Senegal – Sub-Saharan Africa’s good news story


We think Senegal is one of the good news stories in Sub-Saharan Africa (SSA), which will be reinforced as GDP is revised up by perhaps 30% in 2018.

Senegal was one of only two Sub-Saharan Africa countries to be upgraded in 2017
Senegal is the only SSA country we follow to get upgraded in 2017, from B1 to Ba3 by Moody’s in April. This put it one notch above the B+ S&P rating which is unchanged since 2000. In the rest of SSA over 2017, only Burkina Faso received an upgrade from B- to B; it is also in the West Africa Economic and Monetary Union (WAEMU). There are IMF programmes with virtually every one of the WAEMU member states, which may be helping this positive trend. We have assumed no further change in Senegal’s ratings, but after this week’s visit to Dakar, we see upside risk to ratings in 2018-2019.

GDP to be revised up, perhaps by 30%, improving most ratios significantly
The most likely trigger is the GDP rebasing that should arrive in 2018, which could lift GDP by around 30%. While not as dramatic as this decade’s 60% GDP hike in Ghana or the nearly 100% rise in Nigeria, it will make a significant difference to Senegal’s ratios. We expect the public debt ratio to drop from 61% of GDP in 2017 to perhaps 46% of GDP in 2018. Gross external debt may fall from around 55-62% of GDP in 2016-2017 to 39% of GDP in 2018-2019, even assuming new eurobond issuance. The current account (C/A) deficit may shrink from the IMF forecast of 5-6% of GDP in 2018-2019 to 4% of GDP and the budget deficit from 3% of GDP to 2%. The only negatives we see are indicators such as exports to GDP (which will fall) or government fiscal revenues to GDP; the latter may fall from a relatively good figure of 20% of GDP now to around 16% of GDP (still better than many in SSA).

This comes against a strong backdrop of government-led infrastructure spending growth
Senegal already looks pretty good to us (and Moody’s evidently) due to strong 6-7% GDP growth in 2015-2017, a one-third reduction in the budget deficit ratio from 5-6% of GDP in 2011-2015 to 3-4% of GDP in 2017, and a halving of the C/A deficit from 10-11% of GDP in 2012-2013 to 5% of GDP in 2017. We think the WAEMU currency is working for Senegal, with that currency within 1% of its long-term average value (XOF562/$) based on our real effective exchange rate (REER) model that extends back to 1995. It has been around fair value 70% of the time since 1995, so stability is normal, and we assume will be maintained. The government is pushing an investment programme which has more than doubled public debt from 24% of GDP in 2008 (post-HIPC) and is paying for infrastructure developments such as the new airport due to open next month. For equity investors, the only semi-liquid name is the telecoms company Sonatel, which is a shame as bank lending is strong. The rebasing of GDP will cut the bank lending stock to GDP from around 38% of GDP to 27% of GDP, meaning there is plenty of room for further growth, as long-term interest rates are around 6-7% but nominal GDP has been rising by 7-8%. Note, good harvests have lifted GDP in recent years – growth may slow to 5-6% in either 2018-2019 if weather conditions are less benign. The other indicator to watch is FX reserves.

On a one-year horizon, we see good reason for Senegal to have tight spreads
For debt investors it is hard to be super-excited when eurobond yields are already the tightest among its peer group. Is it right to trade tighter than Ivory Coast? Yes, politics are evidently far more stable (Senegal has never suffered a military coup) and so fiscal risks seem lower. On a multi-year horizon, literacy data suggest other SSA credits (eg Ghana, Kenya, Zambia) should outperform as they can industrialise earlier. But on a one-year horizon, we would be happy holders of Senegal’s eurobonds and see modest scope for Senegal to outperform due to the GDP rebasing.
Bank lending to the private and non-central government has been rising steadily over the past decade and a half.

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