Economic Analysis - Higher Cocoa Prices To Narrow Deficit After 2018 - MAY 2018


BMI View: C o te d'Ivoire's current account deficit will widen slightly in 2018 due to a fall in cocoa and oil exports and robust demand for capital goods imports. In the subsequent years we expect this trend to reverse as export growth slowly recovers and the gradual completion of construction projects reduces import demand.

We expect Cote d'Ivoire's current account deficit to widen slightly in 2018 as cocoa exports fall and demand for capital goods imports remains high due to ongoing construction projects. We expect that the outlook on the external position will brighten in the following years however, as the price of cocoa continues to climb slowly and import demand slackens as infrastructure projects are completed. In light of this we expect the current account deficit to widen to 2.7% in 2018 from 2.5% of GDP in 2017, before narrowing thereafter. This means that the external position will remain sustainable in the coming years. Strong direct investment as well as concessional loans will largely fund the current account deficit, as well as increasing portfolio investment from eurobond issuances.

Lower Cocoa Exports To Widen Deficit in 2018

A worsening outlook for cocoa and oil exports will weigh on the current account in 2018. We expect that earnings from cocoa exports will decline by 3.1% in 2018, as our Commodities team forecast that production in the country will fall 12.0%. Given that it dominates Cote d'Ivoire's exports - comprising 53.5% of total goods exports in 2016 - this will be the main driver of the decline in export receipts. The outlook for oil exports - which accounted for17.6% of goods exports in 2016 - is also relatively subdued. Our Oil & Gas team expect a 2.0% decline in oil production in 2018 given the lack of new projects in recent years ( See ' In Need Of A Major Discovery ' , October 20). As exports falter, we expect that demand for capital goods imports will remain elevated, as work continues on large projects such as the Abidjan port expansion programme, the San Pedro refined Freight Terminal, the construction of the Ebimpe stadium and various road improvement projects.

External Position To Remain Stable
Cote d'Ivoire - Current Account Balance
e/f = BMI estimate/forecast. Source: AfDB, BMI

Long-Term Outlook More Positive

Going forward, however, we expect that Cote d'Ivoire's current account deficit will trough in 2018 given that recovering cocoa prices are likely to boost cocoa exports, while the completion of construction projects will lead to a fall in import demand. Firstly, we expect that cocoa prices will rise from GBP1,580 per tonne in 2017 to GBP1,850 per tonne by 2021, helping to spur an 18.3% increase in cocoa export value over this period. Moreover, as most of the major construction projects currently underway in Cote d'Ivoire are scheduled to end between 2018 and 2020, we believe that demand for capital goods imports will decline over this period, leading to a gradual narrowing of the current account deficit. This will see the current account deficit narrow from 2.7% of GDP in 2018 to 1.4% by 2021.

Cocoa Production To Slowly Boost Exports Over Long Term
Cote d'Ivoire - Cocoa Production and Currenct Account Balance
e/f = BMI estimate/forecast. Source: National Sources, BMI

Strong FDI And Concessional Loans Will Sustain External Position

We expect that the current account deficit will be funded by robust investment into the construction, consumer retail and agricultural processing sectors. Many of these projects are funded by foreign investments and concessional loans - such as the Abidjan port project which is 85.0% Chinese funded - sustaining strong inflows of foreign currency. Furthermore, although the country's exposure to hot money flows has increased in recent quarters given new eurobond issuances, the West African franc's peg to the euro (for which convertibility is guaranteed by the French treasury) will protect the external position from any risks associated with a weakening currency.