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Rating Action:

Moody's places Senegal's Ba3 ratings on review for downgrade

12 Jun 2020

New York, June 12, 2020 -- Moody's Investors Service ("Moody's") has today placed the Government of Senegal's Ba3 foreign and local currency issuer ratings and its foreign-currency senior unsecured ratings on review for downgrade. Concomitantly, Moody's has affirmed Senegal's Not Prime (NP) short-term foreign-currency and local-currency issuer ratings.

The decision to place Senegal's ratings on review for downgrade reflects Moody's assessment that the country's participation in the G20 Debt Service Suspension Initiative (DSSI) raises the risk that private sector creditors will incur losses. The suspension of debt service obligations to official creditors alone would be unlikely to have rating implications; it provides liquidity relief at a time when Senegal's fiscal position is under pressure as a result of the global coronavirus shock. However, the G20's call on private sector creditors to participate in that initiative on comparable terms raises the risk of default on privately-held debt under Moody's definition.

The government has expressly stated its commitment to comply with all of its contractual obligations vis-a-vis private sector creditors and does not intend to extend the DSSI to them. However, this contrasts with a call by the official sector for commercial creditors to contribute to debt service relief.

Consistent with Moody's approach globally, the review period will allow the rating agency to understand the significance of the statement in the Debt Relief term sheet that private sector creditors should participate on comparable terms. The review will assess whether Senegal's participation in that initiative will indeed be implemented without private sector participation, in which case the rating will likely be confirmed at the current level; or, if not, what lower rating would be consistent with expected losses.

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

RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

REVIEW FOR DOWNGRADE WILL ASSESS CREDIT IMPLICATIONS OF ACCESSING G20 DEBT SERVICE SUSPENSION INITIATIVE (DSSI)

On June 10, the government of Senegal announced its participation in the G20 DSSI and the initiation of discussions with the Paris Club secretariat and official bilateral creditors for an orderly implementation of DSSI. The government announced that DSSI will take effect with the suspension of principal and interest payments due to all official bilateral creditors until the end of 2020 for an amount of FCFA 90.6 billion ($157.2 million or 0.6% of GDP) between June 1 and the end of the year, accounting for 13.5% of the government's external debt service in 2020.

Suspension of debt service obligations to official creditors alone would be unlikely to have rating implications; indeed, relief from official debt service obligations would allow fiscal resources to be devoted to essential health efforts and social spending, while also reducing external and government liquidity pressures at a time when Senegal is experiencing significant pressure as a result of the coronavirus global shock.

However, the G20 has called on private sector creditors to participate in that initiative on comparable terms. Moody's estimates remaining government external debt service due to private creditors in 2020 to be about 0.4% of GDP, mainly reflecting service on Senegal's five international bonds which account for about 25% of central government debt, or about 16% of GDP. For 2021, the government's eurobond debt service will amount to about $330 million, or 1.2% of GDP.

Moody's central government debt perimeter excludes coverage of para-public entities and SOEs' debt and guarantees which account for an additional 10% of GDP and which are mostly externally funded. Should these entities need support from the government, effective external debt service by the government would rise accordingly.

Senegal has explicitly confirmed its intention not to extend the DSSI to private sector debt. Nevertheless, the G20's current debt relief terms as articulated in the term sheet published on 15 April call for private sector participation on comparable terms. The review period will allow Moody's to assess how the apparent tension will be resolved between the government's desire not to extend participation in the DSSI beyond debt service owed to official sector creditors, and the G20's call for private sector creditors to participate. It will assess whether Senegal's participation in that initiative will indeed be implemented without private sector participation and, if not, what lower rating would be consistent with expected losses.

CORONAVIRUS SHOCK EXACTING SIGNIFICANT TOLL ON SENEGAL'S GROWTH AND FISCAL POSITION

One key constraint for Senegal's credit profile is the relatively high central government debt burden which reached 56% of GDP in 2019, and which Moody's expects to increase further to 65% in 2020 and is unlikely to fall back in the foreseeable future. This large increase in the central government debt ratio is mainly driven by the expected widening of the primary deficit to 3.3% of GDP in 2020, reflecting pandemic-related spending and weaker revenues, in addition to the significant growth slowdown and a more uncertain medium-term growth outlook than previously expected. Relatively high government debt above the Ba3 median limits Senegal's shock absorption capacity and its ability to support the development of strategic sectors.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Environmental considerations are material to Senegal's rating and weigh on its economic strength. Senegal is exposed to recurring natural disasters, the credit impact of which is exacerbated by low wealth levels and the importance of agriculture for employment. This sector however has proved resilient to weather-related shocks lately, with a steadier contribution of agriculture in growth.

Social considerations have limited the speed of economic development of Senegal, though these are not material to the rating. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. For Senegal, the shock manifests mainly in deteriorating debt dynamics which are exacerbated by slower growth.

Governance considerations are material for Senegal's rating. Governance reforms have progressed with the support of the IMF under Senegal's Policy Support Instrument (PSI), with a focus on public governance even though the improvement in fiscal outcomes has lagged.

FACTORS THAT COULD RESULT IN CONFIRMATION OF THE CURRENT RATING OR DOWNGRADE OF THE RATING

The rating would likely be confirmed at its current level should Moody's conclude that participation in DSSI would be unlikely to entail default on private sector debt.

The rating would likely be downgraded should Moody's conclude that participation in the G20 DSSI would probably entail default on private sector debt. Under this scenario, Moody's would position the rating at the level consistent with the losses expected to be incurred by private creditors in the near future and over the medium term.

Other factors that could place downward pressure on the rating were they to become apparent during the review period include a material further intensification of fiscal and growth pressures and/or indications that Senegal's access to affordable funding has materially and durably deteriorated.

GDP per capita (PPP basis, US$): 3,859 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 6% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.7% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -3.9% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -7.8% (2019 Actual) (also known as External Balance)

External debt/GDP: 59.4% (2019 Estimate)

Economic resiliency: ba2

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 11 June 2020, a rating committee was called to discuss the rating of the Government of Senegal. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, 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 Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, 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 further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Elisa Parisi-Capone
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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