CFA Franc

The CFA Franc (official name: Franc of the Financial Community of Africa) is the currency used by 14 countries in West and Central Africa. Think of it as a special currency with a powerful guardian: the Euro. The CFA franc is pegged to the euro at a fixed exchange rate, meaning its value doesn’t float freely based on market supply and demand. Instead, it maintains a constant, stable relationship with the euro (currently 1 EUR = 655.957 CFA). This arrangement is a legacy of the French colonial era, where the CFA franc was originally pegged to the French franc. The convertibility of the currency is historically guaranteed by the French Treasury. This peg is the CFA franc’s most defining feature, creating a unique set of opportunities and risks for investors looking at this vibrant and growing part of the world. It’s a bit like having a small, predictable boat securely tied to a massive, stable ship—the ride is smoother, but you can’t choose your own direction.

It's important to know that the CFA franc isn't a single, unified currency. It's actually split into two distinct, though functionally identical, monetary zones, each with its own central bank.

• West African CFA franc (XOF): Used by the eight member states of the West African Economic and Monetary Union (UEMOA): Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo.
• Central African CFA franc (XAF): Used by the six member states of the Central African Economic and Monetary Community (CEMAC): Cameroon, Central African Republic, Chad, Republic of the Congo, Equatorial Guinea, and Gabon.

While both francs are pegged to the euro at the exact same rate, they are not legally interchangeable. You can't spend a West African CFA franc in a Central African country, and vice-versa. For an investor or traveler, this is a crucial practical detail to remember.

The CFA franc’s peg to the euro presents a fascinating mix of pros and cons. A savvy investor needs to weigh both sides carefully.

For many, the biggest draw of the CFA zone is its predictability in a continent often associated with volatility.

• Reduced Currency Risk: The fixed exchange rate is a huge relief for European and American investors. You can value a company, project future cash flows, and repatriate profits without the headache of a wildly fluctuating currency erasing your gains overnight. This drastically reduces currency risk, a major hurdle in many emerging markets.
• Low Inflation: The strict monetary discipline required by the peg, managed by the regional central banks, has historically resulted in lower and more stable inflation compared to neighboring countries. Low inflation protects the real value of your investments and creates a more stable operating environment for businesses—a core tenet of value investing which prioritizes the preservation of purchasing power.

The stability comes at a cost, creating risks that are less about market chaos and more about economic policy and politics.

• Lack of Monetary Sovereignty: Member countries give up control over their monetary policy. They cannot devalue their currency to make their exports cheaper and more competitive on the global market. They also can't independently adjust interest rates to stimulate their economies during a downturn. This means a policy that's right for the Eurozone might be wrong for West Africa, potentially leading to prolonged economic slumps.
• The Devaluation Ghost: While stable, the peg is not eternal. In 1994, the CFA franc was devalued by 50% overnight. While the current setup is robust, a future political or economic crisis could force another devaluation. This is a significant tail risk that could instantly cut the dollar or euro value of your assets in half.
• Political Undercurrents: The arrangement is a frequent target of criticism, with many viewing it as a neocolonial tool that hinders economic independence. Any major shift in the political relationship between France and the African member nations could threaten the entire system.

So, how should a value investor approach the CFA zone?

1. Go Beyond the Balance Sheet: Investing here is as much a macroeconomic and political bet as it is a microeconomic one. You are betting on the continuation of the peg. Pay close attention to the political discourse in both France and the CFA member states.
2. Focus on Domestic Champions: Look for high-quality businesses that serve their local or regional populations. Companies focused on domestic consumption (e.g., banking, telecom, consumer staples) are often better insulated from the currency's potential overvaluation, which can harm exporters.
3. Don't Forget Diversification: The CFA zone offers a specific type of risk-reward profile. Balance your portfolio by also investing in other major African economies with floating currencies, like Nigeria, Kenya, or South Africa. This spreads your currency and political risk.
4. Use Stability to Your Advantage: The stable currency makes financial statements easier to analyze. Unlike in markets with high inflation and currency volatility, strong, consistent earnings in a CFA-zone company are a clearer signal of genuine business quality and management skill. This allows you to focus on what matters most: finding wonderful companies at fair prices.