Somewhat reassured about the consequences of a debt moratorium, Moody’s maintains Senegal’s Ba3 rating. The agency nevertheless points to high debt, in view of a slowly growing wealth.
Moody’s confirmed its rating for Senegalese sovereign debt at Ba3. Note therefore maintained, as for the Ivory Coast and Cameroon, the American agency considering the risk that private borrowers will suffer losses in the event of a debt moratorium as estimated at its fair scale. But unlike its two neighbors in sub-Saharan Africa, Cameroon is seeing its outlook go “negative”. In other words, Moody’s warns of a possible downgrade of its rating.
Over the past few weeks, Moody’s has reviewed evidence of the implementation of the G20 Debt Service Suspension Initiative (DSSI) for a range of rated sovereign debt, as well as statements by G20 officials.
While Moody’s continues to believe that the ongoing implementation of DSSI poses “risks to private creditors,” the decision to complete the review and uphold the rating reflects Moody’s assessment that, at this stage, for Senegal, these risks are correctly reflected in the current Ba3 rating.
However, the agency acknowledges that “it is still not clear” what influence countries like Senegal have in negotiating equally between private sector creditors and multilateral or bilateral creditor institutions. “However, a number of evidence suggests that the likelihood of broad private sector participation has declined.”
The government of Senegal, like those of other countries in sub-Saharan Africa, says private sector participation in a possible debt moratorium is not being considered. This, in spite of the urgent requests of the World Bank and the IMF.
So far, moreover, there is no indication that interest payments on debts to private holders have been suspended. However, the rating agency would be forced to reconsider its judgment if Senegal’s debt relief also extends to private creditors. Indeed, Moody’s would consider this option to be a default.
The debt burden!
The “negative” outlook relates more to the fundamentals of the risks associated with Senegal’s debt. Which is “relatively high”, at around 65% of GDP in 2021, against 56% in 2019. This stock of debt – not to be confused with the debt burden – would be around 325% of State revenue against a level by 280% in 2019.
The shock of the coronavirus is exacerbating an upward trend in the debt burden, which was already weighing down before the pandemic. “Such a debt trajectory for an economy with low levels of wealth, like Senegal, limits its absorptive capacity to shocks,” says Moody’s.
This increases the risk that the government will be increasingly constrained in its ability to support the economy or to finance itself at low and stable costs. All the countries in the region are concerned, but Senegal’s Ba rating, which is slightly higher, does not reflect this risk.
Especially since taking into account the outstanding debt of public enterprises and parastatals would add another ten percentage points of GDP to the outstanding debt of the state.
The low GDP per capita, at around $3,900 in 2019, indicates a limited taxable income base to bring the tax-to-GDP ratio to the target level of 20% (from around 17% before the pandemic) over the next three to five. years.
This is Senegal’s commitment to the IMF, under the new three-year coordination instrument, which began in January 2020. A higher domestic revenue base is essential to help finance the second phase of the PSE (Plan Emerging Senegal) 2019-2023, while limiting the use of non-concessional debt on onerous terms that would further jeopardize solvency.
Low social risk!
“Delays in the pace of targeted fiscal consolidation would make Senegal’s high debt burden vulnerable to further shocks, potentially consistent with a lower rating level.”
More generally, Moody’s points to a few areas of weakness and solidity for Senegal. The country remains exposed to environmental risk. It suffers from recurring natural disasters, the impact on credit of which is exacerbated by low levels of wealth and the importance of agriculture for employment. However, this sector has been shown to be resilient to climatic shocks in recent times, and agriculture is contributing more steadily to growth.
More generally, Moody’s points to a few areas of weakness and solidity for Senegal. The country remains exposed to environmental risk. It suffers from recurring natural disasters, the impact on credit of which is exacerbated by low levels of wealth and the importance of agriculture for employment. However, this sector has been shown to be resilient to climatic shocks in recent times, and agriculture is contributing more steadily to growth.
While the coronavirus epidemic risks increasing social tensions, like other affected countries, this factor does not appear to be significant for Senegal.
For the country, the pandemic shock is manifested mainly by a deterioration in the dynamics of debt reduction, exacerbated by a slowdown in growth. Similarly, governance reforms have progressed, with IMF support.
In the medium term, for these latter reasons and barring a further shock, the debt burden could gradually ease, Moody’s considers. Which warns that any delay could have a negative impact on its rating.
Reference: https://lesenegalquejadore.com/2020/08/13/dette-du-senegal-inquiete-moodys/
