Higher Cocoa Prices Narrow Current Account Deficit
BMI View: Higher cocoa prices will cause Côte d'Ivoire's current account deficit to narrow from 3.0% of GDP in 2013 to 2.8% of GDP in 2014. Rising prices for the country's key export will provide welcome support to export earnings, but will not prevent the current account deficit widening towards the end of our forecast period as a building boom inflates the import bill. We forecast a shortfall worth 4.6% of GDP in 2017.
Chocolate demand in Europe is recovering, and the boost provided to global cocoa prices by the Old Continent's sweet tooth will have a substantial effect on Côte d'Ivoire's balance of payments situation. Despite higher prices, however, BMI stresses that stagnating cocoa production will slow export growth over the longer term and contribute to a widening current account deficit in the context of rising imports.
BMI's Commodities Team recently increased their 2013 and 2014 average cocoa price forecasts from GBP1,475/tonne and GBP1,550/tonne to GBP1,560/tonne and GBP1,750/tonne, respectively (see 'Global - Cocoa To Average GBP1,750/tonne In 2014', September 16). This has led BMI to revise our current account deficit forecasts for the two years from 3.4% of GDP and 3.6% of GDP to 3.0% of GDP and 2.8% of GDP (see chart below).
|Boosted, But Still Deteriorating|
|Côte d'Ivoire - Current Account Components, US$bn (LHS) & Current Account Balance, % of GDP (RHS)|
Rising prices will provide support to Côte d'Ivoire's current account deficit in 2013 and 2014, but we do not believe that they will prevent the deficit from gradually widening towards the end of our 2013-2017 forecast period. We maintain the view that the surging import demand spurred by Côte d'Ivoire's investment-fuelled economic growth will contribute to a wider deficit, and predict a shortfall worth 4.6% of GDP in 2017 (see ' Economy reaching Cruising Speed ', July 4) .
|Cocoa - Prices, GBP/Tonne|
There are two key causes of rising cocoa prices, increasing demand in Europe and stagnant production in key exporters.
European demand is rising as the continent's fragile economic recovery boosts consumer spending, especially on the discretionary purchases that many consumers cut back on during the recession. With Europe making up almost 40% of global cocoa demand, increasing consumption will have a significant impact on prices.
We doubt, however, that production will increase to meet this demand, and predict that the industry will see a rising deficit over the coming years. Production has been stagnant in key growers (including Côte d'Ivoire itself ) due to low levels of investment in a sector that remains inefficient and dominated by small-holders. Ivorian farms face particularly high barriers to boosting yields, with years of underinvestment leaving the country with ag e ing trees and very low fertiliser use. We predict that cocoa production in Côte d'Ivoire will rise by just 1.1% in 2013 and 2.2% in 2014.
Production in the country has been stagnant for a decade. Highly favourable weather boosted yields in 2011, but BMI forecasts that Ivorian production will be a shade lower in 2014 than it was in 2 004. This lost decade coincided with a period of political and social unrest in Côte d'Ivoire, which only re-established a unified national government in 2011. The effects of this instability on the cocoa industry are clear when the country's production figures are compared with those of neighbouring Ghana.
|West Africa - Production, '000tonnes (LHS) & Production, Rebased To 2004 (RHS)|
While total Ivorian production is over 50% higher than that in Ghana, the lat t er has seen output rise significantly in recent years. Taking 2004 as a base, Ghana has boosted production by 160 % between 2004 and 2013 , while Côte d'Iv oire has seen output fall by 3 % (see chart).
BMI predicts that the structural weaknesses of the Ivorian cocoa sector will keep production growth low, meaning that the sector's contribution to boosting exports will be minimal and largely driven by changes in the global price. The key risk to this production forecast is changing weather effects, which could either lower or raise output.
|A Gradual Rebalancing|
|Côte d'Ivoire - Key Export Goods, % of Total Exports|
Despite efforts to diversify the economy and boost non-cocoa exports, BMI believes that the cocoa sector will remain Côte d'Ivoire's key foreign exchange earner over the duration of our 2013-2017 forecast. This means that the health of the industry, and changing global prices, will continue to have a significant effect on the country's balance of payments position, as well as on the economy generally.
Notwithstanding higher prices over the coming years, BMI believes that stagnating production will prevent the total value of cocoa exports from increasing significantly, and predicts that the sector's share of exports will decline. Even so, the sector's share of export earnings will remain above 25% over the duration of our forecast period.