(The following statement was released by the rating agency)
July 16 -
-- After more than a year of popular unrest, there has been a fairly smooth leadership transition in Senegal.
-- We expect the new administration will act to address higher-than-expected fiscal imbalances, but we also note substantial implementation challenges.
-- We are affirming our 'B+/B' long- and short-term foreign and local currency sovereign credit ratings on the Republic of Senegal.
-- The negative outlook reflects our view that we could downgrade the Republic of Senegal's ratings if the new government's policies do not effectively address the country's most pressing fiscal and external imbalances and boost economic growth prospects.
On July 16, 2012, Standard & Poor's Ratings Services affirmed its 'B+' long-term and 'B' short-term foreign and local currency sovereign credit ratings on the Republic of Senegal. The outlook is negative.
The transfer & convertibility (T&C) assessment on the Republic of Senegal remains at 'BBB-', which is the same for all countries belonging to the West African Economic and Monetary Union (WAEMU). The recovery rating is '4', indicating our expectation of average (30%-50%) recovery in the event of a payment default.
The ratings on Senegal are constrained by the country's low level of economic development, weak social indicators, and persistent external and fiscal deficits. The ratings are supported by recent political advances, good relations with donors, and monetary stability, as provided by CFA franc zone membership.
We believe Senegal's political situation has improved in recent months. President Macky Sall took office after the March 2012 presidential elections--a smoother political transition than we had anticipated. Popular discontent over electricity shortages and rising food and fuel prices, as well as controversy over the legality of former President Wade's run for a third presidential mandate, has dissipated. We believe this will afford the new government a window in which to effectively address economic imbalances. On July 1, President Sall's coalition secured majority in parliamentary elections.
We project Senegal's GDP per capita to increase by 1% in real terms in 2012, slightly up from 2011. We expect annual real GDP per capita growth to approach 2% over the next few years as the effects of the 2011 drought fade and government investment programs start to remove the impediments posed by electricity and other infrastructure shortages.
Fiscal performance in 2011 was slightly worse than we had expected, with the general government recording a deficit of 6.6% of GDP to push the debt-to-GDP ratio towards 40% of GDP. We anticipate little improvement this year, but we believe the government's fiscal consolidation plans should reduce the deficit to 4.0% by 2015, when debt should reach 47% of GDP.
To boost medium-term growth, the new government intends to proceed with some of the infrastructure developments started under the former legislature, particularly the reform of the government-owned electricity company, investment in energy production and distribution, and the construction of a new motorway and airport. Other plans in the country include the extension of privately run Dakar port, the creation of an additional port, and the creation of a special economic zone.
While capital expenditure--accounting for about 40% of total government spending--may be delayed in order to achieve fiscal targets, we expect most of the government's fiscal adjustments to be on the current expenditure side, which has rapidly grown in recent years.
We believe the new government will meet its commitments to the IMF under its Policy Support Instrument (PSI) program. We understand that it is clearing domestic arrears--mainly to suppliers--and auditing the former administration's results. Reform programs for public enterprises have started, which could increase their efficiency and decrease contingent liabilities for the government.
While WAEMU membership provides monetary stability, it may also be contributing to Senegal's competitiveness challenges. Senegal has run current account deficits for almost the last two decades, though they have moderated from double digits as a percent of GDP to around 6% in recent years. The current account deficits have been largely debt-financed, albeit mostly by official creditors at favorable rates.
External risk is related to Senegal's capacity to finance its external deficits through external borrowing-despite largely concessional--and attract FDI. Reserves amount to little more than the monetary base, a level we usually consider crucial in maintaining confidence in a pegged exchange rate regime. However, the pooling of reserves in the CFA franc monetary union gives members more leeway.
The negative outlook reflects our view that we could lower the ratings if the new government's policies do not effectively address fiscal and external imbalances and boost economic growth prospects. We could lower the ratings if plans to address the most needed infrastructure shortfalls are not implemented rapidly, or if unforeseen factors increase projected fiscal and external deficits. Conversely, we could revise the outlook to stable if infrastructure investments as well as structural reforms reduce the economy's vulnerability to external shocks.
Related Criteria And Research
-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011
-- Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009
-- Introduction Of Sovereign Recovery Ratings, June 14, 2007
Senegal (Republic of)
Sovereign Credit Rating B+/Negative/B
Transfer & Convertibility Assessment BBB-
Senior Unsecured B+
Recovery Rating 4