Or, an interesting walk on the wild side in political risk.
It was generally a bad day to be Laurent Gbagbo on Tuesday. His generals are negotiating a ceasefire at pixel time while the French think he’ll probably leave Ivory Coast within hours, after a heavy cost in bloodshed.
But a brand new day for the Ivorian state?
If you’ve been watching the levitating prices on the country’s (defaulted) 2032 bond, you might think that:
Having been rallying for some time, the bond is now priced more generously than before a $29m coupon payment failed in January, making the issue somewhat notorious.
This is quite some faith in the ability — willingness — of Gbagbo’s successor, Alassane Ouattara, to resume debt service. So it’s an interesting bet to look at, being positioned right in the middle of some deep political risk.
And we mean right in the middle. Much as UN forces had to get involved halfway through to break the military stalemate facing Ouattara, new holders are really joining the 2032 bond halfway through debt relief structures pre-dating the crisis. This isn’t merely a clean bet on whether payment resumes.
For example, Stuart Culverhouse of Exotix thought on Tuesday that Ouattara will eventually resume paying the 2032 bond, but after talking to donors, and with a question-mark over the next coupon payment in June.
As he warned:
Where we think Cote d’Ivoire is vulnerable however is: (1) fiscal sustainability; and (2) continued reliance on donor funding. We point out on the former that it was, after all, mainly under the fiscal window (debt/revenue) that it qualified for HIPC debt relief and the fiscal impact of the crisis is not yet clear (debt/revenue was 286% in 2009). On the latter, even with HIPC debt relief, the IMF’s own analysis shows continuing need for donor funds to support the balance of payments and public finances, especially when debt service picks up next year when rescheduled Paris Club debt becomes due (and the bond’s coupon steps up).
Reviving the economy and getting debt relief back on track is one thing, but we think a Ouattara government will face a stiff challenge in reuniting the country. The crisis reveals a polarised society. We expect Ouattara will have to reach out to Gbagbo’s supporters in order to build an inclusive government. He won’t be able to ignore the other 50% of the population that did not vote for him, yet Gbagbo’s supporters may frustrate Ouattara’s government and governance. Ouattara will also have to control his supporters and the army.
It’s a curious case study — Ivory Coast’s debt sustainability on paper is probably better off than similarly unstable countries like Iraq or Pakistan, but the country is by this point in the crisis less able to support its finances with reserves or commodity exports, even after sanctions end. A bit of a mess to estimate currently as cocoa markets also wait to assess Gbagbo’s ouster.
Still, another lesson not to take frontier markets en bloc, no?
Related links:
Ivory Coast and intervention – Gideon Rachman’s blog
Lukoil declares ‘force majeure’ in Ivory Coast – FT Tilt