Senegal bolstered by strong post-COVID recovery

Senegal’s long-term sovereign credit rating has been affirmed at B+ by S&P Global Ratings, on expectations of strong economic recovery after the coronavirus disease 2019 (COVID-19) crisis.

The outlook has also been kept at stable, as the country benefits from a number of external financing options.

S&P expects that Senegal’s bounce back will be spurred by the on-going infrastructure investment under the Plan Senegal Emergent (PSE).

The rating agency also notes that economic growth, from 2022 to 2023 may exceed the already strong performance in recent years due to new oil and gas production.

S&P expects real gross domestic product (GDP) growth to slow significantly in 2020, to less than 2%, but expects the economy to recover in 2021.

This is given that measures to curb the spread of COVID-19 are likely to weigh on economic activity.

Senegal has implemented strong social measures and over a two-month period has paid approximately $26.7 million (XOF15.5 billion) in electricity bills and XOF3 billion in water bills.

The government measures to support the economy include direct support for the hardest-hit sectors, such as tourism and transport.

Tourism accounted for 9% of formal employment in Senegal and about 5.5% of GDP in 2018, according to the International Monetary Fund (IMF).

Furthermore, the underlying reasons why Senegal has seen strong growth in recent years have not changed, according to S&P. Since the launch of the PSE in 2014, real GDP growth has nearly doubled, to an average of 6.6% in 2015 to 2018, from an average of about 3.5% in 2011 to 2014.

Senegal’s net foreign direct investment (FDI) remains relatively low at 2% to 3% of GDP.

S&P expects FDI inflows into Senegal to increase over the next five years due to recent offshore hydrocarbon discoveries and the participation of several international oil and gas companies.

Initial estimates suggest that hydrocarbon production could start in 2022 or 2023. If these new resources are well managed, this could boost real GDP growth and both fiscal and external revenue, according to S&P.

S&P expects the budget deficit to widen sharply in 2020. Lower growth, combined with a higher budget deficit, will push general government debt to over 60% of GDP.

Nevertheless, significant multilateral and bilateral financial assistance will support the country’s fiscal and external position.

In April, the IMF provided a $442 million loan to Senegal to enable the country to cope with the impact of the pandemic. The loan is expected to cover over two-thirds of Senegal’s estimated additional financing needs.

In addition to the IMF loan, the West African Development Bank has disbursed a XOF15 billion financing package to Senegal.

The rating agency also expects the fiscal deficit to decline toward the West African Economic and Monetary Union’s (WAEMU) 3% convergence criteria.

S&P also expects the government to implement measures to improve tax collection, one of the country’s key weaknesses, toward 20% of GDP, in line with the PSE.

However, Senegal’s above-the-line reported general government deficits are not a complete measure of the country’s net financing needs. This is because they exclude substantial below-the-line treasury operations.

These include financial support to state-owned postal company SN La Poste through an overdraft facility – and capital support to the Civil Service Pension Fund (FNR).

Other treasury operations excluded include budgetary transactions initiated in the previous fiscal years, postponed from one year to the next.

These operations explain the all-time peak net government borrowing of 9.7% of GDP in 2018, which was above the headline budget deficit of 3.7% of GDP, according to S&P.

However, S&P expects financing needs related to these operations to shrink over the coming years.

In addition to fiscal policy, measures taken by the Central Bank of West African States (BCEAO) should also help mitigate economic effects of the pandemic in Senegal.

Measures taken by BCEAO include increasing the liquidity available to banks.

The central bank has also allocated XOF25 billion to the trust fund of the West African Development Bank to strengthen the amount of concessional resources.

BCEAO has also extended the collateral framework to access central bank refinancing to include bank loans to 1700 prequalified companies.

Furthermore, BCEAO has established a framework in cooperation with banks to support companies with repayment difficulties.

In addition, BCEAO has also created a special refinancing window for COVID bonds issued on the regional market by member countries.

These bonds are used as bridge financing for upcoming bilateral support planned in the three months following issuance and can be fully refinanced at a fixed rate of 2.5%.

S&P expects Senegal’s already large current account deficit to widen in 2020. Given the tighter external financial conditions and the expected drop in FDI, S&P anticipates the deficit to be mainly financed by concessional debt from development financiers.

Hydrocarbon production will likely affect the size of Senegal’s current account deficit. Two-thirds of the deficit stems from the country’s net energy import bill of about 5% of GDP.

S&P expects the current account deficit to widen further through 2021. This should be followed by a reversal as production and export of hydrocarbons begin in 2022 to 2023.

In S&P’s view, external risks are lessened by Senegal’s membership of WAEMU. According to the rating agency, the WAEMU monetary arrangement mitigates most risks related to substantial exchange rate volatility, and helps contain inflation.

The XOF is pegged to the euro, and the French treasury guarantees its convertibility. However, the level of the exchange rate is not guaranteed, and the XOF was devalued by 50% in 1994.

On the downside, Senegal’s low per capita income, substantial external leverage, rapidly increasing public debt, and structural bottlenecks continue to constrain the ratings.

S&P would consider upgrading the ratings if, following the COVID-19 crisis, net government borrowing requirement declines significantly.

The rating agency would downgrade the rating if Senegal’s budgetary performance deteriorates more than expected and real GDP growth rates are significantly weaker than forecasted.

Meanwhile, S&P has also affirmed Senegal’s short-term sovereign credit rating at B.

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