Bonds in the WAEMU: The government securities market under tension

(Need for a reform of the financing of economies)

The government securities market of the West African Monetary Union (UMOA) is under tension with the impacts of the Russian-Ukrainian war and inflation. Thus, urgent monetary policies are needed to finance the economies of the Union.
Despite the increase in the main key rate, for a third time, by decision of the Monetary Policy Committee (CPM) of the Central Bank of West African States (BCEAO) in order to counter galloping inflation, the economies of the West African Economic and Monetary Union are struggling to cope with the effects of inflation, which stood at 6% in January 2023, far from the community standard of 3%. The results of government securities issues during the first three months of 2023 speak volumes. If the main key rate at which the BCEAO lends its resources to commercial banks therefore fell from 2.50% to 2.75% in December 2022, this decision has setbacks on the bond market of the Union. According to the analysis of the results of the loans, the amount raised on the market by auction in January increased by 21.8% to 507.89 billion FCFA. This monthly trend should normally be maintained throughout the year according to historical data, but a reversal of the situation has been noticed since February due to monetary policy which is beginning to weigh on the banks. As proof, in February 2023, the amount raised fell to 403.42 billion FCFA against 528 billion FCFA in February 2022, a decrease of 23.59% billion FCFA. At the same time, the amount available for bank refinancing increased from 6,000 billion FCFA to 5,800 billion FCFA on February 21, 2023. On February 28, 2023, this amount available for refinancing increased to 5,600 billion FCFA.
According to the situation of securities issues by auction on the sub-regional financial market in January 2023, there is an issue covered by Mali but with a high yield, the marginal price is 9,600 over 3 years. Benin recorded the lowest 3-year yield during the month with a marginal price of 9,920. There is one issue not covered by Togo and one issue was canceled by Burkina on auction day. Over the same period, there is an issue covered by Niger but the yield is high for a marginal price of 9,610 over 5 years. Senegal got a high 3-year return from its issuance with the marginal price of 9,610.
It should be noted that the situation evolved in sawtooth in the month of February 2023. There is a tightening of the market in February compared to January 2023. An issue covered by Niger recorded a high yield at the marginal price of 9,425 over 3 years. For example, Senegal went from a coupon of 5.20% to 5.30% over 3 years and still exits with a marginal price of 9,521. Although Benin has remained on the same coupon levels, l The issue is hedged with yields down from Jan 26, 2023 at the marginal price of 9,800. It also has market tightening. Although Côte d’Ivoire is positioned for the short term, it was only able to retain 44 billion FCFA. There is one program not covered by Guinea-Bissau. Only 5 billion retained with a marginal price of 9,500. Same situation for an issue not covered by Togo. Only 14 billion retained. We should note the debacle of Côte d’Ivoire on February 28 for an uncovered issue at the end of which only 22 billion were collected out of the 85 billion sought.
However, Benin successfully closed an operation in advance on 03/02/2023 with a coverage rate of 110%.
According to the current market context, there is a tightening of monetary policy due to successive increases in key rates to lower inflation; the abolition of the fixed-rate refinancing measure by banks at BCEAO counters taken to ensure bank liquidity due to the Covid-19 crisis; the return of variable-rate auctions on the weekly and monthly counters and the end of full coverage of the refinancing needs expressed by the banks.

Decline in investor offers on the regional government securities market

The liquidity need situation did not improve in March 2023. On March 1, 2023, at the end of its ordinary meeting, the CPM (Monetary Policy Committee) of the BCEAO decided to increase by 25 basis points the main key rate, bringing it to 3% as of March 16, 2023. Following this announcement, we will notice a drastic drop in offers from investors on the regional public securities market concomitantly with an increase in requirements (interest rates) of investors, resulting in a fall in the envelopes mobilized by the States. Added to this, the amount available for bank refinancing continued to decline. On March 7, 2023, it fell to 5,500 billion FCFA, i.e. a drop of 8.33% in the amount available in 1 month. The banks were suffocated by this rise in the key rate coupled with the sudden and massive withdrawal of liquidity available for refinancing, leading to panic on the public securities and interbank markets. Thus, since March 1, 2023, and until March 27, the amount raised is estimated at 159 billion FCFA against 476 billion FCFA in March 2022, i.e. a drop of 66.60%. In detail, following the announcement of the increase in the main key rate to 3%, from March 1, the market was turned upside down. The first effect was the postponement of Burkina’s issue and the cancellation of Niger’s on March 1 and 2, 2023. The week that followed, Guinea-Bissau, seeking 5 billion FCFA, received only 1. 06 billion FCFA, an amount which was certainly rejected because of the rates requested by investors. Mali followed with a coverage rate of 34.5% and Togo ended the week with a coverage rate of 38.7%. On Tuesday, March 13, 2023, Côte d’Ivoire postponed its issue, and from there, investors began to invest mainly only in issues from their countries of origin. The following day, March 14, Burkina issued securities for an amount of 30 billion FCFA; an issue which received offers of 10.76 billion FCFA including 10.24 billion FCFA from local investors. The same was true for Niger the day after March 15, with 34.6 billion FCFA withheld, including 34 billion FCFA from Nigerien investors. Cote d’Ivoire, on March 17, withheld 80 billion FCFA, including 78 billion FCFA from Ivorian investors. During the week of March 20, the Ivorian State received 8.24 billion FCFA, including 8.2 billion FCFA from Ivorian investors, but no amount was retained and this for a requested amount of 85 billion FCFA. Mali and Benin subsequently postponed their broadcasts.
A UEMOA Council of Ministers for good decisions
The Council of Ministers of the West African Economic and Monetary Union (UEMOA) will take place this Friday, March 31, 2023. Various points are on the agenda, including the report on the monetary and economic situation of the Union and the outlook ; renewal of the members of the Financial Stability Committee; the bill on the fight against money laundering and the financing of terrorism, etc. This meeting of the Council of Ministers therefore comes at the right time. Decisions for better financing of regional economies must be taken.

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