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Public spending and inflation theoretically have a strong link. Given the level of taxes, an expansionary fiscal policy (increasing public spending in order to stimulate demand and de facto growth) can have perverse effects on the economy. The economy will end up well above its potential level (full employment), generating inflationary pressures.

The U.S. economic stimulus package estimated at US$1.9 trillion is raising concerns about a return of inflation. Economists Larry Summers and Olivier Blanchard consider this stimulus policy too ambitious and warn of a possible overheating of the economy.

From the first quarter of 2018 to the fourth quarter of 2019, economic activity in the United States was slightly above potential (observed GDP above potential) before experiencing a drastic and deep fall in the second quarter of 2020 (covid-19 effect). The Congressional Budget Office (CBO) projections anticipate a gradual return of economic activity to its potential level until the fourth quarter of 2023. But the economy will remain below potential in the absence of a new shock.

President Joe Biden's stimulus package would obstruct the CBO's projections and quickly push economic activity above potential. This positive shock could be accompanied by the return of high inflation. The U.S. Federal Reserve, in response to this situation, could then adopt a restrictive monetary policy by raising interest rates to slow the pace of economic activity.

What about the implications of an overheated U.S. economy on African economies?

The overheating of the U.S. economy could lead to imported inflation in several countries, including those in Africa. The high content of international trade in U.S. dollars makes it possible to understand the transmission mechanisms. American inflation will lead to an increase in the prices of goods imported (from) the United States. If, for a country, the consumption basket of the population is strongly dominated by goods imported from the United States, then there would be an increase in the general price level in that country. For countries with a fixed exchange rate regime, the inflation mechanism imported from the United States may result from the constraint on the central bank to maintain the fixed exchange rate. Indeed, U.S. inflation will be accompanied by a large amount of dollars in circulation (due to the vast stimulus package). Local central banks, in order to maintain the fixed parity, will buy back U.S. dollars, which will increase the supply of local currency. If economic activity does not follow this increase in the money supply, inflation will result.

Furthermore, if the U.S. Federal Reserve decides to pursue a restrictive monetary policy by raising interest rates (in order to control inflation in the United States), this will hamper the latitude of African countries in the international capital (debt) market to finance their economies.

In the short term, however, the overheating of the U.S. economy could benefit African economies by improving the competitiveness of goods produced in Africa relative to goods from the United States that will be more expensive. But the heavy dependence of African countries on imported goods, coupled with the predominantly raw material content of African exports, could quickly obstruct this positive effect.

A share is a title deed issued by a corporation (e.g., a public limited company or a partnership limited by shares). It confers to its holder the ownership of a part of the capital, with the associated rights: to intervene in the management of the company, i.e. to vote at general meetings of shareholders and to receive an income called a dividend, which represents a share of the annual profits distributed by the company.

The holder of shares qualifies as a shareholder and all shareholders constitute the shareholding.

The shares are issued as consideration for the contributions made when the company is created, thereby constituting its share capital.

During its existence, the company may issue new shares during a capital increase that will be subscribed either by existing shareholders or by third party shareholders.

The decision to issue new shares, to whom they are offered for subscription and at what price are sensitive elements in the life of a company.

Conversely, but more rarely, a company may buy back its shares to support the share price by way of a normal course issuer bid. This repurchase is different from the repurchase carried out to support the share price via a liquidity contract, since in the latter case the shares will be resold as quickly as possible.

The issue of shares is therefore often synonymous with a capital increase, while the repurchase followed by cancellation generally corresponds to a capital reduction. The company carrying out these operations therefore sends a message of either growth or decline.

A share buyback program is announced in Nigeria by the billionaire ALIKO Dangote up to 10% of its capital for a value of approximately 6 billion dollars to support the stock market price (see AFRIMAG News of December 22, 2020).

According to the ECOFIN Agency dated August 24, 2020, Heineken is accelerating the purchase of more than 6 million shares of Nigeria Breweries, its subsidiary in Nigeria.

In order to ensure the liquidity of the shares and their constant valuation, the company may decide to list its shares on the financial market. 

A share is listed from the moment it can be bought or sold on the stock market, commonly known as the stock exchange. The table below presents, by sector, the shares listed on the Regional Stock Exchange (BRVM).

SECTOR - INDUSTRY

FINANCIAL SECTOR

SECTOR- TRANSPORT

SECTOR - AGRICULTURE

SECTOR - DISTRIBUTION

OTHER SECTORS

Source: Official bulletin of the BRVM listing of Thursday, December 30, 2020

The Harmonized Index of Consumer Prices (HICP) is an indicator that makes it possible to assess price stability, one of the leading convergence criteria adopted for WAEMU member countries.

It is used to measure changes in the prices of a basket of goods and services consumed by households in the WAEMU zone. Its analysis accounts for either an increase or a decrease in consumer prices, and in either case allows for the quantification of price changes. 

In December 2020, the HICP stood at 105.5 in the WAEMU zone, down 0.3% from its November 2020 level and up 2.2% from its December 2019 level [WAEMU (2021)]. 

The decline in the general price level in the Union in December 2020 compared to November 2020 is related to the price level declines in the following countries : Mali (-2%), Benin (-1.7%), Burkina Faso (-1.6%), Senegal (-0.7%) and Niger (-0.1%). These are countries for which there has been a fall in the price level of products within the "Food and Non-Alcoholic Beverages" functions. On the other hand, the opposite effect is noted for Côte d'Ivoire, Guinea Bissau and Togo, which experienced an increase in the price level within the "food and non-alcoholic beverages" functions.

We note that there is an effect of the closest neighbor of the price level from the East to the West of the WAEMU, which can be explained by the presence of similarities in several states (see figure). 

It should be noted, however, that for the Union as a whole, inflation is 2.1% in 2020, a level below the 3% threshold, which allows member countries to meet the convergence criterion on price stability.

Like other States, WAEMU member countries need financial resources that are complementary to regular revenues (taxes and duties), for the implementation of major economic projects (road infrastructure, hospitals, modern markets, airports, budget support, etc.), and more generally for the implementation of their economic development policies. 

To meet these enormous expenses, the States have recourse, among other things, to WAEMU capital markets, particularly the public securities market, to mobilize resources. They generally borrow through the issuance of Bons Assimilables du Trésor (BATs) or Obligations Assimilables du Trésor (BATs), or bond issues in return for an interest rate. 

BATs and OATs are debt securities issued by auction by governments seeking financing, but these two types of loans differ in terms of their repayment terms. A warrant is redeemable in the short term (up to 2 years) while a bond is redeemable in the medium or long term (over 2 years). 

Bonds are generally longer-term securities issued by syndication on the regional capital market.

The table below presents the projected annual program of issuance by auction of Treasury bills and bonds by WAEMU states during 2021.

Source: Agence UMOA Titres. Data in millions of FCFA

The Nigerian currency, the Naira has been losing value since the health and economic crisis. The IMF estimates a depreciation of more than 18% against the dollar. Whereas the Naira needed 0.5028 Naira for one FCFA on 02/01/2020, it now needs 0.6816 Naira on 12/02/2021, i.e. a depreciation of the Naira by more than about 35% against the FCFA. This instability of the Nigerian currency is also reinforced by the decline in oil resources and is reflected in particular in the prices of goods. The National Bureau of Statistics (NBS) estimated the inflation rate at 15.75% in December 2020.

Graph : Naira-FCFA exchange rate, since January 2021

Source: AJEB based on data from the Central Bank of Nigeria

While the IMF is advocating a devaluation of the NAIRA, we are assessing the potential effects on neighboring economies, particularly the Beninese economy.

Nigeria is one of Benin's main trading partners: in 2019, it was the 5th largest destination for Benin's exports. In a degraded scenario, the depreciation of the Naira against the FCFA will have a direct effect on the Beninese economy via trade. It will influence the import prices of goods from Nigeria and the prices in CFAF received by Beninese exporters. As a result, Benin's imports from Nigeria could increase. On the other hand, the loss of competitiveness of Beninese products vis-à-vis Nigeria will lead to a drop in exports of Beninese goods to Nigeria. Similarly, the decline in purchasing power in Nigeria due to rising inflation may reinforce this decline.

Moreover, although devaluation and depreciation of a currency refer to a loss in the value of a currency against a foreign currency, the two concepts differ from each other. When the loss in value of the currency results from the will of the central bank, we speak of devaluation (adapted for cases of fixed exchange rate regimes). Conversely, if the loss of value results from a free mechanism of the foreign exchange market (confrontation between the supply and demand of the currency), we speak of depreciation (a concept adapted to the case of a floating or flexible exchange rate regime).

Capital markets are places where short (negotiable debt securities), medium and long-term securities (bonds, shares) are exchanged for currency.

The WAEMU capital market is composed of the money market and the financial market.

The money market can be defined as the short- and medium-term capital market. It is an over-the-counter, non-localized market. Established since July 1, 1975 and supervised by the Central Bank of West African States, the WAEMU money market was renovated in October 1993. It comprises two compartments:

- The interbank market: a meeting place where supply and demand for bank liquidity meet;

- The market for negotiable debt securities (commercial paper, negotiable certificates of deposit, etc.) open to all economic agents.

It should be noted that the market for government securities by auction is linked to the market for negotiable debt securities. This market is exclusively dedicated to financing WAEMU member states.

The Financial Market, created on July 3, 1996, can be divided into two distinct parts: the Primary Market and the Secondary Market.

The Primary Market is based on the issuance of new shares and bonds, while the Secondary Financial Market is where securities already issued are traded.

It is this Secondary Market which is organized by the Regional Stock Exchange (BRVM) with the Central Custodian/Settlement Bank (DC/BR) which guarantees the successful completion of operations.

The highest financial market authority is the Conseil Régional de l'Epargne Publique et des Marchés Financiers (CREPMF), which has powers of authorization, control and sanction.

Through this link between the search for and presentation of the funds required for the growth dynamics of any economy, the capital market performs several functions that enable it to :

- ensure the financing of WAEMU economies;

- the best management of state deficits;

- to create wealth for savers;

- facilitate the capital operations of companies;

- to serve as a reference for the valorization of companies;

- improve access to financing for businesses.

In our upcoming publications we will discuss the financial products available on WAEMU capital markets.

The limited availability of resources at the national level leads to multifaceted economic interdependence resulting in international economic relations. These are manifested through demographic movements, trade in goods and services and capital. It is in this context of globalization and market integration that Benin is subject to the interaction of its trading partners. [Download the document to see the full publication]

When reference is made to a country's external debt, it consists of long-term public or government-guaranteed borrowing, long-term unsecured private sector borrowing, International Monetary Fund (IMF) credits, and short-term debt. Download the document to view the full publication] [Download the document to view the full publication].

The State budget describes, for one year, all the income and expenditure that the State has the right to collect and commit. It is drawn up by the government and submitted to the national assembly which, through the adoption of the finance law, approves the financial forecasts for the coming calendar year. [Download the document to see the full publication].

In our latest publications and at conferences, we have stressed the importance of stimulating private investment and creating a regulatory and economic framework conducive to the creation, blossoming and growth of private enterprise. This includes reducing the cost of entry (financial and material). [Download the document to see the full publication].

For its second outing (on January 12, 2021) on the international capital market after that of 2019, the State of Benin has issued one billion euros (656 billion FCFA) eurobonds in two tranches with the following characteristics.

Source: AJEB from data on the Benin government website.

The resources raised should be used to finance, among other things, the partial repurchase of the first eurobond worth 500 million euros (placed in 2019).

Given the country's historical performance on the local and international markets, this new operation should enable the country to improve the weighted average cost and average maturity of its debt portfolio and, moreover, limit refinancing risks.

The first 7-year Eurobond is redeemable over the last three years (2024, 2025 and 2026) and offers a coupon of 5.75%. In 2020, Benin's 10-year issues (longest maturity) on the WAMU government securities market serve an interest rate of 6.50%.

However, this mobilization of CFAF 656 billion comes at a time when the 2021 management finance law provides for CFAF 1102.3 billion in financing resources, including CFAF 176.1 billion in external resources, which allows us to formulate the following hypotheses :

- the State of Benin could reduce the domestic debt (913.3 billion FCFA) planned for 2021, the cost of which is expected to be higher,

- or he could instead prepay other outstanding debt,

- he could also make a combination of the two preceding hypotheses.

It should be noted that the 2021 Budget Act estimated the amortization of external and domestic loans to be made in 2021 at FCFA 146.4 billion and FCFA 517.7 billion, respectively.

Market risk is the risk of loss related to fluctuations in the value of a portfolio of financial instruments (shares, bonds, commodities, derivatives, etc.). The risk being linked to the nature of the financial assets, we can distinguish: the interest rate risk (linked to the fluctuation of interest rates), the exchange rate risk (linked to the fluctuation of exchange rates between several currencies), the commodity risk, the share risk (linked to the variation of the share price).

In order to evaluate this risk, several tools are used such as volatility (which is the extent to which a financial asset changes), risk sensitivity, value at risk (VaR) and others. The evaluation of market risk allows financial analysts to better understand the evolution of market prices, and portfolio managers to refine their predictions and thus better manage portfolios of financial assets.

Stylized facts

The upward movement of Tesla shares (Tesla Inc.) in January 2021, led the Bloomberg agency to declare the South African Elon Musk (who holds 18% of the shares) "the richest man in the world" (with a fortune estimated at $188.5 billion). The fortune of Elon Musk is therefore linked to the market risk on his shares. In 2020, Tesla Inc. had already been noticed by a very high volatility on its shares and a price increase of 743.4%. We will see in the weeks and months to come if the volatility of Tesla Inc. will be high.

This event may also make us question the valuation methods of an asset and the positive evolution of several shares despite a gloomy economic context. We will address these questions in our next articles.

The economy of a country is characterized by a multitude of economic agents, inter-connected and operating in several sectors of activity. While some produce (companies), others consume (mainly households) and others ensure the implementation of economic policy and public investment (the State and its public administrations). Liberal economists argue that each economic agent, in his or her quest for personal well-being, contributes to the happiness of the community. However, quantifying aggregate happiness or the level of economic activity in an economy is not an easy exercise.

Fortunately, national accounts provide macroeconomic aggregates that capture the overall level of economic activity over a given period of time (usually a year). The best known and most widely used is the Gross Domestic Product (GDP).

GDP is the sum of value added generated by the residents of an economic territory, minus total intermediate consumption (i.e. the value of all goods used and completely destroyed in the production process). It presents the overall economic situation of the country during a given period. A positive increase in GDP is a sign that the economy is generating more resources and wealth, which should lead to an improvement in collective well-being. However, the transition mechanism between an increase in a country's wealth and an improvement in the well-being of the population is not systematic. In order to do so, one must question the genesis of growth and the distribution of wealth.

It must be hammered out that GDP alone is not sufficient to quantify the level and dynamics of a country's economic activity.

The financing of the economy is the set of modalities by which economic agents obtain the financial resources necessary for the development of their activities. Banks and bank-like financial institutions play a major role in this financing.

In fact, banks act as intermediaries by transforming deposits into loans to finance the needs of individuals, households, businesses and public authorities.

The number of credit institutions operating in the WAMU space increased by 7.25% between 2017 and 2019, from 138 to 148 (WAMU Banking Commission). In Benin, over the same period, the number of institutions remained static, at 15 in 2019, after the merger of BOA Benin and the Banque de l'Habitat du Bénin.

In 2019, the 148 institutions in the zone granted CFAF 22,923,984 million, or 82.4% of all deposits collected, compared with an average transformation rate of 82.8% between 2017 and 2019. Long-term loans granted represent an average weighting of 4.45% over this period, while short-term loans averaged 53.6%. The net portfolio downgrading rate was 4.60% in 2019, a decrease of 80 basis points compared to 2017.

Source: AJEB construction from WAMU Banking Commission data

In Benin, the net portfolio degradation rate, which is well above the WAMU average, is 8.90% in 2019, compared with 6.80% in 2017. In 2019, the 15 credit institutions operating in Benin granted the economy CFAF 1,824,723 million in credit, an increase of 19.3% over the period under review, for a bank transformation rate of 72.7%.

Long-term loans, which will decline in 2019, account for 3.7% of the total granted by Benin's banks. At the same time, short-term and medium-term loans account for 34.2% and 53.1% respectively.

It should be noted that demand deposits account for an average of 53.5% of total deposits collected by WAMU credit institutions between 2017 and 2019. In Benin, this rate is 45%. It should also be noted that this review of the financing of the economy does not include the contribution of the Decentralized Financial Systems (SFD).

Source: AJEB construction from WAMU Banking Commission data

The Covid-19 pandemic has perhaps not finished revealing its impacts on the economy and the standard of living of the populations. For the time being, among the direct negative effects of this calamity that can be identified are those affecting the labour market and particularly the employment of young people. We take up here some of the main conclusions of an international survey of the International Labour Organization-ILO (2020) dealing with the impacts of Covid-19 on youth employment.

Before the crisis, employment prospects were already quite difficult for young people. According to the ILO (2020), young people aged 15 to 24 were three times more likely to be unemployed than those aged 25 and over. With the arrival of the crisis, it is estimated that 17.4% of young people between 18 and 29 years old stopped working.

The consequences of the crisis on the youth labor market also extend to working hours, income and productivity. The working hours of young workers have been reduced by 23% during the crisis. The decrease in working hours has also led to a decrease in income. The worsening situation of young people is more evident in the private sector than in the public sector. Indeed, the decline in income affects 64% of young people in the private sector, and only 23% in the public sector. Moreover, the decline in labor productivity since the beginning of the crisis affects 61% of young people.

In view of all this, we recommend that special attention be paid to employment in general, and youth employment specifically, in order to contain the consequences on this rather vulnerable segment of the population.

Table : Employment Opportunities

Source : ILO, 2020