OREANDA-NEWS. Fitch Ratings has affirmed the West African Economic and Monetary Union's (WAEMU) Country Ceiling at 'BBB-'.

KEY RATING DRIVERS
The 'BBB-' Country Ceiling of the WAEMU, which captures transfer and convertibility (T&C) risk of its eight member countries (Benin, Burkina Faso, Cote d'Ivoire (B+/Stable), Guinea Bissau, Mali, Niger, Senegal, Togo), balances a long-standing, tested monetary arrangement between the region and France (AA/Stable), with existing controls on capital transfers outside of the region.

The support provided by France under its monetary arrangement with the WAEMU member countries significantly reduces the correlation of T&C risk with regional sovereign risk. WAEMU countries must pool their foreign reserves at the regional Central Bank of West African states (BCEAO), which in turn deposits at least 50% of its foreign reserves into a dedicated account at the French Treasury. The latter then backs the convertibility of the CFA franc at the fixed rate of XAF655.957/EUR1, if needed through an unlimited overdraft of this account. This represents significant foreign currency liquidity support in case WAEMU member countries suffer a temporary shortage of foreign currency receipts. However, an unsustainable drain on the account would likely trigger adjustment measures, such as the 50% devaluation of the CFA franc that took place in 1994.

The monetary agreement is backed by tight control mechanisms that ensure sufficient external liquidity in the region. The amount of FX reserves held by the BCEAO must exceed 20% of the base money and corrective measures must be taken in case the threshold is breached. In recent years, reserves have exceeded this threshold materially (84.3% at end-2014). Additionally, direct advances by the BCEAO to member countries have been banned since 2003 to reinforce control over the money supply in those countries.

Fitch nonetheless considers that the Country Ceiling is constrained by the existence of controls and delays on capital transfers on most transactions with non-residents. Although capital flows are theoretically free between the region and France, regional agents must obtain approval by the BCEAO or finance ministries before executing most outward transactions in foreign currency.

RATING SENSITIVITIES
The main factors that, individually or collectively, could trigger a downgrade in the Country Ceiling are:
-A loosening in the monetary arrangement between the WAEMU and France
-A multi-notch downgrade of France's sovereign rating

The main factors that, individually or collectively, could trigger an upgrade in the Country Ceiling are:
-A gradual improvement in the sovereign creditworthiness of WAEMU member countries over the medium- to long-term

KEY ASSUMPTIONS
Fitch assumes that WAEMU member countries and France will remain committed to their obligations under the monetary agreement.