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Rating Action:

Moody's upgrades Senegal's issuer rating to Ba3, outlook stable

Global Credit Research - 13 Apr 2017

New York, April 13, 2017 -- Moody's Investors Service has today upgraded the long-term issuer and senior unsecured debt ratings of the Government of Senegal to Ba3 from B1 and changed the outlook to stable from positive. Moody's also affirmed the short-term issuer ratings at Not Prime.

The key drivers supporting the upgrade to Ba3 are:

1) The higher economic growth potential driven by government-led upgrades to energy and transport infrastructures as well as structural reforms.

2) Slow but continuous fiscal consolidation that has been concomitant to enhancements in the budget structure with increased government capital spending and revenue intake.

3) Government debt metrics broadly in line with Ba3-rated sovereigns, with high debt affordability and limited foreign exchange risk against the backdrop of higher debt burden.

All Senegal's long-term foreign and local currency bond and bank deposit country ceilings remain unchanged at Baa1.

RATINGS RATIONALE

RATIONALE FOR THE UPGRADE TO Ba3

HIGHER ECONOMIC GROWTH POTENTIAL

Senegal's economic growth stepped-up to 6% in 2014-16 from 3% in 2011-13. This acceleration has been primarily structural, driven by government-led upgrades to energy and transport infrastructures and structural reforms, including some supply side reforms in agriculture and an improvement in economic governance. Direct contribution from public investment explains only 0.7 percentage point of the acceleration, followed by private investment and consumption.

Moody's expects a 6.5% of real growth over the medium-term, alongside the further implementation of the authorities' economic development policy roadmap, the PSE (Plan Sénégal Emergent). In particular, agriculture will likely continue to benefit from improved productivity and tourism from improved infrastructures. For instance, the opening of the new international Blaise Diagne International Airport, delayed on several occasions, is now planned for the end of 2017.

Moody's growth expectation remains however below that foreseen by the PSE of 7-8% by 2020 as the latter would likely require higher private investment. While the business environment has improved, as illustrated by the World Bank's Ease of Doing Business Survey which ranked Senegal among the top 10 best performers in 2015 and 2016, Senegal's economic competiveness remains low and foreign direct investment limited at around 2% of GDP annually.

Noteworthy improvements in agricultural output have not only had a positive impact on the overall economic performance -- as agriculture employs 46% of the workforce -- but it has also helped reduce Senegal's trade balance with the food bill, accounting for 21% of imported goods, down by 2% in value between 2013 and 2015 while food exports were up by 37% during the same period. The overall current account deficit improved substantially to an estimated 6.9% of GDP in 2015, from 10.4% in 2013, also having benefited from the drop in oil prices. Going forward, Moody's expects contained food imports to counter-balance oil imports as oil prices are slightly rebounding, with a current account deficit around 7.5% of GDP.

SLOW BUT CONTINUOUS FISCAL CONSOLIDATION AND IMPROVED BUDGET STRUCTURE

The government has stressed its intention to maintain fiscal discipline over the course of the implementation of the PSE and to create sufficient fiscal space to finance key infrastructure projects. It reduced its fiscal deficit at a slow but steady path from 5.5% in 2013 to 4.2% in 2016. Moody's expects a further reduction in fiscal deficit to 3.7% in 2017, in line with the budget target, and 3.0% by 2019 which corresponds to the medium term target applicable in the WAEMU (West African Economic and Monetary Union).

Over the last two years, the government has managed to reach its budget targets, in part thanks to prudent budgetisation with a reserve envelop of 2.5% of budgeted capital spending. However, the government has also often reallocated revenue in excess of budgetary levels to operating and capital spending during the year, thereby giving precedence to economic support vis-à-vis debt moderation.

Concomitant to the reduction in the fiscal deficit, Senegal's budget structure improved gradually over the last years. Operating spending has remained broadly stable, while capital spending has progressively increased to 12.5% of GDP in 2016 from 10.8% in 2013. Concurrently, the government revenue net of grants increased to 23.9% of GDP in 2016 from 19.9% in 2013.

GOVERNMENT DEBT METRICS BROADLY IN LINE WITH Ba3-RATED SOVEREIGNS

Senegal government debt metrics are broadly in line with Ba3-rated sovereigns. Although its debt burden as measured against GDP is higher than peers at 60% (2016), compared to a median of 45% for similar rated peers, Senegal's debt-to-revenue metric of 226% is more in line with that of its peers and its debt affordability, as measured by its average interest cost, is more favourable, at 3.5% in Senegal versus 4.1% for the Ba3-median.

Senegal's current government debt load remains relatively high but is expected to trend downward in the coming years. Moody's expects debt-to-GDP to have peaked in 2016 and fall to 55% by 2019, supported by the continued reduction in the deficit and the maintenance of high nominal growth rate of about 8.5%. The downward debt trajectory should also be on a more secured footing going forward given that the government has now addressed most legacy issues arising from accumulated arrears within the public sector.

The structure of the debt is also credit supportive. Roughly half of the debt is on concessional terms. And despite having a large share (68%) of its debt denominated in foreign currency (FC), the government's exposure to foreign exchange risk is well contained. Indeed, a significant part of its FC debt is in Euro (25% of total debt) and since the local currency is pegged to the Euro with the convertibility guaranteed by the French Treasury, FX risk is more limited. Moreover, all market debt in FC has consistently been swapped into Euro limiting FX risk exposure to concessional debt.

Moody's further notes that Senegal has recently revalued up by 30% its 2014 GDP as part of a rebasing of national accounts and switch to the 2008 National System of Account, instead of the 1993. When the full historic data under that new base will be available, this will improve the government debt to GDP ratios and other metrics.

RATIONALE FOR THE STABLE OUTLOOK

The outlook is stable. This is supported by the expectation that a level of around 6.5% of growth will be maintained in the medium term and that government debt has started to trend downward, supported by continued fiscal consolidation.

WHAT COULD CHANGE THE RATING DOWN

Moody's would consider downgrading Senegal's Ba3 ratings if the government debt-to-GDP ratio were to rise over the next years, external imbalances were to markedly widen and/or external or domestic shocks were to affect economic growth.

WHAT COULD CHANGE THE RATING UP

Moody's would consider upgrading Senegal Ba3's ratings further should the government bring debt to significantly lower levels, thereby providing shock absorption capacity to any potential shocks, and boost private investment in the economy -- both foreign and domestic -- thereby stepping up the country's growth potential, increasing wealth levels and limiting external vulnerabilities.

GDP per capita (PPP basis, US$): 2,614 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 6.7% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.1% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -4.2% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -7.5% (2016 Actual) (also known as External Balance)

External debt/GDP: 39.4% (2016 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 11 April 2017, 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 increased. The issuer's fiscal or financial strength, including its debt profile, has improved. Other views raised included: The issuer's institutional strength/ framework, have 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 December 2016. 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 or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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

No Related Data.
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