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Summary: Senegal (Republic of)

Publication Date: 22-Dec-2000

Analyst: Navaid Farooq, London (44) 20-7847-7106; John Chambers, CFA, New York (1) 212-438-7344

Credit Rating: B+/Stable/B

Rationale

The ratings on the Republic of Senegal are constrained by:

l A low level of development, with per capita GDP of less than $500, and deficiencies in the social and

physical infrastructure. Low educational standards, high poverty, and other weak human-development

indicators reflect the subsistence nature of Senegalese agriculture, which employs more than one-half of

the labor force. Infrastructure deficiencies, especially in power generation and transportation, also constrain

growth prospects.

l High general government debt at 92% of GDP, well above the 'B' median, and all other 'B+' rated peers

except for 137% in Lebanon. However, a favorable debt structure-- nearly all government debt is external

and concessional-- mitigates both the economic burden and liquidity risk of government debt. As a result,

general government interest payments amount to less than 8% of revenues. Senegal's external public

finances are less vulnerable to volatile investor confidence than are the external public finances of many

peer credits.

The ratings are supported by:

l Senegal's membership of the West African Economic and Monetary Union, with an independent central

bank (Banque Centrale des Etats de l'Afrique de l'Ouest, BCEAO) responsible for monetary policy and

issuance of the Communauté Financière Africaine (CFA) franc, the zone's local currency. The CFA franc is

pegged to the euro and receives a guarantee of convertibility (although not of the exchange rate) from the

French Treasury. These institutional arrangements, the strong support from its eight member states (Benin,

Burkina Faso, Guinea-Bissau, Côte d'Ivoire, Mali, Niger, Senegal, and Togo) for more than four decades,

and the prudent conduct of monetary policy by BCEAO itself have yielded several benefits to the zone. It

has produced low inflation (estimated at 2% per year in 2000 and 2001 for Senegal). It has maintained the

currency as a store of value compared with the currencies of many other emerging markets. It has rendered

the zone less vulnerable to external liquidity pressures. And it has also reduced the uncertainty of one

variable (the exchange rate) for domestic agents. As such, Standard & Poor's views the creditstanding of

the zone as greater than the sum of the collective member states.

l Cautious domestic macroeconomic management and structural reforms. Continued financial and technical support from the official community and external constraints imposed by the monetary zone should ensure policy continuity. Further reforms of public enterprises will allow a more efficient allocation of resources and improve the business environment.

Outlook

In March 2000, Senegal underwent its first political transition from one party to another since independence in 1960, when Abdoulaye Wade of the Parti Démocratique Sénégalais won the presidential election. The outlook reflects the expectation that President Wade's government will adhere to its program of structural reforms, which includes selling many state assets, unifying value-added tax, simplifying investment regulations, and restructuring the public pension fund. The country's political institutions, coupled with the stability of macroeconomic conditions, set Senegal apart from some other sovereigns in sub-Saharan Africa. Steady adherence to President Wade's reform agenda should lead to significant debt relief under the Highly Indebted Poor Country Initiative (HIPC), thereby improving Senegal's external debt profile.

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