Senegal: Fifth Review Under the Policy Support Instrument and Request for Program Extension and Modification of Assessment Criteria—Debt Sustainability Analysis
Author: International Monetary Fund. African Dept.
Publication Date:
24 Jun 2013
eISBN:
9781484338483
Language:
English
Keywords:
ISCR; CR; deficit; real GDP; current account; long-term debt; Eurobond issuance; debt indicator; creating flow; debt stock; sustainability framework; Debt sustainability analysis; Public and publicly-guaranteed external debt; Depreciation
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Program implementation has been satisfactory, and all assessment criteria were met. The fiscal deficit was reduced to 5.9 percent of GDP despite a significant revenue shortfall. Delays were incurred in the implementation of reforms in the energy sector. The authorities intend to accelerate reforms to improve the business environment by streamlining expenditure and by improving the efficiency of the state to reduce the fiscal deficit to below 4 percent of GDP by 2015. This will restore fiscal buffers and ensure long-term debt sustainability.

Abstract

Program implementation has been satisfactory, and all assessment criteria were met. The fiscal deficit was reduced to 5.9 percent of GDP despite a significant revenue shortfall. Delays were incurred in the implementation of reforms in the energy sector. The authorities intend to accelerate reforms to improve the business environment by streamlining expenditure and by improving the efficiency of the state to reduce the fiscal deficit to below 4 percent of GDP by 2015. This will restore fiscal buffers and ensure long-term debt sustainability.

Underlying Assumptions

1. This debt sustainability analysis (DSA) updates the joint IMF-World Bank DSA produced in November 2012 for the Fourth Review under the Policy Support Instrument (PSI).2 The last DSA found that, although the risk of debt distress was low, vulnerabilities had increased since Senegal benefited from comprehensive debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI), as evidenced by a steady increase in public debt ratios. Key changes to macroeconomic assumptions since the last DSA area as follows:

  • Real GDP growth is expected to be marginally lower over the medium term, while long-term growth projections are essentially unchanged.

  • The 2013 and 2014 fiscal deficits have been revised upward, reflecting a slightly slower pace of fiscal consolidation to accommodate the impact of exogenous shocks. Projected fiscal deficits beyond 2014 are essentially unchanged.

  • Medium- and long-term current account deficit projections have been revised upward following much higher-than-expected imports in 2011 and 2012.

  • The government is expected to issue a new 10-year, $500 million Eurobond this year at an interest rate of about 6 percent, in line with current yields on the 2011 Eurobond. 3 The previous DSA had assumed a $200 million Eurobond in 2013 on the same terms as the 2011 Eurobond (10-year maturity, 8.75 percent interest rate).

  • The assumption in the last DSA that Senegal will borrow 0.5 percent of GDP per year on nonconcessional terms starting in 2014 has been shifted to 2016, reflecting the anticipated frontloading of nonconcessional borrowing in 2013.

  • Over the period 2013-2014, Senegal is expected to borrow CFAF 67 billion (about $136 million) in external debt with a grant element of between 15 and 35 percent, upwardly revised from CFAF 44 billion and consistent with the new ceiling in the program.

Evolution of selected macroeconomic indicators

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Defined as the last 15 years of the projection period. For the current DSA, the long term covers the years 2019-2033; for the previous DSA, it covers 2018-2032.

2. Another key change compared to the last DSA is the presentation of remittances-based debt indicators in the base case. According to new guidance issued in March 2013, remittances must be presented as the base case in the DSA if they are both greater than 10 percent of GDP and greater than 20 percent of exports of goods and services. 4 Over the period 2010-2012, remittances in Senegal equaled, on average, 52 percent of exports of goods and services and 13 percent of GDP. Gross remittances inflows continued to show resilience in the face of the crisis in Europe, growing 6.1 percent in 2012 in local currency terms.

External DSA

3. Public and publicly guaranteed (PPG) external debt ratios remain comfortably below indicative thresholds in the baseline scenario, but stress tests lead to breaches of two thresholds (Figure 1a and Table 1a). The PV of debt to the sum of GDP and remittances breaches the threshold under a stress test simulating a one-time 30-percent depreciation of the exchange rate. The breach lasts for 13 years but is relatively small (less than 2 percentage points at its peak). 5 The same threshold is breached under a scenario where borrowing terms are less favorable than under the baseline scenario, but the breach is even smaller and of shorter duration. The debt service-to-revenue threshold is breached by a small margin in 2021 under the one-time 30-percent depreciation shock. The spikes in debt service in 2021 and 2023 reflect the repayment of the 10-year Eurobonds issued in 2011 and 2013.

Figure 1a.
Figure 1a.

Senegal: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios (with Remittances), 2013-2033 1/

Citation: IMF Staff Country Reports 2013, 170; 10.5089/9781484338483.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2023. In figure b. it corresponds to a One-time depreciation shock; in c. to a Terms shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock
Table 1a.:

External Debt Sustainability Framework, Baseline Scenario, 2013–2033 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 1b.

Senegal: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt (with Remittances), 2013-2033

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

4. The slightly worse outlook for PPG external debt compared to the last DSA can be attributed in part to the expected 2013 Eurobond issuance. The authorities’ intention to issue a $500 million Eurobond this year, rather than a $200 million bond as assumed in the last DSA, is motivated by their desire to have an issue large enough to be included in international bond indexes, which allows for higher liquidity and therefore a lower interest rate, and by their objective of lengthening the average maturity of public debt. Substituting resources from a 10-year Eurobond for short-term financing in local currency from the WAEMU market would significantly lengthen the average maturity at issuance of new financing without significantly affecting the interest cost. 6 This switching from domestic to external debt, combined with a slightly slower pace of fiscal consolidation and downwardly revised GDP growth projections, is projected to lead to a marginal deterioration in PPG external debt ratios compared to the last DSA.

Public DSA

5. Indicators of overall public debt (external plus domestic) and debt service do not point to significant vulnerabilities related to the level of domestic debt (Figure 2 and Table 2a). In the baseline scenario, the PV of total public debt to GDP and the PV of total public debt to revenue are expected to decline gradually over time. The PV of public debt to GDP peaks at 44 percent, well below the benchmark level of 56 percent associated with heightened public debt vulnerabilities for medium performers. 7 Stress tests, however, indicate that the path of public debt would reach unsustainable levels in the absence of fiscal consolidation (Table 2b). In a scenario that assumes an unchanged primary deficit (as a percent of GDP) over the entire projection period, starting with the level projected in 2013, the PV of public debt to GDP grows rapidly, breaching the 56 percent benchmark level in 2023. The benchmark level is also breached in the historical scenario (holding real GDP growth and the primary deficit constant at their historical levels). These stress tests highlight the importance of reducing fiscal deficits and raising potential output growth.

Figure 2.
Figure 2.

Senegal: Indicators of Public Debt Under Alternative Scenarios, 2013-2032 1/

Citation: IMF Staff Country Reports 2013, 170; 10.5089/9781484338483.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2023.2/ Revenues are defined inclusive of grants.
Table 2a.

Senegal: Public Sector Debt Sustainability Framework, Baseline Scenario, 2013-2033

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

The public sector refers to the central government.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 2b.

Senegal: Sensitivity Analysis for Key Indicators of Public Debt 2013-2033

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

6. The limited development of the WAEMU financial market poses financing risks. The short average maturity of domestic debt (slightly over one year) continues to be a source of vulnerability, as it exposes the government to significant rollover and interest rate risks in an unreliably liquid regional market. In that regard, the 2013 Eurobond issuance—which is expected to carry an interest rate similar to what Senegal is paying on one-year Treasury bills—should help reduce financing risks in 2013 and beyond, albeit at the expense of increasing exchange rate risk.

Conclusion

7. In staff’s view, Senegal continues to face a low risk of debt distress, despite a marginal deterioration in the outlook for PPG external debt. Although stress tests result in two breaches of thresholds in the external DSA, the overall picture is more balanced. The 2013 Eurobond, while pushing up PPG external debt ratios, should help reduce vulnerabilities associated with short-term domestic debt, consistent with the authorities’ medium-term debt strategy. To maintain debt sustainability and avoid a downgrade to moderate risk, it will be critical to reduce fiscal deficits from levels seen in recent years. While Senegal is expected to gradually shift to nonconcessional external borrowing as it moves toward emerging market status, it should approach such borrowing with caution given current debt levels and the sensitivity of debt indicators to less favorable borrowing terms. Further improvements in debt management capacity can also help consolidate the low risk rating. Indeed, if recent trends in Senegal’s CPIA score continue, Senegal stands to be upgraded to the strong performer category next year and will face higher indicative thresholds for PPG external debt.

1

The DSA presented in this document is based on the Debt Sustainability Framework (DSF) for low-income countries (LICs). See “Debt Sustainability in Low-Income Countries—Proposal for an Operational Framework and Policy Implications” and “Debt Sustainability in Low-Income Countries—Further Considerations on an Operational Framework and Policy Implications.”

2

See “Staff Report for the 2012 Article IV Consultation, Fourth Review Under the Policy Support Instrument, and Request for Modification of an Assessment Criterion—Debt Sustainability Analysis” for a more complete discussion of the macroeconomic assumptions in the DSA.

3

The authorities plan to obtain technical assistance from IDA to help them prepare for raising financing from international capital markets.

4

Both ratios should be measured on a backward-looking, three-year average basis.

5

As noted in the previous DSA, the exchange rate shock is arguably overstated in the case of Senegal in light of the peg to the euro, which is guaranteed by the French Treasury, and the relatively large percentage of Senegal’s public external debt stock denominated in euro and SDR (which is partially linked to the euro).

6

The authorities were initially planning to issue CFAF 538 billion on the regional market in 2013, with an average maturity at issuance of about 1.5 years. With the 10-year Eurobond expected to substitute for CFAF 145 billion and the remaining CFAF 393 billion issued on the market expected to have an average maturity at issuance of about 2 years, the average maturity of the whole CFAF 538 billion would increase by about 2 years. The current yields on short-term local currency debt and the 2011 Eurobond are comparable, at about 5.5 percent. Issuing in US dollars, however, increases the exchange rate risk.

7

See Revisiting the Debt Sustainability Framework for Low-Income Countries for a discussion of public debt benchmarks. Senegal’s three-year average CPIA score is 3.71, which places the country at the upper end of the medium policy performance category. Senegal’s CPIA score has increased every year since 2008.

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Cover IMF Staff Country Reports
Senegal: Fifth Review Under the Policy Support Instrument and Request for Program Extension and Modification of Assessment Criteria—Staff Report; Debt Sustainability Analysis; Informational Annex; and Press Release
Author: International Monetary Fund. African Dept.
Volume/Issue:
Volume 2013: Issue 170
Publisher:
International Monetary Fund
ISBN:
9781484338483
ISSN:
1934-7685
Pages:
75
DOI:
https://doi.org/10.5089/9781484338483.002