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The dynamics of bond and equities markets in WAEMU

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 7 The dynamics of bond and
equities markets in WAEMU
Romain Houssa and Kelbesa Megersa

Acknowledgements
This research has been supported by the Belgian Development Cooperation
through VLIR-UOS. VLIR-UOS supports partnerships between universities and
university colleges in Flanders (Belgium) and the South looking for innovative
responses to global and local challenges.
We are grateful to Karel Verbeke, Evelyn Wamboye and anonymous referees
for their constructive comments. All remaining errors are ours.

Introduction
Following the introduction of the euro as the currency of the European
Monetary Union (EMU), there has been a renewed and a growing interest in
monetary integration around the world. Africa represents a special case because
monetary unions like the Common Monetary Area (CMA) in Southern Africa,
the Central African Economic and Monetary Union (CAEMU); and the West
African Economic and Monetary Union (WAEMU) already operated on the
continent before the start of EMU.1
One potential benefit of a monetary union is that it facilitates the integration
of financial markets among member countries.2 Indeed, monetary unions, by
eliminating exchange rate risks, can stimulate the development of banking and
capital markets. For low income countries (LICs), regional capital markets could
enhance domestic resources mobilisation capacities and help to close the savings-
investment gap for long-term development needs (Sy, 2015).3
This chapter identifies the challenges and opportunities that have emerged
with the development of WAEMU’s capital markets where both private and
public bonds, as well as stocks, can be traded. In line with WAEMU’s stated
objectives, member states have benefited from the integration of the region’s
financial system (AFS, 2010; Allen et  al., 2011). Banks and other institutions
that function in the union have been freed from bureaucratic and entry hurdles
they would have faced in each sovereign state. Given the setup of WAEMU, an
authorization in one member state for a financial institution will also grant it the
licence to operate in other member states. This has helped the region to benefit

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 110  Romain Houssa and Kelbesa Megersa
from more fluid flow of funds across borders. Therefore, national governments
and firms in each member country have access to larger sources of financial
resources.
The development of capital in WAEMU also poses a number of challenges.
For instance, with the emergence of regional market for bonds, governments
may accumulate excessive debt, which in turn may lead to crisis and destabiliza-
tion (Gnangnon, 2013; Sy, 2015). One way to prevent this situation is to impose
rules that enforces fiscal discipline. Since 1994, WAEMU has imposed a number
of convergence criteria, including a ceiling on public debt and government
deficit. Another way to prevent excessive debt accumulation is through market
discipline, where bad borrowers are forced to pay a relatively high interest rate
on their securities issuances.
The rest of the chapter is structured as follows. The next section presents a
background on the development of the regional capital market. Particularly, it
discusses the advances in WAEMU’s primary markets (where debt securities
such as bonds issued by governments and companies are directly purchased by
investors and/or banks for the first time) as well as secondary markets (where
investors trade among each other on issued financial securities). This is followed
by an analyses of the nature of bond holdings and the role of the banking sec-
tor. Commercial banks are the prime buyers of government securities (treasury
bills and bonds) in WAEMU. Therefore, while analysing the buyers’ side of the
securities market, the chapter pays some attention to the banking sector. Later,
the chapter assesses the extent to which WAEMU member states show fiscal
discipline in the process of capital market development. Finally, it concludes with
some policy recommendations.

Developments in WAEMU’s capital market

Since the commencement of WAEMU’s capital market, activities both in the
primary and secondary markets have increased considerably, financing issuers
of bonds and other securities – both government and private institutions. For
instance, by the end of 2014, transactions in the primary market reached over
750 billion CFA.4 Moreover, debt securities constitute about 96% of total securi-
ties in WAEMU capital market, making it the largest portion of issuances in the
primary market in 2014. Further, of the debt issued in primary markets, about
76% constituted government bonds. The secondary market also continues to
expand, with rising regional stock indices, volume of transactions and market
capitalization (CREPMF, 2014).
These positive developments have occurred following a number of reforms
that have been undertaken to deepen and strengthen WAEMU’s securities mar-
ket in recent years. In 2003 (following a decision in 1998), BCEAO5 effectively
suspended its statutory advances to government budget financing. As a result,
WAEMU governments started to resort more to the issuance of bonds for their
financing needs. In the same way, the donor community (namely, the Inter-
national Development Association (IDA), Multilateral Investment Guarantee

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 Dynamics of bond & equities markets in WAEMU  111
Agency (MIGA) and the French and Canadian Development agencies) together
with BCEAO and the West African Development Bank (WADB) initiated a
development project on WAEMU’s capital market in 2004. The project intro-
duced various guaranty facilities aiming to promote infrastructure investment
in the region. Finally, a regional agency “Agence UMOA-Titres” was created in
2013 to support the issuance and management of public securities in the region.

Primary market
The issuance of bonds has significantly increased over the years in WAEMU.
The establishment of regional financial markets (e.g., BRVM)6 and the presence
of common financial institutions (e.g., BCEAO) are among the key facilitators
for rising issuances of debt securities (Sy, 2007, 2015). State issuances dominate
the primary bond market (Figure 7.1). However, there is also some participation
of independent public enterprises, regional organisations and institutions and,
importantly, the private sector.7
The trend of transactions involving capital securities in primary market
(Figure 7.2) is similar to that of the bond market. There is significant rise in
transactions of capital securities, where public sector selling represents the big-
gest component of overall transactions. There is also some foreign investor
(non-WAEMU) participation. Yet this is negligible compared with the domestic
appetite for capital securities.
Issuance of bonds and bills across the monetary zone by member states has
been steadily rising (both in size and frequency) in recent years.8 As data from
BCEAO show, Cote d’Ivoire has issued over 2,280 billion CFA franc (about 3.93
billion USD) worth of bonds over the 2007–2015 period. Senegal, WAEMU’s
second biggest economy, has issued about half that amount in the same period.
By comparison, Niger issued about 255 billion CFA franc (about 439 million
USD) worth of bonds in the period.9 WAEMU countries have also significantly

4,25,000.00 70000
3,75,000.00 60000
3,25,000.00
50000
2,75,000.00
2,25,000.00 40000
1,75,000.00 30000
1,25,000.00
20000
75,000.00
25,000.00 10000
-25,000.00 0
09

10

12

13
98

99

00

01

02

03

04

05

06

07

08

11
20

20
19

19

20

20

20

20

20

20

20

20

20

20

20
20

Regional organizations and Int. States Private sector public enterprises

Figure 7.1  WAEMU’s primary market – bonds (mill. CFA)

Source: Conseil Régional de l’Epargne Publique et des Marchés Financiers (CREPMF)

15031-2014-FullBook-Part I-II.indd 111 6/19/2018 9:24:45 PM

 112  Romain Houssa and Kelbesa Megersa

PUBLIC SELLING & TOTAL CAPITAL Total capital securities transactions Public Selling Foreign investments

450000
SECURITIES TRANSACTION

400000
(OPV,OPA,OPE,PE,OPR)

350000
300000
250000
200000
150000
100000
50000
0
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015
Figure 7.2  WAEMU’s primary markets – capital securities, stocks (mill. CFA)
Source: CREPMF
NB: Foreign investment applies to non-WAEMU investments.

2500

2000

1500

1000

500

0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Benin Mali Senegal Burkina Faso
Niger Guinea-Bissau Togo Cote d'Ivoire

Figure 7.3 Issuance of treasury-bills (bill. CFA)

Source: BCEAO
NB: For a better perspective on the growing issuance of T-bills across WAEMU, the issuances by Cote
d’Ivoire are separately shown on the right-hand side. This is due to the big size of its issuances in relation
to other WAEMU member states.

increased their issuance of treasury bills in recent years. The combined regional
issuance of treasury bills has increased from about 55 billion CFA in 2001 to
over 3.1 trillion CFA by 2011.
Looking at the issuance by individual member countries (Figure 7.3), Cote
d’Ivoire, WAEMU’s largest and most developed economy, in recent years issued

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 Dynamics of bond & equities markets in WAEMU  113
bonds and treasury bills that match the combined issuance by other member
countries. As such, the size of Cote d’Ivoire’s bond and treasury-bill issuances
(compared with WAEMU peers) is much bigger than what its relative economic
weight within the monetary zone (i.e., share of regional GDP). Apart from Cote
d’Ivoire, Benin and Senegal are the next dominant players that have consistently
increased their issuance of T-bills in recent years.

Secondary market
The trading volume and value of transactions in the secondary markets is also
rapidly rising (Figure 7.4). For instance, the value of transactions has increased
from well below 50 billion CFA in 2007 to over 350 billion in 2015. Further,
trading volume has risen from below 20 million to over 100 million CFA within
the same period.
Market capitalization in secondary markets also shows steady upward trend
(Figure 7.5). Capitalization in the stock market increased from about 1 trillion
CFA in 1998 to over 7.4 trillion CFA in 2015. In the same period, capitaliza-
tion in secondary bond markets rose from around 83 billion in 1999 to over
1.5 trillion CFA in 2015. Therefore, overall market capitalization (i.e., both in
secondary bond and stock markets) grew from a mere 1 trillion CFA to over
9 trillion CFA in the 1998–2015 period.
The development of the secondary markets could also be seen from the rise in
the region’s stock market indices and from growth in the number of companies
listed on the market (Figure 7.6). However, the number of companies listed on
the secondary market did not visibly rise, ranging between 35 and 40 enterprises
in the 1998–2015 period.10 The number of bonds issued by private companies
annually increased from 13 to 36 in the same period. Key stock market indices
of the region (BRVM & BRVM 10) have been steadily rising except for a slight

12,00,00,000 400
Transaction Value (bill CFA)

350
10,00,00,000
Trading Volume

300
8,00,00,000
250
6,00,00,000 200
150
4,00,00,000
100
2,00,00,000 50
0 0

Trading volume transaction values (billions of CFA francs)

Figure 7.4  WAEMU’s secondary market (bill. CFA) and trading volume
Source: CREPMF

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 114  Romain Houssa and Kelbesa Megersa

20,000
18,000
16,000
14,000
Billions of CFA

12,000
10,000
8,000
6,000
4,000
2,000
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Bond market (billion FCFA) Stock market (billion FCFA) Market capitalization (billions of CFA francs)

Figure 7.5  Secondary markets in WAEMU (bond and stock market)

Source: CREPMF
Number of companies & bonds

80 350
70 300

Stock market indices

60 250
50
200
40
150
30
20 100

10 50
0 0
15
98

99

00

01

02

03

04

05

06

07

08

09

10

12

13

14
11
20
20

20

20

20

20
19

19

20

20

20

20

20

20

20

20

20

20

Number of bond lines Number of listed companies

BRVM 10 index BRVM Composite index

Figure 7.6  WAEMU’s secondary markets (companies and stock market indices)
Source: CREPMF

dip in 2008–2009. This corresponds to the Global Financial Crisis and the fall
in appetite for bonds and other financial securities by banks and other buyers
of financial assets.
As Diouf and Boutin-Dufresne (2012) noted, the secondary market for bonds
and bills in WAEMU is not developed up to its potential, despite growth in
recent years. This is partly due to lack of diversification among issuers (which are
mostly government treasuries) and also narrow investor base, that is, lack of pen-
sion funds or social security entities. Instead of trading in government securities
(e.g., as part of a diversified investment strategy), banks often buy and hold secu-
rities until their maturity dates. The divergent tax regimes followed by member

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 Dynamics of bond & equities markets in WAEMU  115
states is also noted as additional impediment to the development of secondary
markets, because it complicates the pricing of securities. The incorrect pricing
of bonds and bills, shortages of long-term financial securities (with intermediate
maturities) and capacity problems in secondary markets make financial securities
less profitable. Meanwhile, this keeps other potential investors from joining the
market – further limiting the development of secondary markets.

Bond holding and the banking sector

Bond holding by banks and challenges of market liquidity

In recent years, commercial banks have rapidly increased their borrowings from
BCEAO. Until 2010, WAEMU’s commercial bank liabilities to the central bank
(as percentage of bank assets) were comparable to other Sub-Saharan African
(SSA) countries. However, since 2010, WAEMU’s bank liabilities have rapidly
increased (Figure 7.7) to a level much higher than those of others in SSA. In
particular, the liquidity provision given by BCEAO to commercial banks was
below 2% of commercial bank assets in the period before the Global Financial
Crisis in 2007. Thereafter, this had slightly increased to around 3% in 2008 and
marginally dipped in 2009 and 2010, and since 2011, BCEAO’s liquidity provi-
sions to commercial banks rose from around 4% to 9% in 2014.
Part of the significant increase in commercial bank liabilities and the corre-
sponding rise in BCEAO’s liquidity provisions is explained by the simultaneous
rise in government securities held by banks. In the early 2000s, commercial bank
holdings represented under 10% of government securities (Figure 7.8). As from
the late 2000s, nevertheless, the size of government securities held by commercial
banks steadily increased to roughly 20% by 2013.
WAEMU governments have been increasingly issuing bonds and treasury
bills due to worsening government finances. Overall, their fiscal balance was

10
WAEMU Tanzania Zambia Uganda
9
Kenya Lesotho Rwanda Nigeria
8
7
6
5
4
3
2
1
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Figure 7.7  Commercial bank liabilities to Central bank (% bank assets)

Source: IMF, BCEAO

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 116  Romain Houssa and Kelbesa Megersa

25

20

15

10

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 7.8  Commercial bank holdings of government securities (% bank assets)

Source: IMF, BCEAO

–4.6% in 2015. For some member states, it was much bigger. For example, IMF
(2016) estimates of overall fiscal balance (including grants) in 2015 were high for
Niger (–8.9%), Benin (–8.1%), Togo (–5.6%), Senegal (–5.2%) and Cote d’Ivoire
(–3.9%). Furthermore, there is no member state that is forecasted to run overall
budget surplus as far as 2020.
On the demand side, the domestic banking sector has financed the recent rise
in government borrowing – while the banking sector itself has been funded by
liabilities from the regional central bank, BCEAO. This undoubtedly shows that
the regional securities market (BRVM), although developing, has not kept pace
with the rise in government borrowing (Diouf and Boutin-Dufresne, 2012).
However, capacity constraints (although they pose challenges in the short term),
provide room for future expansion to securities markets.
Nonetheless, as noted in IMF (2015), part of this recent growth in bank
holdings of government securities is explained by “carry-trade” activities, that
is, a scenario where commercial banks borrow at lower rates from BCEAO and
then buy government securities that provide high returns. This claim is not
unfounded as there is, indeed, a rate spread between treasury bills (which pay
around 5%) and the refinancing rate of BCEAO, which is 2.5%. Such circum-
stances, where BCEAO’s short-term credit indirectly finances WAEMU govern-
ments, carry serious liquidity risks. The problem materialises if there is monetary
tightening in the short term. Yet contractionary monetary policies are unlikely
in the near term as inflation is stable in the region. However, if/when inflation-
ary problems arise, monetary tightening will be costly (and less effective).
Another potential risk of persistent “carry-trade” by banks is its detrimental
role to interbank market, and the broader financial market (IMF, 2015; McKinnon,
2012). Banks with high degree of liquidity are disinclined to lend to other banks.

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 Dynamics of bond & equities markets in WAEMU  117

50
40
30
20
10
0
2010 2011 2012 2013 2014 2015

Liquid assets to total deposits Liquid assets to total assets

Figure 7.9  Liquidity in WAEMU

Source: IMF

Their reluctance is partly explained by lack of collateralized operations, and also by

segmentation and high degree of heterogeneity in WAEMU’s banking system.11
To circumvent counterparty financial risks, most banks participate in interbank
lending only with other banks in their respective banking groups (IMF, 2013).
The presence of excess liquidity in the banking system is clearly seen in Fig-
ure 7.9. For instance, in the 2010–2015 period, the “ratio of liquid assets to total
assets” was more than 30%. Although this ratio marginally declined from 33.3%
in 2010 to 30.2% in 2015, it is still relatively high. Another (even stronger)
measure of bank liquidity – the “ratio of liquid assets to total deposits” – was on
average around 45% in WAEMU in the same period.
The combination of bank-excess liquidity and the accumulation of securities
by banks penalises the private sector financing in WAEMU. Indeed, domestic
credit to the private sector is markedly low in WAEMU as compared with SSA
average (about 24% versus 45% of GDP in 2015).12 Limited financing of private
enterprises is problematic because it undermines their growth and potentially
limits their welfare and development impacts.
Easy provision of liquidity (at lower rates) by BCEAO will keep banks from
raising funds on financial markets. The same is true for sovereign borrowers. The
combination of capacity limits in domestic financial markets with easy availability
of funds to commercial banks will encourage banks to hold more government
securities. At the same time, the process generates a feedback loop which further
slows the development of domestic financial markets. This might generate bigger
capacity gaps in the future, causing a growing share of government securities to
be sold to commercial banks – further expanding BCEAO’s balance sheet.

Tackling problems in the interbank and secondary markets

If financial markets were more developed, banks would have a channel where
they can trade liquidity (e.g., banks with excess liquidity can fund those with
low liquidity), thereby avoiding the need for BCEAO’s provision of funds.13

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 118  Romain Houssa and Kelbesa Megersa
In the meantime, this process will also lead to the development of “interbank
market.” This would deliver helpful information for the use of monetary policy
by BCEAO. Furthermore, in an environment where there is less excess liquidity
and where banks depend less on BCEAO’s refinancing, monetary policy could
be conducted at lower cost. That is, BCEAO could potentially target inflation
via monetary policy without big side effects to banks and the economy.
BCEAO is planning to undertake various reforms that are deemed to develop
the interbank market. Some of these reforms are the introduction of collateral-
ized operations (repos). In the past, their absence has limited interbank lending,
as banks, even those with considerable excess liquidity, were unenthusiastic about
lending to banks that are illiquid – unless, of course, these banks were within
some sort of shared banking groups. Another reform is the introduction of elec-
tronic trading platforms that will facilitate auctioning and trading of liquidity
and also “government papers” (application Trésor).14 To speed up the development
of the secondary market, there is a plan to introduce primary dealers. These
agents could potentially assist in developing secondary markets for government
debt securities. According to IMF (2013), BCEAO could also set up a “debt
agency” for member states. This institution could assume responsibilities of
supporting sovereign debt markets’ development, coordinating issuance of debt
securities, delivering advices to treasuries and so forth. Overall, such an agency
would enhance the management of liquidity within WAEMU and monetary
operations of BCEAO.

Fiscal discipline and the WAEMU capital market

Convergence criteria
Table 7.1 shows the performance of WAEMU member countries as regards
convergence criteria (fiscal surveillance framework) in recent years and also
near-term projections. From the list of so-called first-order criteria, many
WAEMU countries fail to achieve the ceiling of 3% (of GDP) for budget deficit.
Especially, Burkina Faso and Senegal have often displayed a large deviation for
this target (Figure 7.10). IMF projections also show that some member states
will continue to fail to meet the overall budget balance targets in the near term,
up until 2020 (Table 7.1). The criteria on inflation of 3% or less has been met
by all member states since 2013. The requirement for a total debt to GDP ratio
of 70 has also been met by all countries since 2010 when Guinea-Bissau, the
last of the member states to violate the criteria (and historically with the highest
debt levels within WAEMU),15 brought down its debt levels below the required
threshold (Table 7.1 and Figure 7.11).16 By contrast, both key second-order cri-
teria are violated by the majority of the member states in recent years, and also
in projections for the 2016–2020 period. The criterion of bringing government
wage bills below 35% of tax revenues cannot be achieved by five member states.
Specifically, Benin, Cote d’Ivoire, Senegal, Burkina Faso and Togo have relatively
high wage bills (IMF, 2013). Further, the requirement of collecting tax revenue

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15031-2014-FullBook-Part I-II.indd 119
Table 7.1  Current WAEMU convergence criteria (and countries violating)

Projection

2011 2012 2013 2014 2015 est. 2016 2017 2018 2019 2020

Overall balance/GDP (≥ –3%) 4 2 3 4 5 5 5 3 2 2

Average consumer price inflation (≤ 3%) 5 3 0 0 0 0 0 0 0 0
Total debt/GDP (≤ 70%) 0 0 0 0 0 0 0 0 0 0
Second-order criteria
Wages and salaries/tax revenue (≤ 35%) 5 6 5 5 6 5 5 5 5 5
Tax revenue/GDP (≥ 20%) 8 8 8 8 8 8 8 8 8 7
Source: Using IMF and BCEAO estimates

6/19/2018 9:24:48 PM
 120  Romain Houssa and Kelbesa Megersa

0
2001 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 est.

-5

-10

-15

-20

-25

-30 WAEMU Benin

Burkina Faso Côte d'Ivoire
Guinea-Bissau Mali
-35 Niger Senegal
Togo Threshold ( - 3 %)

Figure 7.10  Overall fiscal balance, including grants (≥ –3%)

1000

800

600

400

200
6 5 3 3 3 3 3 3 2 0 1 0
0
1 2 3 4 5 6 7 8 9 10 11 12

Benin Burkina Faso

Côte d'Ivoire Guinea-Bissau
Mali Niger
Senegal Togo
WAEMU Threshold ( 70 percent)
Number of countries violating

Figure 7.11  Total debt/GDP (≤ 70%)

of 20% of GDP is virtually unachievable by all member states. Thus, WAEMU

member states will struggle to realise their revenue mobilisation targets for years
to come. The need to boost revenue mobilisation is further necessitated by high
wage bills and continued deficits in the public sector.

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 Dynamics of bond & equities markets in WAEMU  121
Market discipline
WAEMU’s convergence criteria are intended to enforce fiscal discipline among
member states. Capital markets could play the role of enforcing fiscal disci-
pline via indirect (market-based) channels. They could do this, for instance, by
demanding higher interest rates on bonds issued by countries that display weaker
fiscal stance (e.g., bigger deficits or public debt levels). In other words, bond
yields will reflect the level of fiscal risk a sovereign bond issuer has. To under-
stand the nature of market discipline, the chapter analyses about 96 sovereign
bonds issued by the respective treasuries of WAEMU member states, namely:
Cote d’Ivoire, Burkina Faso, Benin, Mali, Niger and Togo over the 2007–2016
period (also summarised in Figure 7.12 and 7.13). Our findings suggest that, on
average, there was no significant difference across countries on interest rates of
their sovereign bond issuances (see Figure 7.12 and 7.13). Bonds issued by Togo
and Senegal on average carried interest rates of around 6.3%, whereas those of

Average Interest Rate (%) Average Maturity of

by Issuer Bonds Issued (Years)

Trésor du Togo 6.34 Trésor de Côte 6.40

Trésor du Sénégal 6.34 Trésor du Burkina 6.10
Trésor du Burkina 6.23 Trésor du Bénin 6.00
Trésor de Côte 6.13 Trésor du Sénégal 5.21
Trésor du Bénin 6.11 Trésor du Togo 5.21
Trésor du Niger 6.09 Trésor du Niger 5.00
Trésor du Mali 5.89 Trésor du Mali 4.55

5.6 5.8 6.0 6.2 6.4 0 1 2 3 4 5 6 7

Average Amount Issued Total Amount Issued

(Mill. CFA) (Mill. CFA)
Trésor du Niger 31,837 Trésor du Niger 2,54,696

Trésor du Sénégal 33,339 Trésor du Mali 4,00,798

Trésor du Togo 33,339 Trésor du Sénégal 4,66,744

Trésor du Mali 36,436 Trésor du Togo 4,66,744

Trésor du Bénin 47,775 Trésor du Burkina 4,78,488

Trésor du Burkina 47,849 Trésor du Bénin 6,68,852

Trésor de Côte Trésor de Côte 22,80,493

91,220
d'Ivoire d'Ivoire
0 40,000 80,000 0 10,00,000 20,00,000

Figure 7.12  Interest rate, maturity and principal amount of sovereign bonds
Source: BCEAO data

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 122  Romain Houssa and Kelbesa Megersa

Figure 7.13  Sovereign bond yields and principal amounts (by issuer)
Source: Using BCEAO data
NB: The inner ring shows issuers (i.e., treasury departments of member states), the middle ring shows
amount issued (in Mill. CFA franc), the outer ring shows bond yields.

Mali were slightly below 6%. Nevertheless, in the case of Mali, lower interest
rates reflect the lower maturity (3 and 5 years) of bonds issued. Hitaj and Onder
(2013), who empirically studied the fiscal discipline in WAEMU member states
over the 1997–2011 period, also find limited evidence for the responsiveness of
sovereign bond rates to governments’ fiscal behaviour.
Nonetheless, the average attributes of the sovereign bonds masks the diversity
among member states in terms of size and frequency of bond issuances. As
shown in Figure 7.13, Cote d’Ivoire issues sovereign bonds more frequently than
other member states. Furthermore, the bonds are also much bigger in amount
than other member states. In fact, the value of bonds issued by Cote d’Ivoire

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 Dynamics of bond & equities markets in WAEMU  123
over the 2007–2016 period (2280.49 billion CFA or about 3.47 billion euro)
was more than the combined face value of bonds issued by Burkina Faso, Togo,
Senegal, Mali and Niger in the same period.
Analysis of the link between yields and various key attributes of WAEMU’s
sovereign bonds does not indicate systematic market enforcement of fiscal disci-
pline. There is no clear link or significant correlation between bond yields and
fiscal fundamentals (Figure 7.14). Recent sovereign bond issuances by WAEMU

Debt-to-GDP vs. Interest on Bonds Fiscal Balance vs. Interest on Bonds

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Figure 7.14  Interest rate vs. deficit and debt (WAEMU Sovereign Bonds)
Source: Using BCEAO data
NB: The measure of debt distress risk shown here (i.e., low, moderate and high debt distress scenarios)
follows the IMF-WB debt sustainability analysis for low income countries (LIC DSA). For more on the
assumptions, methodology and country reports on LIC DSA, visit IMF’s website: www.imf.org/external/
pubs/ft/dsa/lic.aspx

15031-2014-FullBook-Part I-II.indd 123 6/19/2018 9:24:50 PM

 124  Romain Houssa and Kelbesa Megersa
member states had yields that averaged around 6%. This reality largely persisted
whether these countries showed low, moderate or high risk of debt distress at
the time of their bond issuance.17
Interest rates on sovereign bonds normally go higher or lower to reflect
perceived economic weaknesses or strengths. Specifically, they mirror trends
in government finances, inflationary expectations and other factors such as
political and environmental risks (Baldacci et al., 2011). Yet WAEMU mem-
ber states enjoy steady interest rates. The “relative” stability of bond yields
(across countries and time) is probably due to their membership in a unified
monetary and economic zone. Macroeconomic risks could be reduced for
individual member states, as BCEAO could easily rescue and offer liquidity to
member states in times of need. Furthermore, the fact that the region follows
a unified monetary policy and is subject to close scrutiny to “macroeconomic
prudence” ensures that deficits are temporary and public debt is sustainable
in the longer-term.

Conclusion
This chapter assesses the state of development in WAEMU’s financial markets.
It focuses on the dynamics of Treasury bonds and bills, as these represent the
primary sources of debt financing for member states via the regional financial
market. The monetary union is witnessing rapid rises in issuance of govern-
ment bonds and other financial securities, with some short-term cyclical
dips. Transactions involving government bonds often dominate the primary
market. Nonetheless, there are also some significant transactions involving
bonds of private financial institutions and public enterprises. The second-
ary market is also showing considerable expansion over time. Yet challenges
relating to excess liquidity, lack of diversified investor base and investment
strategies of market actors have limited the unabated growth potential of the
secondary market. As much as member state governments are the main issuers
of securities, commercial banks in the union serve as key buyers/holders of
these financial securities. Therefore, the growth in transactions of govern-
ment bonds and bills in primary and secondary markets has closely followed
the expansion of commercial bank liabilities. This trend has persisted and has
gotten even more amplified in recent years, compared to other SSA countries.
Further, the banking sector of the region is dominated by few major bank-
ing groups. If these major bank groups continue to hold a large proportion
of government securities in their portfolios and fail to adhere to prudential
norms and minimum liquidity requirements, the monetary union could
potentially face systemic risks associated with the banking sector (Diouf and
Boutin-Dufresne, 2012).
The study also evaluates WAEMU’s convergence criteria and how well
member states conform to it. To introduce fiscal discipline and macroeconomic
stability, WAEMU has already set convergence criteria. The criteria consist of

15031-2014-FullBook-Part I-II.indd 124 6/19/2018 9:24:50 PM

 Dynamics of bond & equities markets in WAEMU  125
the so-called first-order and second-order targets. The “first-order” targets
mainly relate to fiscal balance, inflation and public debt, whereas the “second-
order” targets relate to government wage bills, government capital expenditure,
external current account balance and tax revenue. The recent experience of
member states shows that the first-order convergence criteria relating to con-
sumer price inflation of 3% (or less) and debt to GDP target of 70% (or less) is
achievable by most member states. Though, many external advisers, including
the IMF, argue that the public debt targets of the convergence criteria are too
high to be deemed “sustainable.” Further, the other key first-order criterion
of maintaining a (0%) basic fiscal balance and the second-order convergence
criteria of limiting wage bills at 35% of tax revenue (or less) and collecting a
tax revenue of 20% of GDP (or more) appear to be ambitious and unattain-
able by most member states. The past experiences of these countries also easily
reaffirms this doubt.
Finally, the chapter investigates if there are some evidence for the enforce-
ment of these convergence criteria by the market itself, that is, “market dis-
cipline.” The “disciplinary” enforcement of desired macroeconomic norms
would normally be carried out by the market via differentiation of yields on
sovereign debt securities – where debt securities of governments violating
prudential guidelines would feature higher interest rates. In reality, there is
limited evidence for this, although the analysis presented here relies essentially
on unconditional correlation, and hence requires further investigation. The
absence of effective market differentiation of sovereign securities is likely due
to the lack of well-developed financial markets. Especially, scarcity of a diversi-
fied investor base and immaturity of the secondary markets affects the proper
pricing of debt securities.
Overall, our assessment shows that the securities and bonds markets are
rapidly developing in the region. However, to harness their full potential,
member states should work further on market reforms. WAEMU countries
also suffer from multiple challenges, and at times are not keeping pace with
some of the fastest growing economies in SSA (IMF, 2014; Ahokpossi et al.,
2012; Diouf and Boutin-Dufresne, 2012). Some of the key challenges faced
by member countries include low level of private sector financing, poor
infrastructure, slow pace of structural transformation, low competitiveness,
red tape in legal and business environments and immature financial markets
(Coulibaly, 2014).
Given their use of common currency, clear monetary targets and presence of
regulatory institutions, WAEMU countries have a unique capacity to achieve
higher degree of financial development. The possibility of raising development
financing from a regional market platform presents access to a bigger pool
of capital – compared with what countries could get in their own domestic
financial sector. Though, the realisation of this potential would depend on con-
tinued effort by member states in tackling lingering economic and institutional
challenges.

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 126  Romain Houssa and Kelbesa Megersa
Notes
  1 WAEMU was created following a treaty in January 1994 (Allen et al., 2011; AFS, 2010).
Its creation involved seven states (Benin, Burkina Faso, Cote d’Ivoire, Mali, Niger, Sen-
egal and Togo), while Guinea-Bissau joined later in May 1997. The CFA (Communauté
Financière d’Afrique) franc is WAEMU’s common currency. Since 1999, it has been
pegged to the Euro at official exchange rate of 1 Euro = 655.957 CFA (Zhao and Kim,
2009; Allen et al., 2011; Coulibaly, 2014).
  2 Apart from their benefits, monetary unions could involve considerable costs (De Grauwe,
2016). This is becoming evident from challenges seen in the Eurozone, especially since the
2008–2009 financial crisis and following debt crisis. See The Economist (2013), Houssa
(2008), Devarajan and de Melo (1987) for analysis of the economic cost of monetary
union in West Africa.
  3 WAEMU has successfully initiated its regional capital markets in 1998.
  4 Government bond market capitalization, despite its development over the years, has stood
at around 15% GDP in 2010. By comparison, it was around 10% of GDP in CEMAC
and over 30% in South Africa (Mu et al., 2013).
  5 Banque Centrale des États de l’Afrique de l’Ouest (BCEAO) is WAEMU’s central bank.
  6 Bourse Régionale des Valeurs Mobilières (BRVM) is WAEMU’s stock exchange.
  7 Some of the key non-state market actors (i.e., private financial institutions and public
enterprises) that issue securities include Bank of Africa country branches (e.g., Senegal,
Niger, Cote d’Ivoire, Burkina Faso), Port authorities (e.g., Abidjan and Dakar), Regional
Mortgage Refinancing Fund and Regional Development Bank.
  8 Recent data from BCEAO show that four of the eight treasuries of WAEMU member
states (namely, Trésor du Senegal, Benin, Togo and Burkina) issued bonds in 2007. In the
fiscal year 2015, however, 38 bonds were issued – that is, virtually all WAEMU member
states issued multiple bonds (BCEAO, 2016).
  9 For more on the issuance characteristics of individual countries, see the “Market disci-
pline” section of this chapter.
10 Most of the BRVM listed firms are based in Abidjan, Côte d’Ivoire.
11 WAEMU’s segmentation and heterogeneity (Bah, 2015) is also visible in its banking sector
and also the wider financial sector. For instance, potential buyers of government securities
have to first choose among eight member states. Then, they also have to choose between
government papers that are issued via two separate channels: (i) via the regional stock
exchange (i.e., BRVM) for longer-term government papers, and (ii) via money-market,
where BCEAO auctions the sovereign papers (IMF, 2014). This complex structure raises the
cost of investing in the regional market and also reduces liquidity in the financial system.
12 World Development Indicators https://data.worldbank.org/
13 Other key reasons behind the slow development of WAEMU’s secondary market is lack
of long-term investment (IMF, 2016). The lack of pension funds and other social security
funds (which often make investments with significantly longer-term horizons) diminishes
the transactions on secondary markets (the “Secondary market” section of this chapter
offers discussion on WAEMU’s secondary market).
14 Government papers refer to financial securities (such as sovereign bonds) traded by gov-
ernments or sovereign entities.
15 This coincides with the country’s completion of the Heavily Indebted Poor Countries
(HIPC) Initiative, see IDA and IMF (2010).
16 The debt sustainability threshold of the convergence criteria, that is, 70% of GDP, is
too high (IMF, 2014). This is close to the sustainability threshold set for middle income
countries. The debt sustainability thresholds for low income countries (as in IMF’s “Debt
Sustainability Analysis for low income countries” – LIC DSA) are much lower than that.
17 The LIC DSA conducts a standardised external and public debt sustainability analysis in
low income countries. It facilitates the credit delivery, grant allocation and policy advice
process to LICs (IMF, 2012).

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 Dynamics of bond & equities markets in WAEMU  127
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