Research Update:

Ratings On Senegal Affirmed At

'B+/B'; Outlook Stable
Primary Credit Analyst:
Patrick W Raleigh, London +44 (0)2071767194; [Link]@[Link]
Secondary Contact:
Sophie-Aurore de Saint-Marcq, Paris (33) 1-4420-7362; [Link]@[Link]
Analytical Group Contact:
SovereignEurope; SovereignEurope@[Link]
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Key Statistics
Related Criteria And Research
Ratings List
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Research Update:
Ratings On Senegal Affirmed At 'B+/B'; Outlook
Stable
Overview
The ratings on Senegal are constrained by its low income levels, and our
expectation that sizable government and current account deficits will
narrow only gradually.
The ratings are supported by institutions we consider fairly strong for
the country's region and level of economic development, and by the
government's program of growth-promoting reforms and investment.
Consequently, we are affirming our 'B+/B' sovereign credit ratings on
Senegal.
The outlook remains stable, reflecting our assumption that the expected
rise in investment materializes and succeeds in significantly raising the
country's growth trajectory, and that the government sticks closely to
the path of narrowing its deficit as set out in its IMF program.
Rating Action
On June 20, 2014, Standard & Poor's Ratings Services affirmed its 'B+/B' long
and short-term foreign and local currency sovereign credit ratings on Senegal.
The outlook remains stable.
Rationale
The ratings on Senegal are constrained by its low per capita income levels,
and our expectation that sizable government and current account deficits
(CADs) will persist. The ratings are supported by our perception of Senegal's
institutions as fairly strong for the region and the country's level of
economic development, and by the government's program of reforms and
investment, which we think will boost economic growth.
Since our last published rating action (see "Senegal Ratings Affirmed At
'B+/B'; Outlook Stable," Dec. 20, 2013) we have altered our assumptions only
slightly. We have revised up our forecasts of narrow net external debt in line
with our latest estimates of the international investment position. By
contrast, we have lowered our estimates and forecasts for gross financing
requirements in line with latest indications that the current account deficit
will narrow slightly faster, relative to GDP, than previously expected.
We expect Senegal's institutions and governance to remain fairly strong
compared to West African countries generally, and to similarly rated peers.
This assessment is consistent with the country's standing according to various
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international measures, such as the World Bank's world governance indicators.
The country's record of smooth transfers of power since independence and lack
of civil conflict is a rarity in Africa and other developing regions. This has
helped to win the confidence of foreign donors and investors alike, who also
appreciate apparently-moderate levels of corruption: Senegal ranked at 77 out
of 177 countries in Transparency International's 2013 corruption perception
index. Despite this relative strength, we expect Senegal's business
environment to remain very difficult. The World Bank ranked it at only 178 out
of 189 countries worldwide for ease of doing business in 2013. This will
continue to weigh on investment inflows and economic growth absent
improvement.
Real GDP growth averaged an estimated 3.8% annually in 2004-2014, which we
consider slow for the country's very low income levels. Real GDP growth in
2013 was just 3.5% (according to latest estimates) amid weather-related drops
in agricultural output, as well as declines in manufacturing outturn related
to technical problems in the phosphates sector. We estimate income per head at
just over $1,100 in 2014, and 10-year average trend growth in real GDP per
capita terms at just 1.5%. However, we expect output from the minerals sector
to rebound from recent lows, and the government's ambitious program of reforms
and investment in infrastructure, energy, and agriculture to accelerate
per-capita growth rates to over 2% a year in 2014-2017.
The government's medium-term development strategy, Plan Sngal Emergent
(PSE), targets improvements in agriculture, health, education, housing,
energy, and particularly infrastructure. The plan has attracted pledges of
investment from foreign donors and private investors totaling several billion
dollars. It remains to be seen how much of the pledged investment will
actually be made, over how long, and how effectively it will be executed and
monitored. Nonetheless, on balance we expect it to meaningfully accelerate
growth. Notably, we expect a significant rise in installed electrical
generation capacity--together with falling electricity costs as cheaper
coal-fired generation increases its share in the energy mix and transmission
improves--to stimulate growth across the board in the next three years.
We anticipate that large external imbalances will persist. We estimate the
current account deficit (CAD) in 2013 at around 10% of GDP, and assume it will
continue to be financed by external borrowing and a gently rising proportion
of net FDI. We expect the CAD to narrow gradually relative to GDP as growth in
exports outstrips that in imports. However, the structural trade deficit will
remain for at least the next five years, as the country's high import
requirements for food and energy products will diminish only gradually. The
government's efforts to increase the use of coal for power generation instead
of more expensive diesel and gas will also take time.
We forecast gross external financing requirements at 150% of current account
receipts (CARs) and usable reserves in 2014-2017. Narrow net external debt,
meanwhile, will equal around 100% of CARs in 2014-2017.
The government's plans to take stakes in many of the investment projects
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Research Update: Ratings On Senegal Affirmed At 'B+/B'; Outlook Stable
targeted by the PSE will keep capital spending high over the next three years.
Given this, and the difficulty we expect the authorities will face in slowing
growth in its current spending, particularly on subsidies and public sector
wages, we forecast continued, albeit narrowing, deficits in 2014-2017. We
believe that a chronic shortfall in infrastructure and basic services will
constrain fiscal flexibility, as popular demands for improvement will keep
spending pressures high.
Despite these pressures, we expect the government to continue shrinking its
deficit relative to GDP through efficiency savings, improved revenue
collection, and better monitoring of spending. Although we see a risk of
slippage, particularly if spikes in the cost of living prompt the government
to raise spending on subsidies, on balance we forecast a general government
balance equivalent to 3.7% of GDP in 2017.
We anticipate that the financing of these deficits, through both local and
foreign borrowing, will lead general government debt to increase by an average
of 3.6% of GDP annually in 2014-2017. We expect the government's stock of
debt, net of its liquid assets, to rise to 46% of GDP in 2017, higher than
before debt relief was granted under the Heavily Indebted Poor Country
initiative in 2006. Over three-quarters of government debt is external (and
mostly concessional in nature) and most is denominated in foreign currency. In
our view, the government's plans for an imminent Eurobond issuance would
probably increase the proportion of commercial debt in the government's
external debt stock and raise average interest rates.
We expect Senegal to remain a member of the WAEMU, which limits the country's
monetary policy flexibility. Our forecasts assume that the West African CFA
franc (XOF) will remain pegged to the euro at XOF656:1 during 2014-2017,
given the macroeconomic stability that this arrangement confers, particularly
in terms of limiting exchange rate risk for investors and of keeping inflation
to low-single-digit annual average increases.
Outlook
The outlook remains stable, reflecting our assumption that the expected rise
in investment materializes and succeeds in significantly raising the country's
growth trajectory, and that the government keeps closely to the path of
narrowing its deficits as set out in its IMF program.
We could lower the ratings if real GDP per capita growth does not accelerate
as much as we expect, particularly if the government's reforms to the business
environment and energy supply falter, or if the large pledged investments to
improve the country's infrastructure are not forthcoming. We could also lower
the ratings if the fiscal and current account deficits fail to narrow as
quickly as we expect.
Alternatively, we could raise the ratings if consolidation of the twin
deficits significantly surpasses our current expectations, and if economic
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Research Update: Ratings On Senegal Affirmed At 'B+/B'; Outlook Stable
growth accelerates significantly beyond our current forecasts.
Key Statistics
Table 1
Republic of Senegal - Selected Indicators
2007 2008 2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Nominal GDP (US$ bil) 11 13 13 13 14 14 15 16 17 18 19
GDP per capita (US$) 948 1,094 1,018 997 1,077 1,022 1,049 1,111 1,113 1,160 1,210
Real GDP growth (%) 4.9 3.7 2.4 4.3 2.1 3.5 3.5 4.9 5 5 5.1
Real GDP per capita growth (%) 2.1 0.9 -0.4 1.3 -0.8 0.5 0.8 2.1 2.2 2.2 2.3
Change in general government
debt/GDP (%)
4.8 2.5 9 4 7 5.2 6.4 2.6 4.3 3.9 3.7
General government balance/GDP
(%)
-3.8 -4.8 -5 -5.2 -6.7 -5.9 -5.5 -4.9 -4.2 -3.9 -3.7
General government debt/GDP
(%)
23.7 23.9 32.6 34.9 39.9 42.9 48.5 48 49.1 49.8 50.2
Net general government
debt/GDP (%)
18.9 18.7 26.1 29.6 34 35.9 43 42.4 44 45 45.7
General government interest
expenditure/revenues (%)
2.6 3 2.9 3.4 6.6 6.8 6.8 8.3 8.2 8.2 8.2
Oth dc claims on resident
non-govt. sector/GDP (%)
24.5 24.5 26.6 28.9 31.3 31.3 35.1 35.8 36.5 37.2 37.8
CPI growth (%) 5.9 5.8 -1.1 1.3 3.4 1.4 0.7 1.7 1.8 1.8 1.8
Gross external financing
needs/CARs +use. res (%)
134.8 140.7 133.3 121.1 132.5 141.1 130.8 141.1 150.3 153.6 153.8
Current account balance/GDP (%) -11.6 -14.1 -6.7 -4.5 -7.9 -10.8 -10.3 -9.7 -9.5 -9.1 -7.7
Current account balance/CARs
(%)
-28.1 -32.6 -16.9 -11 -19.2 -25.3 -23.7 -21.7 -20.3 -19 -15.4
Narrow net external debt/CARs
(%)
55.2 64.9 86 79.5 71.8 87.3 92.2 97.4 103.3 105.6 105.1
Net external liabilities/CARs (%) 29 49.9 60.6 57.9 66.4 83.6 89.4 102.9 111 114.8 114.7
Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the
national definition of broad money. Gross external financing needs are defined as current account payments plus short-term
external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt
maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private-
sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus
financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external
lending. CARs--Current account receipts.
The data and ratios above result from S&Ps own calculations, drawing on national as well as international sources, reflecting S&Ps
independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.
Related Criteria And Research
Related Criteria
Sovereign Government Rating Methodology And Assumptions, June 24, 2013
Methodology For Linking Short-Term And Long-Term Ratings For Corporate,
Insurance, And Sovereign Issuers, May 7, 2013
Criteria For Determining Transfer And Convertibility Assessments, May 18,
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Research Update: Ratings On Senegal Affirmed At 'B+/B'; Outlook Stable
2009
Related Research
Sovereign Defaults And Rating Transition Data, 2013 Update, April 18,
2014
In accordance with our relevant policies and procedures, the Rating Committee
was composed of analysts that are qualified to vote in the committee, with
sufficient experience to convey the appropriate level of knowledge and
understanding of the methodology applicable (see 'Related Criteria And
Research'). At the onset of the committee, the chair confirmed that the
information provided to the Rating Committee by the primary analyst had been
distributed in a timely manner and was sufficient for Committee members to
make an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and critical issues
in accordance with the relevant criteria. Qualitative and quantitative risk
factors were considered and discussed, looking at track-record and forecasts.
The chair ensured every voting member was given the opportunity to articulate
his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the
rating committee are summarized in the above rationale and outlook.
Ratings List
Ratings Affirmed
Senegal (Republic of)
Sovereign Credit Rating B+/Stable/B
Transfer & Convertibility Assessment BBB-
Senior Unsecured B+
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Research Update: Ratings On Senegal Affirmed At 'B+/B'; Outlook Stable
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