Senegal: Staff Report for the 2018 Article IV Consultation and Seventh Review Under the Policy Support Instrument and Request for Modification of Assessment Criteria—Debt Sustainability Analysis
Author: International Monetary Fund. African Dept.
Publication Date:
28 Jan 2019
eISBN:
9781484396254
Language:
English
Keywords:
ISCR; CR; debt; deficit; Senegal; market financing risk indicator; Eurobond issuance; financing term; evolution debt indicators DSA; deficits of the Post Office; Debt sustainability analysis; Government debt management; Stress testing
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Staff Report for the 2018 Article IV Consultation and Seventh Review Under the Policy Support Instrument and Request for Modification of Assessment Criteria--Debt Sustainability Analysis-Press Release; Staff Report; and Statement by the Executive Director for Senegal

Abstract

Staff Report for the 2018 Article IV Consultation and Seventh Review Under the Policy Support Instrument and Request for Modification of Assessment Criteria--Debt Sustainability Analysis-Press Release; Staff Report; and Statement by the Executive Director for Senegal

Background

1. In this DSA, the debt perimeter has been expanded to include para-public entities and state-owned enterprises (SOEs) (Box 1). Because of the expanded coverage starting in 2017, the end-2017 debt stock has increased by 10.8 percentage points of GDP to 60.6 percent of GDP, compared to central government debt of 49.8 percent of GDP. The structural break in 2017, combined with the GDP rebasing which resulted in an increase in the level of GDP of about 30 percent, makes comparison with the last published DSA (Country Report No. 18/8)—based only on central government data and the “older GDP base” DSA—somewhat difficult.

Coverage of Public Sector Data in the DSA

The DSA presented in this document is based on a broader coverage of the public sector, both for the debt stock and government guarantees, and the fiscal deficit. The public sector includes the (i) central government, (ii) para-public entities which are part of the general government, and (iii) SOEs.

Total public debt data, including debt of para-public entities and SOEs, are provided by the authorities. Revenue and expenditure data on para-public entities and SOEs are derived from technical assistance (TA) reports from the Statistics and Fiscal Affairs Departments of the IMF. Combining the realized deficit of 3.3 percent of GDP for the central government in 2016 with the rest of the public-sector data derived from the TA reports and the authorities, puts the end-2016 overall public-sector deficit at 1.4 percent of GDP. Over the medium term, the implementation of an ambitious public-sector investment program under the Plan Senegal Emergent (PSE), including from the national electricity company SENELEC (the largest SOE), PETROSEN (the state-owned hydrocarbon company), and the startup costs from the newly created Air Senegal state-owned airline company, widen the overall public-sector deficit to 2.8 percent of GDP. The expanded coverage of debt data increases the end-2017 debt stock by 10.8 percentage points of GDP pushing the total debt stock to 60.6 percent of GDP compared to central government debt of 49.8 percent of GDP.

The authorities remain committed to tackling public debt data gaps and improve debt transparency. The expanded coverage of public sector data in this DSA starting in 2017 creates a structural break with historical data, making comparison to the previous DSA more difficult.

A02ufig1

Senegal: Total Domestic Public Debt, year end 2017

(Percent GDP)

Citation: IMF Staff Country Reports 2019, 027; 10.5089/9781484396254.002.A002

2. External debt vulnerability indicators have somewhat deteriorated over the past year, reflecting an increase in external non-concessional borrowing and the coverage of para-public entities and SOEs’ debt and guarantees. 2 For 2018, external public debt in Senegal is projected at 47.6 percent of GDP, compared to 45.2 percent projected in the previous DSA. The expansion of the debt perimeter represents one of the key factors in this increase. Also, in 2018, Senegal issued a $2.2 billion Eurobond, its largest ever and twice the previous issuance of $1.1 billion in 2017. Both the 2017 and 2018 issuance substituted, to a large extent, for borrowing on the regional market. Senegal’s Eurobond issuance had the benefit of creating space in the regional bond market for WAEMU countries without access to international markets, and, combined with substantial Eurobond issuance by Cote d’Ivoire, helped in the short run to further build up WAEMU pooled reserves, which had fallen in 2016. Nevertheless, the increase in the debt to GDP ratio was held back by the GDP rebasing.

Figure 1.
Figure 1.

Senegal: Public Sector Debt

(Percent GDP)

Citation: IMF Staff Country Reports 2019, 027; 10.5089/9781484396254.002.A002

Source: Staff estimates

3. The new Eurobond shifted borrowing from the domestic to the external market. Domestic debt is projected to decrease from 20.2 percent of GDP at end-2017 to 16.9 percent of GDP at end-2018. Total public debt, including the expanded perimeter coverage (Box 1), is projected to reach 64.5 percent of GDP in 2018, although this includes accumulation of 2018 budget overfinancing (1.6 percent of GDP) in an escrow account which will be unwound to meet 2019 financing needs. Despite the expanded coverage, the increase in the 2018 debt-to-GDP ratio remains somewhat moderate compared to the previous DSA estimation because of GDP rebasing, as well as a decline in domestic debt given that Senegal has not accessed the regional market in 2018. The higher debt also reflects higher financing requirement owing to the need for the Treasury to finance deficits of the Post Office and the Civil Service Pension, as well as the tapping of unutilized appropriations of past budgets through the comptes de dépôt. The high public debt service, which is projected to reach 40.9 percent of revenue in 2018, reflects an increased recourse to non-concessional borrowing in the last two years and the partial repurchase of the 2011 Eurobond.3

Table 1.:

Evolution Debt Indicators DSA

(Percent GDP)

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Source: Staff estimates.
Table 2.

Senegal: Coverage of Public Sector Debt and Design of the Contingent Liability Stress Test

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The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

Underlying Assumptions and Borrowing Plan

4. The authorities remain committed to a debt management strategy that will rely predominantly on concessional and semi-concessional borrowing. They aim to borrow largely from traditional bilateral and multilateral lenders, and resort to non-concessional borrowing only in exceptional cases and for specific high-return projects. Eurobond issuances and, more generally, borrowing on commercial terms, will be considered if financing terms are favorable and if it is not possible to obtain concessional financing from development partners, particularly the African Development Bank and the World Bank.

5. The DSA is consistent with the macroeconomic framework outlined in the Staff Report and updates the previous DSA produced in Country Report No. 18/8, for the Fifth Review of the Policy Support Instrument (PSI). In line with the previous DSA, the baseline scenario assumes the implementation of sound macroeconomic policies, structural reforms, and an ambitious investment plan, as outlined in the Plan Senegal Emergent (PSE). It is also assumed that Senegal’s fiscal deficit remains at 3 percent of GDP over the long term, consistent with WAEMU targets. This scenario is expected to deliver strong and sustained economic growth and a narrowing fiscal deficit over the medium term. In the current framework, growth, imports, investment, exports and other macroeconomic variables include the implementation of two significantly large off-shore oil and gas projects (the so-called GTA and SNE projects), including pre-production investment and borrowing, with first production and export of oil and gas expected in 2022. As a result, medium-term projections for variables like real GDP growth are more optimistic than historical averages, but aligned with recent outcomes in 2016-17, implying that the take-off is assumed to persist, conditional on reforms being implemented. The main assumptions are as follows:

  • Real GDP growth is projected to be 6.2 percent in 2018. The growth momentum is maintained in the medium term capturing the effects of infrastructure investment, export growth, and reforms under the PSE. The growth rate peaks at 11.6 percent in 2022, with a slight deceleration to 10.4 percent in 2023, reflecting the incorporation of oil and gas production. Over the long run, real GDP growth is projected at 5.1 percent over the period 2020-34, slightly lower than in the last DSA. This is in line with international experience that suggests that over a long period, as economies converge to middle income status, the real growth rate slows down.

  • Fiscal deficit. The public sector deficit is projected at 5.1 percent of GDP in 2018 and 3.7 percent over the medium term. In the long run, the deficit is set at 2.8 percent of GDP, incorporating some efforts to increase revenues, mainly through improved revenue administration and lower tax exemptions, in support of investment needs and other development challenges.

  • Current account deficit. The current account deficit is projected to stay above 7 percent of GDP in 2018, due to an increase in imports of capital goods and oil, and to lower export growth. The current account deficit is projected to widen through 2021 due to oil and gas investment in the pre-production period. Over the long term, the average current account deficit is projected to decrease to 1.2 percent of GDP due to improved export growth, including from the oil and gas sector and the ongoing export-oriented investment in the special economic zones (SEZs). Remittances remain a significant component of the current account, but are expected to decline as a percent of GDP over the medium term.

  • Inflation. Inflation is projected to remain contained at under 2 percent in 2018. The GDP deflator is projected at 2.2 percent in 2018 and is expected to remain around 2 percent until 2023.

  • External financing mix and terms. The DSA assumes that the financing mix will be consistent with a prudent borrowing strategy. Even though recent borrowing has seen an increased reliance in non-concessional borrowing, the average maturity of new debt is close to 18 years, with 7-year grace period.

  • Domestic borrowing. Domestic debt is assumed to account for 16.4 percent of total public debt on average over 2018-23, 6.2 percent of which has maturity below one year. New short-term domestic debt is assumed to be issued at an average real interest rate of 4.0 percent, while medium- and long-term domestic debt is assumed to carry a real interest rate of 4.7 percent with average maturity of 6.0 years, consistent with the current structure of domestic debt.

  • Discount rate. The discount rate for this DSA is set at 5 percent.

Table 3.

Senegal: Evolution of Selected Macroeconomic Indicators, 2015-18

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Defined as the first 5 years of the projection period. For the current DSA update, the medium term covers the years 2018-23.

Defined as the last 15 years of the projection period. For the current DSA update, the long term covers the years 2024-38.

Overall fiscal deficit of General Government and Public Sector.

Overall fiscal deficit of Central Government.

Table 4.

Senegal: Debt Carrying Capacity

Table 4.
Source: Staff estimates.

External DSA

6. Similar to the last DSA, external debt indicators breach their thresholds for a short period of time under most stress tests (Figure 2). The external debt to export ratio breaches its threshold only under the most extreme shock. The debt service to exports ratio breaches the threshold twice, each short-lived, lasting one year: (i) in 2018 due to an operation in the first half of 2018 to reduce the Eurobond repayment spike in 2021 by 40 percent, and (ii) a more significant breach in 2021 due to the same Eurobond bullet repayment which occurs under a shock to exports.4 Triggered tailored stress tests and the market financing risk indicators show no breach of the benchmarks or thresholds (Figure 6). A number of factors have helped counter the mechanical deterioration in indicators caused by the expanded debt coverage, including: (i) GDP rebasing, (ii) repurchase of 40 percent of the 2011 Eurobond and the resulting reduction in the 2021 bullet repayment spike, and (iii) introduction of oil and gas-related production and revenues starting in 2022 and the resulting higher exports and GDP growth.

7. Public external debt is projected to be on a downward path. Public and publicly guaranteed (PPG) external debt is estimated at 47.6 percent of GDP in 2018 and is projected to decline to 35.7 percent of GDP in 2023 and below 30 percent in the long term. This baseline scenario assumes good progress on reforms, where the government takes measures to contain Treasury financing, improve revenue mobilization, and sustain growth. However, the historical scenario in the DSA provides an illustration of how lack of progress on reforms and a return to the low growth of the past would put debt on an upward and unsustainable path (Figure 2). Under this scenario, Senegal would grow at 4.5 percent and most indicators would breach their respective thresholds over the medium to long term. The historical scenario highlights the importance of steadfast implementation of structural reforms to sustain high growth.

8. Senegal remains at a low external risk of debt distress, but it is a borderline case. There are two export-related breaches for external debt and debt service indicators under the most extreme shock. Yet, mitigating factors favor maintaining the low external risk of debt distress.5 These include:

  • Authorities’ ongoing exploration of debt liability management options to reduce the Eurobond bullet repayment in 2021 by 50 percent. Simulation of the debt operation under consideration would reduce the 2021 debt service spike by close to 11 percent, making the new breach less than 10 percent of the threshold, without causing new breaches over the projection period;

  • Partial credit guarantee for currency risk hedging made available to Senegal by the African Development Bank and further supplementary partial guarantees for currency risk being negotiated with commercial banks;

  • Unrestricted access to a pool of liquid financial assets (e.g. WAEMU international reserves currently over $15 billion or more than 4 months of regional imports);

  • A sound track record of market access as evidenced by sustained and successful Eurobond issuances in 2011, 2014, 2017, and 2018, with the 2018 issuance doubling the 2017 amount and five times oversubscribed. On the regional WAEMU bond market, except for 2017 and 2018 when Senegal raised substantial financing through Eurobonds, it has also been an active market participant, with bond issuance surpassing 5 percent of GDP annually prior to 2017; and

  • Authorities’ ongoing structural reforms to boost private investment, especially the establishment of SEZs through the “Prosperity Triangle” project with export-oriented investment, are expected to boost exports, thus further minimizing the significance of the export-related breaches.

Public DSA

9. Indicators of overall public debt and debt service do not point to significant vulnerabilities. Total public debt increases from 60.6 percent in 2017 to 64.5 percent in 2018, and then is projected to decline to 40.5 percent of GDP by 2038 (Figure 3 and Table 6).6 Overall, these ratios are higher than the ones estimated in the last DSA, reflecting the broader coverage of public sector debt, increased borrowing to finance below the line Treasury operations, and greater reliance on non-concessional debt. Under the most extreme stress test, a shock to GDP growth results in a prolonged breach of the threshold, but the stress test may overstate the magnitude of the debt vulnerability in the case of Senegal because the sizable permanent increase in the primary deficit created by the standardized simulation is not consistent with Senegal’s stated fiscal policy or historical data. 7 Under the historical scenario, the PV of total public debt is on an upward trend and only breaches the threshold in the last year of the projection period. Like the external DSA, the historical scenario illustrates the risk that insufficient reforms accompanied by low growth represent for public debt dynamics. Overall, risks to public debt sustainability remain low, but stress tests underline the importance of making continuous efforts to reduce the fiscal deficit, increase revenue, sustain strong economic private sector-led growth and strictly control the volumes and terms of non-concessional borrowing.

10. The public DSA highlights vulnerabilities related to debt service which are also presented in the external DSA. Debt service reaches 40.9 percent in 2018 of revenues, but falls over the medium term to 30.5 percent with some spikes due to Eurobond bullet repayments.8 Under the current trajectory, debt service will absorb a sizable portion of fiscal revenues, thus limiting room for other expenditures in critical areas such as infrastructure investment, health, and education. As in the external DSA, this illustrates the importance of implementing key policies and reforms both to control spending and mobilize additional revenue to finance economic development in a sustainable manner.

Conclusion

11. According to staff’s assessment, Senegal remains at low risk of debt distress, but it is a borderline case. The breach of the debt service-to-export threshold in 2021, which is due a Eurobond bullet repayment, is the most significant. Breaches of other thresholds are short-lived and do not raise significant concerns owing to the mitigating factors highlighted above, including ongoing debt liability management, guarantees to address currency risk, access to liquid financial assets, and a sound track record of market access. However, the evolution of debt ratios under the historical scenario indicates that debt sustainability hinges on continuing fiscal consolidation and on steadfastly implementing reforms to achieve high and sustained growth, as envisaged in the PSE. Senegal remains a borderline case and slippage on structural reforms or fiscal consolidation could place it at moderate risk of debt distress. Also, while progress has been made on expanding debt perimeter, the debt coverage could be improved further. The authorities remain committed to expanding the coverage of public sector deficits and debt which will contribute to strengthening further the analysis of debt vulnerabilities.

12. The current projections highlight that rising levels of debt and debt service require a cautious approach to commercial borrowing. Debt service ratios are projected to remain high despite their decline over the medium term, signaling that a further deterioration of borrowing terms could increase debt-related vulnerabilities. In this context, staff recommends a careful and continuous monitoring of financing needs and of borrowing plans, the development of a transparent pipeline of bankable projects, and a strengthening of debt management.

13. The authorities are committed to reduce debt ratios over the medium term. They aim to achieve this through further fiscal consolidation, improvement in the current account and a strengthening of debt management policies—including more attention to the terms and volume of non-concessional external financing. While progress has been made, further reforms that will effectively reduce the structural deficits of the Post Office and civil service pensions are needed, as well as addressing the current stock of appropriations from past budgets in the comptes de dépôt. It will be important to contain fiscal pressures from Treasury operations and address fiscal risks from the broader public sector, including the energy sector. The successful Eurobond issuance in 2018, following that of the 2017, on reasonable terms9 indicates continued market confidence in the economy, but recent trends in bond prices suggest that future issuances could be at higher interest rates.

14. The authorities agree with the assessment in this DSA. The findings of this DSA were shared with the authorities, who broadly concurred with the staff’s assessment and maintaining the low risk of debt distress rating. They plan to continue efforts to expand the coverage of public sector debt. Accordingly, they concurred with staff on the need for a prudent debt management strategy and expressed their commitment to limit non-concessional borrowing, while ensuring that borrowing decisions consider their impact on growth.

Figure 2.
Figure 2.

Senegal: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2018-28

Citation: IMF Staff Country Reports 2019, 027; 10.5089/9781484396254.002.A002

Sources: Senegal authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2028. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Table 5.

Senegal: External Debt Sustainability Framework, Baseline Scenario, 2015-38

(Percent of GDP, unless otherwise indicated)

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Sources: Senegal 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.

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).

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

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Figure 3.
Figure 3.

Senegal: Indicators of Public Debt Under Alternative Scenarios, 2018-28

Citation: IMF Staff Country Reports 2019, 027; 10.5089/9781484396254.002.A002

* Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections.Sources: Senegal authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2028. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Table 6.

Senegal: Public Sector Debt Sustainability Framework, Baseline Scenario, 2015-38

(Percent of GDP, unless otherwise indicated)

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Sources: Senegal authorities; and staff estimates and projections.

Coverage of debt: The central, state, and local governments plus extra budgetary funds, central bank, government-guaranteed debt, non-guaranteed SOE debt. Definition of external debt is Currency-based.

The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.

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

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 and other debt creating/reducing flows.

Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Table 7.

Senegal: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2018-28

(Percent)

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Sources: Senegal authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

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

Includes official and private transfers and FDI.