AFD - 2018 Registration document

PRESENTATION OF AFD

Activities of the Agence Française de Développement group in 2018

Economic growth in the South and East Mediterranean countries where AFD operates was not spared the risks linked to trade tensions and a tightening of financial conditions on global markets in the second half of 2018. Turkey has seen its growth outlook fall considerably since April due to the sudden massive depreciation of the Turkish lira in August 2018 and the ensuing credit crunch. The IMF believes the Turkish economy will hit a recession in 2019. The country’s substantial need for external finance (25% of GDP) exposes it to a high refinancing risk while its foreign currency reserves are limited. In Tunisia, the economy’s growth dynamic, despite a slight rise to 2.4% in 2018, is still insufficient to meet the country’s socio-economic challenges. The situation of its public and external sector finances has deteriorated, exacerbating the pressure on both the Tunisian dinar and inflation, and leading to a drop in its foreign currency reserves. The programme agreed with the IMF in 2016 could be undermined by further budgetary slippages in the run up to the 2019 general elections (public service salary increase) while public debt is more than 70% of GDP. The impact of regional conflicts continues to weigh heavily on economic activity in Lebanon and Jordan, while budget leeway in both countries is limited due to high debt and increasing macro- financial vulnerabilities. Egypt’s economy is also vulnerable due to its debt burden. However, the reforms carried out as part of the IMF programme are beginning to bear fruit with higher growth, a reduction in the budget and current account deficits, and lower inflation. Against a turbulent regional backdrop, Morocco stands out for its relative stability, even though its growth remains dependent on the agricultural sector and is not strong enough to lower the unemployment rate. Sub-Saharan Africa should see its growth edge up to 3.5% in 2019. The oil-exporting countries are vulnerable to the further drop in oil prices with a growth rate well below past trends and indebtedness on the rise. In several countries (Burkina Faso, Côte d’Ivoire, Ethiopia, Ghana, Guinea, Senegal and Tanzania) growth was 5% or higher in 2018 and should maintain this momentum in the medium term, bolstered by public investment and healthy agricultural production. South Africa, on the other hand, has witnessed a slowdown of its economy over the last few years and this is weighing heavily on regional growth. Having reached 1.3% in 2017, according to the IMF the country’s growth rate should fall to 0.8% in 2018. Since the start of the year the value of the rand has fallen significantly while the economy’s external finance requirement has increased. The latter is covered mainly by volatile short term capital movements while the foreign currency reserves are under the IMF-recommended level. Public debt grew to 53% of GDP at the end of 2017. Nigeria is expected to record growth of 1.9% in 2018, compared to 0.8% in 2017, mainly due to fewer disruptions in oil production and a recovery of the non-oil economy.

Because of the increase in commodity prices, balance of payment imbalances have fallen overall, but the fiscal consolidation has not delivered such good results and debt-related vulnerabilities are on the increase: approximately 40% of the region’s low- revenue countries are heavily in debt or very much at risk of being so. Several countries in the region (Côte d’Ivoire, Nigeria and Senegal) issued Eurobonds for a total of $7.5bn in 2017, i.e. ten times the 2016 level and the issue momentum continued in 2018. At the end of 2017, the average level of public debt in Sub-Saharan Africa exceeded 50% of GDP. As outstanding debt increases, so do interest payments which absorb a growing portion of the country’s income. For Sub-Saharan Africa as a whole, the average interest payment/income ratio practically doubled from 5% to almost 10% between 2013 and 2017 and, for the oil-exporting countries, it rose from 2% to over 15% over the same period. The countries with the highest increases are Angola, Benin, Congo, Gabon, Mozambique, Nigeria, Uganda, Chad and Zambia. A growing use of foreign currency loans also exposes the countries to risk. On average, 60% of total public debt was denominated in foreign currencies in 2017. Although the interest rates of foreign currency debt are generally lower than the domestic rates in the region, use of foreign currency borrowing exposes the debtor countries to volatile exchange rates and higher refinancing risk. In several countries, the banking sector’s exposure to sovereign debt, combined with the arrears accumulated on domestic loans, weighs heavily on the banks’ balance sheets and credit growth (Angola, Congo, Mozambique and Zambia). The slowdown in loans granted to the private sector threatens recovery in the countries involved, especially those with budget restrictions due to the increasing burden of public debt. The economic situation in the CAEMC countries remains tense, even if the IMF is anticipating a gradual improvement towards an average projected growth rate of 2.7% in 2018 with public and current deficits of 1.3% and 2.6% of GDP respectively. Rebuilding the area’s foreign currency reserves has been slower than anticipated (2.4 months of imports at the end of 2017). In the WAEMU zone the growth dynamic has been considerably higher than in the other countries of Sub- Saharan Africa since 2012, driven mainly by an increase in public investment. This exerts severe pressure on macro-economic balances: in 2017, the regional budget deficit reached 4.7% of GDP, public debt increased to 48.2% (an increase of almost 12 GDP points since 2012) and the current deficit increased by 6% of GDP. As a result, WAEMU’s external margin for manoeuvre fell, as can be seen from the persistent erosion of the communal foreign currency reserves, offset by Eurobond issues in 2017. These covered 4.2 months of imports at end December 2017.

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REGISTRATION DOCUMENT 2018