After two years of recession (2016 and 2017) following the fall in the price of oil, which led to a debt crisis, real GDP growth turned positive, reaching 2.4% in 2018 and 2019, driven by the good performance of grain (up 1.2% in 2019), cotton (142%), and oil production (14%, or 146,000 barrels a day).
Inflation averaged 3.0% in 2019, within the CEMAC criterion of 3%. Fiscal consolidation in the framework of an IMF program, including debt rescheduling in 2018 with the Glencore corporation, contributed to the sus- tainability of public spending.
The fiscal balance turned positive in 2018 (1.9% of GDP) and 2019 (0.2%), but domestic arrears remain high (10% of GDP in 2018), a big obstacle to the resumption of economic activity. Financing the public deficit with bank loans weakened the viability of the country’s banks and had a crowding-out effect that reduced financing to the private sector. The current account deficit was 6.7% of GDP in 2019, up from 3.4% in 2018.
With a poverty rate of 46.7%, Chad ranks 186 of 188 countries on the Human Development Index. The unemployment rate is 5.8%, with youth unemployment very high, rising from 42% in 2015 to 60% in 2017 due to the economic recession.
Tailwinds and headwinds
Prospects are good, with 5.5% GDP growth projected for 2020 and 4.9% for 2021.
As a member of CEMAC, Chad is a stakeholder in the regional strategy launched in 2017 to correct the fiscal and external imbalances of all countries in the region. With significant potential for arable land and live- stock, agriculture accounts for nearly 35% of GDP and employs 75–80% of the population. In August 2018, the government adopted a bill for a framework law on agri- culture to support value chain development. It brought in foreign investors, specifically the Olam Group, to revi- talize the cotton sector and implement initiatives to pro- mote exports of livestock and meat.
Chad is contributing to regional infrastructure (roads, electricity interconnection, preservation of the Lake Chad Basin, internet backbone, and the Trans-Sahara Highway linking Algeria to Nigeria).
The following factors pose risks to the outlook:
- Dependence on oil (79% of export revenues and 37% of budget receipts in 2019) and an unattractive business environment.
- Endemic poverty, high youth unemployment (60% of college graduates without work), and demographic pressure (3.5% population growth and a fertility rate of 6.4 children per woman).
- High exposure to the effects of climate change.
- Political instability and security concerns.
In 2018, Chad ranked 51 of 54 countries on the Africa Infrastructure Development Index. With heavy dependence on oil, it needs to diversify its economy by developing its agricultural resources.
The country has big shortages of human capital and skills in almost all economic sectors, which par- tially explains Chadians’ disinclination to enroll in scien- tific and technical education programs (fewer than 2% of secondary students enroll in science courses). So in several sectors, Chad relies on foreign labor, mainly from Cameroon.
Health sector preparedness
Currently, the Chad health system is unable to deal with the pandemic. The 2019 Global Health Security Index ranked Chad 150 among 195 countries globally, and 33 among 54 African countries, with a score of 28.8 (of 100). The indica- tor scores are extremely low for prevention (23.2), for detec- tion capacity (36.6), and for response capacity (34.5). The health system is facing a number of constraints, particu- larly a lack of doctors (1 for 27,680 inhabitants whereas the WHO standard is 1 for 10,000) and specialists (pulmonary specialists, anesthetists, emergency doctors) for treating COVID–19. Chad has only one testing laboratory capable of analyzing COVID–19 tests for the entire population.
The government took measures as soon as the first COVID–19 cases appeared in neighboring Cameroon and Nigeria. It also developed an initial response plan of CFAF 15 billion and established a monitoring and health secu- rity unit coordinated by the secretary general of the Pres- ident’s office. With the acceleration of the pandemic, this plan was updated to CFAF 31 billion.
Other measures include a curfew since 29 April, clos- ing all markets and places of worship and restricting urban and interurban transport. These measures were gradually consolidated as soon as the first cases were reported. A health emergency was declared for the country on 25 April, and renewed for two months on 15 May. The head of state, aware of the impact of these measures on the popu- lation’s living conditions and economic activity, announced an ambitious economic and social support plan of CFAF 943 billion, 200 billion of which can be mobilized immedi- ately as part of the 2020 state budget.
Fiscal policy will aim at increasing public investment while preserving public debt sustainability according to the National Development Plan 2017-2021. The debt strategy will be based on the following guidelines:
- Continue to give priority to efforts at seeking highly concessional and/or concessional loans, while respecting the country's commitments to its financial partners, CEMAC convergence criteria and debt sustainability thresholds;
- Continue proper debt servicing to avoid the accumulation of payment arrears; and
- Develop a medium-term debt strategy that aims at an appropriate debt portfolio structure for better risk management.
Thus, local financing will be diversified, either in terms of maturity or type of securities (BTA, OTA, Bonds) through the sub-regional financial market. In the medium term and with the aim of attracting a new investor base, the Treasury will prepare the legal and institutional prerequisites for the issue of Islamic SUKUK.
Lending on concessional terms oriented towards productive and infrastructure sector will be prioritised with a view to meeting sustainability and public debt sustainability ratios.
In 2018, the domestic debt/GDP ratio stood at 19.07% and the external debt/GDP ratio at 23.46%. To avoid jeopardising debt sustainability, the use of debt will have to continue to be carefully managed..
Chad has not defined a limited number of benchmarks. The State issues on the maturities of 13, 26 and 52 weeks for short-term securities, but also on the long-term maturities 2 years, 3 years and 5 years.
Yield curve calculation models
The BEAC prepared its own in-house method for computing its yield curve: the implied yield curve. The curves are mainly constructed from the primary market's data and secondary market transactions, when these are significant.
For primary market data for BTA and OTA auctions or syndication of TOs, issues with amounts greater than or equal to 1 billion CFA are used. With regard to TOs, and as far as possible, it is the effective exit rate which will be taken into account when drawing up the yield curve. With regard to the secondary market, all transaction data are taken into account on the basis of the clean price (trading price from which the accrued coupon is subtracted).
In the CEMAC region, the model used is the Nelson-Siegel ones and the estimation approach is based on the generalized gradient reduction algorithm method which is intended for the optimization of nonlinear problems.
Yield curve managed by
The yield curves drawn up by the BEAC are updated and published on a monthly basis. They are communicated to national public treasuries and other market players through the National Directorates of the Central Bank and published on the BEAC website (www.beac.int). In addition, the data used to develop these curves will also be published on the BEAC website at the same time as the curve.
Challenges in building an efficient yield curve
- Illiquid and limited secondary market: buy-and-hold investors
- Narrow investor base: only banks are involved in the bond market
- Coexistence of three agencies for issuing bonds and bills: the Douala Stock Exchange (DSX) and the Bourse des Valeurs Mobilières de l’Afrique Centrale (BVMAC) are in charge of syndication. The Banque des Etats de l’Afrique Centrale (BEAC) is responsible for auctions.
Guide to Buying Bonds
Procedures for market participation
Currently, each country set up its own issuances. The auction takes place at the asking price. Orders are served retained interest rates or the price offered by the bidders within the maximum interest rate or maximum price decided by the government.
At the end of the auction, the general information, including the amount of bids expressed the amounts used and the rate and limit price selected are disseminated through the press.
The methods of creating, presenting and counting of the tenders shall be determined by agreements on the one hand, between BEAC and National Treasuries, and secondly, between the BEAC and the Primary Dealers (PD). Subscriptions to government securities are firm and irrevocable. They are paid in a single payment by debiting the account of the PDs at the BEAC and credited to a special Treasury account opened for this purpose.
Given that the debt market is under developed, the optimal schedule has been adopted as part of regular program.
The six National Treasures issue in turn at regular intervals. Each National Treasury will issue T-Bills weekly on Wednesday. The amounts are generally low to allow all states to issue at the same time, resulting in each State having fifty-two issues of T-Bills per year. Each National Treasury can issue T-Bonds monthly. The auctions are scheduled to take place every Wednesday. However, given the nature of the instrument and the expected volume of transactions in relation to the needs for public investment, treasuries are not able to issue on the set day.
A shift schedule was developed for planned Wednesday auction sessions:
- Cameroon: 1st Wednesday of the month
- Central Africa - Congo: 2nd Wednesday of the month
- Gabon: 3rd Wednesday of the month
- Equatorial Guinea-Chad: 4th Wednesday of the month
These emissions will occur at regular time intervals and are publicly known.
The total amount of the twelve issuances will be released in the Finance Act each year. For each fiscal year, this amount will be communicated to the market by the Minister of Finance no later than November 30th of the previous year. This communication from the Minister responsible for finance may take the form of a conference, briefing or a press release. The amount of the emission will not be announced at this time.
However, the amount to be raised for each auction is specified in the auction announcement in accordance with National Treasury issuance calendar.
On the secondary market, the T-Bills are traded OTC and the T-Bonds are traded on the DSX and the BVMAC.
The settlement of transactions takes place at T+3.
The level of taxation pursuant to Regulation No. 14/07 - UEAC-175-CM-15 instituting a specific tax regime applicable to the transactions listed on the Securities of Central Africa (BVMAC) "are exempt from income Tax Securities (IRVM) or any other taxes or levies of a similar nature, interest obligations of States for residents of the CEMAC." Subscribers residing outside the CEMAC zone must comply with income tax laws of their country of residence. The Issuer shall levy any withholding tax on loan repayments.
|Rating Agency||Current rating||Outlook|
|Moody’s||No rating||No outlook|
|Fitch||No rating||No outlook|
|Standard and Poor’s||No rating||No outlook|
Auctions of Government securities are exclusively reserved for Primary Dealers. Each CEMAC state has its own network of Primary Dealers. However, a credit institution, which meets the eligibility requirements, may be a Primary dealer only for the country they belong to or upon request, all the states. The Ministers of Finance, select Primary Dealers from all the credit institutions in CEMAC that meet specifications adopted by the Committee of Ministers, after consulting the Monetary Policy Committee.
Openness to international investors
Foreign investors can access the debt market under the same terms as nationals of the zone. There are no rules that discriminate foreign participants in the market.
This is no restriction on foreign ownership in the CEMAC zone.
Restrictions on FX and profit repatriation
There are no restrictions on obtaining foreign exchange.
The regional central bank, the BEAC, issues CFA for circulation among the members of the CEMAC. Although the Central African franc is at par with the West African CFA franc, the two currencies are not usually accepted for payment in each other’s zones.
Foreign investors have the right to repatriate earnings and the profits from sales of financial instruments. There are no restrictions on converting or transferring funds associated with investments, including remittances of investment capital, earnings, loan repayments, and lease payments.