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.
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
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%
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.
For ratings issued on a program, series, category/class of
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