets have been increasing in recent years but the level remains low compared to the size of the market. As mentioned previously, the market for local sovereign debt currently has around CFAF12.2 trn outstanding, compared to an annual turnover of CFAF 3 trn, suggesting a still low turnover ratio. Furthermore, infrequent issuance results in challenges regarding both comparability across instruments and the signals provided by the implied slope of the curve. The high importance of primary issuances, as opposed to activity in secondary markets, coupled with common practice of issuing at a discount makes conventional analysis of yields and interest rates more challenging. A new issuance in theory provides information on current financing conditions but the interpretation is complicated by the fact that the maturity and issuance date both change over time. For example, a reduced appetite for duration by market participants could show up in shortening of maturities and higher required yields. However, the result of this could be that a new shorter maturity bond may bear a higher interest rate than an older bond with longer duration, giving a somewhat misleading downward sloping yield curve when plotting yields of outstanding debt by maturity. Furthermore, as noted elsewhere, it is common for countries to issue at a discount, as opposed to par, to keep the coupon rate lower. This creates a wedge between implied or de facto interest payments and coupon payments. With these caveats in mind, we can present simple calculations of government interest rates by maturity based on the data from UMOA Titres (Figure 15).2
2. Overall, the yield curves confirm an upward sloping pattern at the aggregate level. Interest rates range from 5-6 percent in the short end of the curve to 6-7 percent in the longer end. The short-end rates lie somewhat above the central bank's current lending facility rate which is at 4.75% as of December 2022. On a country basis, the WAEMU members show significant heterogeneity with regards to slope, underlying the aforementioned issues of shallow and illiquid local financial markets with very limited activity in the secondary markets. Figure 16 shows the same results as above but for each WAEMU member country separately. While some countries, such as Senegal, exhibit a gradually upward sloping curve, others, such as Benin, show no discernible pattern for the term structure of interest rates.
Transaction Volume in Secondary Markets (CFAFbn)
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: UMOA-Titres, IMF staff calculations. Series calculated as 12-month moving sum.Transaction Volume in Secondary Markets (CFAFbn)
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: UMOA-Titres, IMF staff calculations. Series calculated as 12-month moving sum.Transaction Volume in Secondary Markets (CFAFbn)
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: UMOA-Titres, IMF staff calculations. Series calculated as 12-month moving sum.
Implied Yield Curve
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: UMOA-Titres, IMF staff calculations.Implied Yield Curve
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: UMOA-Titres, IMF staff calculations.Implied Yield Curve
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Sources: UMOA-Titres, IMF staff calculations.
Estimated Country Yield Curves on the Auction Market
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: UMOA-Titres, IMF staff calculations.Note: Interpolation used when no data for specific tenors. No instruments for Guinea-Bissau beyond seven years.Estimated Country Yield Curves on the Auction Market
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: UMOA-Titres, IMF staff calculations.Note: Interpolation used when no data for specific tenors. No instruments for Guinea-Bissau beyond seven years.Estimated Country Yield Curves on the Auction Market
Citation: IMF Staff Country Reports 2023, 103; 10.5089/9798400235986.002.A003
Source: UMOA-Titres, IMF staff calculations.Note: Interpolation used when no data for specific tenors. No instruments for Guinea-Bissau beyond seven years.Prepared by Tryggvi Gudmundsson (RES).
For the baseline analysis, we focus on the WAEMU aggregate. Where appropriate and needed, we look at country specific data.
For interest rates on loans, we look at interest rates on all loans granted by banks, rates on loans to states and related entities, to individuals, to financial customers, to private enterprises in the productive sector, and interest rates on housing loans.
More detailed analysis of the developments of local and external rates goes beyond the scope of this paper but would be useful for future research. This could include the quantitative effects of local and international monetary policy on the different rates, as well as indications of time-varying effects.
This narrow set of local interest rates consists of three series: a composition of bank loan interest rates, the interbank rates, the yield on the regional market, The difference, compared to the initial index, is that the bank loan interest rates are averaged as opposed to including the individual series for bank loans to various sectors.
The current and expected stance of monetary policy would also be expected to play a role in determining interest rates on government bonds. However, due to the underdeveloped nature of the local financial markets, decomposing the term structure of interest rates into the path of expected interest rates on the one hand and term and risk premia on the other is not possible. See SIP on “Inflation Dynamics In The WAEMU". Both the minimum bid rate and the lending facility rate have been below 5% for the last decade, suggesting considerable term/risk premia embedded in market prices of sovereign debt. A lack of a futures market prevents analysis of future expected policy rates.
It should be noted that characteristics, including maturity and date of issuance, vary between auction markets and external markets.
The data in Figure 12 are averages across instruments for each country and may conceal variation. However, long term rates appear to fall in a narrower range than short-term rates which vary more, including by country size. Further analysis on these trends is beyond the scope of this paper but would be warranted, including a closer look at determinants of debt pricing and the effect of country characteristics.
UMOA Titres publishes weekly yield curve data based on primary market yields that are broadly consistent with those presented in the annex.
The figure shows the average interest rate of all instruments in the region for each maturity bucket.
