Economic Analysis - Subdued Exports Will See Current Account Deficit Widen - SEPT 2017


BMI View: Cote d ' Ivoire ' s current account deficit will widen in 2017 on the back of weaker cocoa prices , coupled with strong capital import growth . However, we expect this to remain sustainable given strong inward investment.

Cote d'Ivoire will see its external account position deteriorate modestly in the coming quarters. Lower cocoa prices will cut export revenue despite elevated production and new opportunities in oil and gold mining. Meanwhile, elevated capital expenditure for infrastructure projects will see the import bill remain high. We expect the current account deficit to widen to 2.9% of GDP in 2017 and 2.6% in 2018, up from an estimated 2.4% in 2016. Despite this increase, we believe that robust inflows of foreign direct investment and concessional loans will more than cover these shortfalls.

Deficit To Bottom On Weak Cocoa
Cote d'Ivoire - Current Account
e/f = BMI estimate/forecast. Source: BMI, AfDB, BCEAO

Weak Cocoa Prices Will Drag Down Exports

Low cocoa prices will dent export growth in 2017, despite high production and continuing proceeds from oil. With cocoa prices having fallen by around 40.0% from their May 2016 peak owing to oversupply in the global market, this will more than offset an uptick in production, weighing on export growth. Moreover, this will have a knock-on effect in export growth heading into 2018, with more limited earnings for farmers due to the low cocoa prices likely to lead to a reduction in investment on fertiliser and other inputs. This will see total production fall, tempering the benefits of higher global cocoa prices ( see ' Cocoa: Prices To Stabilise Before Long-Term Uptrend ' , April 24).

Vulnerability To Cocoa Prices Poses Risks
Cote d'Ivoire - 2015 Export Share By USD Value
Source: TradeMap

We also note that, while there are new export production opportunities in the form of oil and gold, these will not grow sufficiently to offset the weaker cocoa exports. Our Oil & Gas team believe that expansion in the country's two main producing fields will lead oil production to remain elevated in the coming quarters, forecasting growth from around 35,300 barrels a day in 2015 to 53,900 in 2017. However, these gains will be short-term and production is set to decline again from 2018. Meanwhile, our Mining team hold a positive outlook for gold production, given the inauguration of a new project ( see 'Randgold-Newcrest Partnership To Further Boost Cote d'Ivoire Gold', January 11). They also note upside risks to their forecasts given the country's favourable regulatory environment for mining ( see 'Mali and Cote d'Ivoire: Up And Coming Players To Outperform', April 13).

Price Rout Will Squeeze Export Revenues
London Cocoa Futures, PS/metric tonne
Source: Bloomberg.

Capital Expenditure Will Keep Imports High

Although the government cut its fiscal spending for investment by 10.0% in April, we still expect capital import demand will remain high as the national development programme progresses. Many projects will be funded by the private sector, meaning that momentum is still likely to be strong. In particular, machinery and vehicles, which are not widely produced in the country, will be required in order to progress with road, port and rail improvements. The largest projects, which will demand the largest capital import volume, include the Soubre and Songon hydropower plants, and the construction of a second container terminal at the Port of Abidjan.

Deficit Sustainable Given Investment And Concessional Loans

Foreign direct investment and concessional loans will comfortably fund the country's current account deficit. While portfolio investment will likely rise as a result of the USD1.3bn eurobond issuance in June, slightly increasing the country's vulnerability to global risk cycles, Cote d'Ivoire's international investment position will continue to be dominated by direct investment and other investment. In particular, foreign direct investment in the consumer and mining sectors is set to outperform. Other investment will mostly come from concessional loans, particularly from multilateral institutions such as the World Bank. As such, we believe that the nature of Cote d'Ivoire's inward investment and improving cocoa prices will keep its external accounts sustainable in the long term.