Forex
Analysis-For West African juntas, CFA franc pits sovereignty against expediency
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© Reuters. FILE PHOTO: Burkina Faso’s interim President Ibrahim Traore attends a meeting with Russia’s President Vladimir Putin following the Russia-Africa summit in Saint Petersburg, Russia, July 29, 2023. Alexander Ryumin/TASS Host Photo Agency via REUTERS/File Ph
By Joe Bavier and Boureima Balima
JOHANNESBURG/NIAMEY (Reuters) – Days after Burkina Faso, Mali and Niger announced last month they were quitting the West Africa political union ECOWAS, Burkina Faso’s military ruler Ibrahim Traore was already naming his next target: the region’s CFA franc currency.
“It’s not just the currency. Anything that maintains us in slavery, we’ll break those bonds,” the 35-year-old army captain turned coup leader said in an interview, posted on YouTube.
The three countries jointly announced on Jan. 28 they were pulling out of the Economic Community of West African States (ECOWAS) after it pressured them to restore constitutional order following a string of coups.
Having already kicked out French soldiers and rolled back a U.N. mission in Mali, these states have consistently shown they value sovereignty over expediency.
Their attitude towards the euro-pegged CFA franc appears no different, although economists and experts say dumping the CFA franc would be riskier and significantly more complicated than withdrawing from ECOWAS, a move seen as a bold, if potentially ill-advised, act of defiance.
Last November, the finance ministers of Burkina Faso, Mali and Niger said they would weigh the option of setting up a monetary union and top officials from all three countries have, to varying degrees, voiced support for abandoning the currency.
The head of the Niger junta, Abdourahamane Tiani, said in an interview on state television on Sunday that abandoning the CFA franc would be a sign of sovereignty and a necessary step in moving away from French “colonisation”.
To do so, however, would mean much more than simply printing new banknotes.
A newly created central bank would need to manage a delicate transition away from the CFA franc, formulate monetary policy, and decide what to do about more than $4.6 billion in outstanding CFA-denominated regional bonds.
‘THE FRENCH ROBBED US’
The CFA franc currencies – one West African and another for Central Africa – sit at the heart of an emotional debate over sovereignty and development in French-speaking Africa.
Proponents hail the CFA franc’s peg to the euro as a guarantee of macroeconomic stability in one of the world’s most volatile regions.
Critics denounce it as a brake on growth and an outdated vestige of French colonial rule: until a 2019 reform, countries were required to hold a portion of their foreign reserves with the French Treasury.
But never since its inception in 1945 has there been the prospect of such a mass exodus.
“The French have robbed us with the CFA franc. African countries must definitively break with this currency,” said Omar Issoufou, a 25-year-old Nigerien who is studying electrical engineering in the capital Niamey.
The military takeovers that have swept across the arid Sahel region were driven by anger over Islamist violence, which Mali’s U.N. mission and a sprawling French anti-militant operation had failed to snuff out.
Punishment for the putsches – the imposition of economic sanctions by ECOWAS, including freezing of some of Mali and Niger’s assets held by the regional central bank – fuelled tensions between the new regimes and the West African Economic and Monetary Union, known by its French acronym UEMOA.
“The moment UEMOA became a weapon of war … I can understand why these three countries moved to clearly free themselves from their engagements towards the Union,” Hamma Hamadou, a former head of Niger’s tax authority, told Reuters.
Beyond ideological issues of sovereignty and practical concerns related to sanctions, some view moving away from the CFA franc as an opportunity.
“The CFA franc has been very detrimental to these countries over the long run,” said Ndongo Samba Sylla of International Development Economics Associates, a network of economists focused on the Global South. “They have lower inflation and extra exchange rate stability, but they’ve suffered from an over-valued currency.”
All three countries have largely agricultural economies. But their inability to set monetary policy has left their exports uncompetitive, he said, and hindered industrial development.
The peg to the euro, meanwhile, makes little sense when the bulk of West Africa’s external trade is done in dollars, he added.
‘GREAT DEPRESSION’
Withdrawing from ECOWAS is already looking easier said than done. Disentangling their economies and finances from UEMOA will be even more delicate.
UEMOA’s eight members deposit their foreign exchange reserves with the Dakar-based regional central bank. Those reserves are mutualised as are liabilities, making a determination of how much each country would be able to walk away with a difficult calculation.
Then there’s the question of CFA-denominated debt. Burkina Faso has over 1.2 trillion CFA francs ($1.99 billion) in outstanding bonds. Mali has slightly over 1 trillion CFA francs, while it’s 498 billion CFA francs for Niger.
“We will enter into a zone of turbulence if these countries pull out,” said one financial expert involved in regional debt issuances, who asked not to be named due to market sensitivity.
There was no clarity, he said, on where the bonds would be listed, whether they would remain in CFA francs or even if the new currency would be convertible.
“There would be a lot of problems for the holders of these sovereign bonds,” he said.
The turmoil would likely leave the three states cut off from future financing from regional and international capital markets, experts said. Burkina Faso already called off a bond auction in the wake of its ECOWAS withdrawal announcement due to a lack of interest.
Uncertainty could provoke capital flight and an immediate depreciation of a new currency. Imports could become prohibitively expensive, fuelling run-away inflation.
“I think you’re taking 10% to 20% off your GDP,” said Charlie Robertson, head of macro strategy at London-based FIM Partners. “Leaving the single currency is bringing on the Great Depression,” he said, adding it would be the worst policy mistake the countries could make.
In light of these risks, the juntas are approaching the currency question more carefully than their ECOWAS withdrawal.
Two government officials from the countries told Reuters that the committee charged with studying a new monetary union, while still planned, had not yet met.
Prime Minister Choguel Maiga of Mali – the only one of the three to have ever issued its own currency – has urged patience.
When Mali exited UEMOA in 1962 in the wake of independence, its new currency was at parity with the CFA franc, but upon its return to the union in 1984 was worth only half as much.
To ensure lessons have been learned, Maiga says the committee needs time to assess all the implications before the country draws up plans for a new currency with its two neighbours.
“This is what I say to the Malians,” Maiga told business leaders last month. “Sure, you have this passion. You want it. But this is strategic.”
($1 = 604.0000 CFA francs)
Forex
Major Russian lenders say yuan coffers empty, urge central bank action
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By Elena Fabrichnaya
MOSCOW (Reuters) – Major Russian banks have called on the central bank to take action to counter a yuan liquidity deficit, which has led to the rouble tumbling to its lowest level since April against the Chinese currency and driven yuan swap rates into triple digits.
The rouble fell by almost 5% against the yuan on Sept. 4 on the Moscow Stock Exchange (MOEX) after the finance ministry’s plans for forex interventions implied that the central bank’s daily yuan sales would plunge in the coming month to the equivalent of $200 million.
The central bank had been selling $7.3 billion worth of yuan per day during the past month. The plunge coincided with oil giant Rosneft’s 15 billion yuan bond placement, which also sapped liquidity from the market.
“We cannot lend in yuan because we have nothing to cover our foreign currency positions with,” said Sberbank CEO German Gref, stressing that the central bank needed to participate more actively in the market.
The yuan has become the most traded foreign currency on MOEX after Western sanctions halted exchange trade in dollars and euros, with many banks developing yuan-denominated products for their clients.
Yuan liquidity is mainly provided by the central bank through daily sales and one-day yuan swaps, as well as through currency sales by exporting companies.
Chinese banks in Russia, meanwhile, are avoiding currency trading for fear of secondary Western sanctions.
At the start of September, banks raised a record 35 billion yuan from the central bank through its one-day swaps.
“I think the central bank can do something. They hopefully understand the need to increase the liquidity offer through swaps,” said Andrei Kostin, CEO of second-largest lender VTB, stressing that exporters should sell more yuan as well.
The acute yuan shortage also follows months of delays in payments for trade with Russia by Chinese banks, which have grown wary of dealing with Russia after U.S. threats of secondary Western sanctions. These problems culminated in August in billions of yuan being stuck in limbo.
Russia and China have been discussing a joint system for bilateral payments, but no breakthrough is in sight. VTB’s Kostin said that since Russia’s trade with China was balanced, establishing a clearing mechanism for payments in national currencies should not be a problem.
Forex
Bank of America sees more downside for the dollar
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Investing,com – The US dollar has stabilized after a sharp fall in August, but Bank of America Securities sees more troubles ahead for the US currency.
At 07:20 ET (11:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.077, having largely held its course over the last week.
That said, the US currency is still down 1.6% over the month.
The dollar’s selloff last month stood out in a historical context, according to analysts at Bank of America Securities, in a note dated Sept. 5.
The greenback has since stabilized, however, despite the outsized weakness, the US bank still sees three reasons to stay bearish on the Dollar Index (DXY).
Following similar episodes of bearish DXY breakouts, the index has tended to continue its downtrend, the bank said.
In the last 3 analogs, DXY index fell on average for another 4% before reaching a bottom. Extending this analysis to bilateral USD/G10 pairs suggests a continuation of the USD downtrend is more likely vs EUR, GBP, and AUD than SEK, NOK, and CHF in G10.
While the DXY made a new year-to-date low in August, broad nominal and real USD trade-weighted indices have stayed at Q4 2022 levels and would suggest the USD remains overvalued.
The USD selloff in 2024 has been concentrated in and other European currencies, leading to DXY divergence from other USD indices.
The bank also noted US 10y Treasury yield’s tendency to fall after the first Federal Reserve cut, while global financial conditions are set to loosen further.
“USD may see more weakness as other central banks, particularly the ones that cut policy rates ahead of the Fed, can now afford to let the Fed do some of their work and indirectly support global economies outside of the US,” BoA added.
Forex
Dollar’s demise appears overstated – JPMorgan
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Investing.com – The US dollar has had a difficult summer, dropping substantially during the month of August, but JPMorgan thinks those predicting the demise of the U.S. currency are getting ahead of themselves.
At 06:00 ET (10:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.127, having lost 1.6% over the course of the last month.
“Diversification away from the dollar is a growing trend,” said analysts at JPMorgan, in a note dated Sept. 4, “but we find that the factors that support dollar dominance remain well-entrenched and structural in nature.”
The dollar’s role in global finance and its economic and financial stability implications are supported by deep and liquid capital markets, rule of law and predictable legal systems, commitment to a free-floating regime, and smooth functioning of the financial system for USD liquidity and institutional transparency, the bank added.
Additionally, the genuine confidence of the private sector in the dollar as a store of value seems uncontested, and the dollar remains the most widely used currency across a variety of metrics.
That said, “we are witnessing greater diversification and important shifts in cross-border transactions as a result of sanctions against Russia, China’s efforts to bolster usage of the RMB, and geoeconomic fragmentation,” JPMorgan said.
The more important and underappreciated risk, the bank added, is the increased focus on payments autonomy and the desire to develop alternative financial systems and payments mechanisms that do not rely on the US dollar.
“De-dollarization risks appear exaggerated, but cross-border flows are dramatically transforming within trading blocs and commodity markets, along with a rise in alternative financial architecture for global payments,” JPMorgan said.
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