Ivory Coast's finances are in much better shape than authorities were predicting when it emerged from civil war in April, and with tax revenues beating forecasts, there is no doubting it can pay defaulted external debt by early next year.
But in the longer run, the markets may punish Finance Minister Charles Koffi Diby's decision to continue defaulting on relatively small payments even after its crisis ended in May -- harming its future borrowing prospects.
The West African state, in default for more than six months on its $2.3 billion Eurobond coupons, said last month it would not be able to service external debt this year, and would resume payments to bondholders only next year.
The bond was launched in April last year to repackage defaulted brady bond debt. It matures in 2032.
"This year, our fiscal policy has not been aggressive because we needed to help businesses get back on their feet in a difficult situation," Diby said last week, explaining his unwillingness to let creditors have their dues immediately.
The council of ministers passed a 3.05 trillion CFA franc budget in June for the rest of 2011, and Diby pledged to tackle high public debt when he released his budget strategy to local investors last Thursday .
Few were surprised when Ivory Coast defaulted on what was supposed to be the bond's first $29 million coupon in December, in the midst of a violent power struggle between ex-president Laurent Gbagbo and current President Alassane Ouattara.
But after Gbagbo was ousted in April, commercial creditors had assumed Ouattara would want to normalise relations with them as soon as possible -- especially considering this debt has already been restructured twice because of past defaults.
Its arrears have since doubled because of a default in June.
Meanwhile, government revenues have consistently beaten its dire projections, raising eyebrows in the markets.
"Many economic figures seem to be understated," said Standard Bank emerging market strategist Samir Gadio. "The stats are well above projections, not as bad as authorities expect."
Tax revenue in Ivory Coast was a third higher in the past three months than authorities anticipated -- totalling 284 billion CFA francs by July 25, compared with a projected 213 billion CFA francs.
And some figures in the budget look worse than they are.
For instance, debt service owed this year is equal to 42 percent of total spending. That sounds like a lot, but almost two thirds of that figure is short-dated treasury bills, which most countries don't count in their one-year budget cycle.
In addition to robust revenues from import tax, oil and export taxes on what is likely to be a record cocoa harvest, donors will contribute 437.3 billion CFA francs to plug budget holes until the end of the year.
"The total amount of the Eurobond coupon is so marginal. There's no doubt that if they wanted to pay it, they could do it, probably at the expense of other expenditure, but it could be done," Gadio said.
"Frankly, commercial debt doesn't seem a top priority."
"CAN'T AVOID IT FOR LONG"
IMF country representative, Wayne Camard sees the default as a "consolidation" move, aimed at marshalling resources for recovery,, in comments echoed by Diby and which some analysts took as a tacit IMF green light for his decision.
Camard said the economy had since bounced back quicker than expected. Industrial output was almost back to normal by May.
Some are even starting to ask whether the negative growth forecast assumed in the budget of 6.3 percent is too gloomy.
"GDP in (Ivory Coast) is 51 percent exports. Their assumptions of negative growth were based on a quarter of exports being lost, but that doesn't seem to be the case," said StrategiCo's Lydie Boka, adding that the main export cocoa is surging ahead of last year, swelling government coffers.
Based on the improving picture, Boka expects the government to start repayments quickly in 2012.
"They're aware they can't avoid it for too long. They can pay and they want to, so I'd expect it by January," she said, adding that most other sovereign debt "is going to be written off anyway" when it completes its debt relief programme.
There are longer term risks: if the global economy goes back into recession, commodity prices on which Ivory Coast is heavily dependent may continue to fall as they have in recent days.
And there's always a risk Ivory Coast may delay payments until after debt relief, but if it did creditors may lose patience and sue to accelerate the bond, demanding it all back.
"I think creditors are being patient for now, but if they keep defaulting next year, that might start up some litigation," said a London-based emerging market bond strategist.
Yet even when Ivory Coast does move out of default, the fact it continued not to pay when it did have the money may make borrowing very expensive down the line. The last time it failed to pay this debt, in 2000, it was also judged able to do so.
"Their track record is ... they don't pay when they are able to," Gadio said. "So when they come back on professional terms, they're going to pay the price: market confidence will be low."