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Rating Action:

Moody's affirms Senegal's Ba3 rating; outlook stable

04 Oct 2019

Paris, October 04, 2019 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Senegal's Ba3 long-term foreign-currency and local-currency issuer ratings and maintained the stable outlook. Concomitantly, Moody's has affirmed Senegal's Ba3 foreign-currency senior unsecured debt ratings as well as its Not Prime (NP) short-term foreign-currency and local-currency issuer ratings.

The key drivers behind Moody's decision to affirm Senegal's Ba3 rating include the continuation of transparent and predictable economic policies that support steady growth in GDP and wealth levels amid Senegal's robust institutional strength and track record of policy effectiveness. This is balanced by the fact that, despite sustained high growth, government debt is relatively high, and has continued to rise, which constrains the government's capacity to absorb shocks and support the development of strategic sectors at times when fiscal developments are weaker than planned. Meanwhile, Senegal's membership to the West African Economic and Monetary Union (WAEMU) and associated institutional arrangements attenuate external vulnerabilities.

The stable outlook reflects Moody's expectation that the economy will continue growing at its 6-7% rate, driving further increases in income levels, and that the current foreign exchange regime and external stability that it fosters will continue for the foreseeable future. Key to the rating agency's stable outlook is its expectation that ongoing fiscal consolidation and the phasing-out of support to public entities will contribute to a stabilisation of the government debt burden around 55% of GDP and 270% of revenues over the medium term.

All long-term ceilings for foreign-currency and local-currency deposits and debt remain unchanged at Baa1.

RATINGS RATIONALE

RATIONALE FOR AFFIRMING THE Ba3 RATING

CONTINUATION OF ECONOMIC POLICIES THAT SUPPORT STEADY ECONOMIC GROWTH AT HIGH LEVELS

The Government of Senegal continues pursuing its economic development policy plan (Plan Sénégal Emergent, PSE), with the second phase covering 2019-22 and focusing on infrastructure upgrades, especially in the energy sector, as well as on improvements to the business and investment environment to foster private sector investment. This second phase will likely be more challenging in terms of implementation than the first one, in part because of the relatively high government debt burden constraining the ability to support strategic sectors, and also given its focus on fostering a transfer to the private sector as an engine of growth. Nevertheless, Moody's expects that economic policies will continue to drive steady GDP growth at high levels, in line with Senegal's performance achieved over 2014-2018 around 6-7%. With this, income levels will continue to rise at a robust pace.

Senegal's strategy is to take advantage of future, large gas production to shift electricity generation from coal to gas and reduce the cost of electricity. More reliable and less costly access to electricity would support the economy's competitiveness. During the first phase of the PSE, the authorities already improved the country's electrification, especially in rural parts, from 30% in 2014 to 40% in 2017. While there are inherent project risks to the gas production plans, which the authorities expect to start in 2022, Moody's expects that the government will achieve some marked reduction in electricity costs. The government is also working at the modernization of the tax system and administration to better reconcile short turnaround in tax matters and the need for controls as a means to improve the business environment.

RELATIVELY HIGH AND, SO FAR, RISING GOVERNMENT DEBT IS A KEY CREDIT CONSTRAINT

The government's debt has been so far on an increasing trend and reached 55% of GDP in 2018, which is above the Ba3 median, and up from 38% in 2014. Relatively high government debt limits Senegal's capacity to absorb shocks or support the development of strategic sectors. Meanwhile, the government has become somewhat more vulnerable to shifts in foreign investor sentiment and interest rate increases given its recourse to five Eurobonds over 2011-18. That said, borrowing has been limited to the funding of capital spending, which the government has in part self-financed.

Foreign currency risk is contained compared to rating peers, thanks to Senegal's peg to the euro and utilization of currency swaps. Moody's estimates that foreign currency risk applies to only 40% of the government debt after accounting for long-maturity swaps and excluding euro-denominated debt given Moody's confidence in the peg to the euro. And while there have been recent statements by officials in the region on the future evolution of the current peg to a floating regime, Moody's does not expect any significant changes in the foreseeable future.

SENEGAL'S WAEMU MEMBERSHIP ATTENUATES EXTERNAL VULNERABILITIES

Despite recurrent current account deficits, in the range of 7-8% of GDP in recent years, Senegal's membership to the WAEMU, where the CFA franc peg to the euro is guaranteed by France (Aa2 positive) and foreign exchange reserves are pooled by the eight member countries, attenuates external vulnerabilities. The arrangement preserves macroeconomic and financial stability in Senegal despite relatively low foreign exchange coverage of imports for WAEMU.

Beyond external vulnerability, Senegal exhibits limited susceptibility to event risks compared to rating peers, with relatively low banking sector risk, government liquidity risk and political risk. The government's financing needs of 10% of GDP annually is met by a mix of official lending on favourable terms and debt issuance, both on international and regional markets, which the government has a track record of accessing. The small size of the banking sector with assets representing 39% of the GDP and its stable funding structure limit Senegal's banking sector risk. Political risk is low as reflected by the country's history of political stability, including peaceful transition of power.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that the government debt burden will stabilize at around 55% of GDP and 270% of revenues over the medium term. This assumes fiscal consolidation measures that will bring the fiscal deficit to 3% of GDP from 2019 onwards, down from 3.7% in 2018, in line with the government's targets. Senegal has in the past generally achieved its fiscal targets thanks to intra-annual budget monitoring and, when necessary, adjustments.

Fiscal prospects are also dependent on "below-the-line" spending (i.e. spending not reflected in the deficits). The clearance of arrears accumulated by the government towards goods and services providers over 2016-18 worth 3% of GDP, as well as the clearance of the backlog of transfers due to public entities representing 2% of GDP, will contribute to the government's borrowing needs in the next few years. At this stage, Moody's assumes sizeable below-the-line expenditure of around 2% of GDP per annum over the medium-term, albeit down from an average of 3.5% of GDP over the past 4 years, according to Moody's estimate. The government has put in place measures to limit below-the-line spending in future, including restrictions on the capacity of public entities to defer credits from one year to another. Larger arrears to clear or support to state-owned enterprises would raise the risk that the debt burden rises further.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

As explained above, governance considerations are material for Senegal's rating. Senegal's ranking under the Worldwide governance indicators has improved to moderate levels on a global scale and high levels compared with other Ba3-rated sovereigns. Governance reforms have progressed with the support of the IMF under Senegal's PSI, with a focus on public governance even though the improvement in fiscal outcomes has lagged.

Environmental considerations are material to Senegal's rating and primarily weigh on its economic strength. Senegal is exposed to recurring climate change-related natural disasters, the credit impact of which is exacerbated by low levels of wealth and the importance of the agricultural sector for employment. However, the authorities have managed to improve the agricultural sector's resiliency to weather-related shocks as illustrated in the steady contribution of agriculture in growth over the last 5 years.

While social considerations have limited the speed of economic development of Senegal, these are not rating material to the rating. Access to health and education services is broadly in line with other countries at similar income levels, while Senegal scores comparatively well on measures of social considerations such as human rights and inclusiveness relative to peers.

WHAT COULD CHANGE THE RATING UP

Prospects that the debt burden is on a sustained downward trajectory would exert upward pressures on Senegal's rating. Such an outcome would provide increased capacity to the government to use fiscal policy to absorb potential shocks, and accelerate measures to foster higher private investment in the economy, in turn limiting the economy's reliance on the public sector.

WHAT COULD CHANGE THE RATING DOWN

A further increase in government debt-to-GDP would put downward pressures on the rating. More generally, signs that the government's capacity to absorb shocks has become more constrained and fiscal policy credibility diminished would likely lead to a rating downgrade.

GDP per capita (PPP basis, US$): 3,651 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 6.7% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.3% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -3.7% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -7.5% (2018 Actual) (also known as External Balance)

External debt/GDP: 49.7% (2018 Actual)

Level of economic development: Moderate level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 02 October 2019, a rating committee was called to discuss the rating of the Senegal, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutional strength/ framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Lucie Villa
VP - Senior Credit Officer
Sovereign Risk Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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