Country Risk Analysis: Senegal

1
Country Risk Analysis Senegal
Based on a country risk report by Abdouramane
Diallo and Dennis Rombach James Boland Candan
Cerci Anja Sadlowski
Last updated on May, 2004
2
Analysis Framework

• Country In Brief
• Social Framework
• III. Political Analysis
• Macroeconomic Analysis
• Balance of Payment Analysis
• The Peanuts Market
• Investment Climate
• VIII. Debt Sustainability
• IX. Ratings
• X. Overall Risk Assessment

3
I-Country In Brief
4
Country Location
5
Country in brief

• Sources World Bank, CIA COFACE

6
Country in brief

• Sources COFACE, World Bank

7
II-Social Framework
8
Cultural/Ethnical background

• Population
• Has tripled in 40 years and is expected to double
  during the next 25 years
• 70 below age of 25
• 55 below poverty line
• Unemployment rate 48
• Religion
• Islam (90, very positive influence)
• Christian (5, but disproportionately high
  influence)

Missions Economiques
9
Social Infrastructure

• Educational gap In spite of declining illiteracy
  rate and increasing primary enrollment, Senegal
  remains below regional and low-income countries
  average

ADB
Worldbank
Worldbank
10
Social Infrastructure

• Devaluation of CAF cuts in quality and quantity
  of nutrition (70 cut of income)
• Very low HIV/AID rate (1.43)
• Current social expenditure in 1999 4.0 (EU
  average 27.5 )
• 3.2 education
• 0.8 health
• Human development Index 152nd (even below
  regional average)
• Unemployment 48

Worldbank
11
Development Diamond
Worldbank
12
III-Political Analysis
13
Socio-political Outlook

• The current President Abdoulaye WADE (since 1
  April 2000) has so far reassured socio-political
  stability in Senegal.
• The constitution ratified in 2001, which reduces
  the length of the presidential term from 5 to 7
  years and the number of terms from unlimited to
  2, will assure better governance.
• However, public confidence seems to be decreasing
  due to continued high levels of poverty and
  unemployment.
• Furthermore, the expected speed-up of structural
  reforms in sensitive socio-economic areas could
  accentuate social tensions.
• On the external front, Mr. Wades objective is to
  give his country both African and international
  high profile. For example, he was strongly
  implied in the negotiations during the Ivorian
  crisis.
• On the whole, the socio-political outlook of
  Senegal is still favourable in the medium term.
  Next elections are to be held in February 2005.

14
Political Climate

• Abdoulaye Wades liberalism has boosted the
  countrys image as democratic
• January 2001s referendum according more power to
  the prime minister won 90 approval, curbing the
  authoritarianism of the state and guaranteeing
  civil liberties
• Presidential term is 5 years, coming into effect
  after Wades current term of office which is 7
  years

• The President names the prime minister and
  cabinet and has the power to dissolve the
  parliament
• There are 70 officially recognised political
  parties in Senegal

15
Diplomacy

• Senegal is adept at international diplomacy
• France is the number one trading partner, but
  Senegal also participates actively in
• The creation of the new African Union
• UEMOA (English WAEMU - West African Economic and
  Monetary Union)
• Reinforcing of CEDEAO (English ECOWAS - Economic
  Community of West African States)
• Wade was president of the latter two from 2001 to
  2003
• Wade is also founder and champion of NEPAD (New
  Partnership for the Development of Africa)
  dealing with infrastructure and commercial
  development in West Africa.

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Casamence

• Separatist war in Casamance region results
• Refugees
• Cross-border raid
• Arms smuggling
• Other illegal activities
• Political instability in Guinea-Bissau
• Casamance separatists negatively impacting
  tourism
• However, it represents no real threat to
  Senegals political stability

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IV-Macro-economic Analysis
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Macroeconomic Outlook

• The effects of drought and disorganisation of the
  groundnut sector have caused a 20 reduction in
  farm production in 2002.
• However, the 200306 program anticipates a
  resumption of high growth rates. Growth will be
  supported notably by development of the mining
  and chemicals sectors, a steadier electricity
  supply and a dynamic service sector. Rising
  private and public-sector investment should
  further drive economic activity.
• Assuming favourable weather conditions, GDP
  growth is expected to reach 6.6 percent in 2003,
  a fiscal balance below 2 percent of GDP,
  inflation under 2 percent, and a current account
  balance within historical ranges.
• At the same time, external accounts which have
  suffered from high public deficits, should
  stabilise in 2004 with the country benefiting
  from cancellation of its public-sector debt under
  the HIPC programme for highly indebted poor
  countries.

19
GDP Growth Rate
drought period

• Source The World Bank

20
Regional Comparison

• Source World Economic Outlook Database,
  September 2003

21
Economic structure
Source The World Bank
22
Major trading partners
Source CIA Word Factbook, December 2003
23
Structure of Imports/Exports
Source COFACE
24
Budget deficit/GDP ()
Current account
deficit/GDP ()
25
Investment/GDP()
Savings/GDP()

• - Rising savings and investment will drive
  Senegals economic activity

26
Inflation

• Due to the prudent monetary policy of BCEAO,
  Senegals inflation rate is under control

27
Exchange Rates
CFA Devaluation

• Source IMF International Financial Statistics
  African Development Bank

28
V- BOP Analysis
29
BOP Analysis
- Senegals trade deficit is rising - Dependance
on agricultural exports (volatile in price and in
harvest volume)
30
BOP Analysis
- Senegals terms of trade are deteriorating
31
BOP Analysis
- Financing Senegals of current account deficit
relies largely on government borrowing and
exceptional financing
32
Errors and Omissions
CFA Devaluation

• - The devaluation of the CFA Franc in 1994 has
  been paralleled by massive capital flight

33
VI- Investment Climate
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Investment Climate

• No barriers regarding 100 ownership of business
  by foreign investors
• Administrative regulations and high input cost
  (electricity) are obstacles for FDI
• In recent history, no major expropriations in
  Senegal unlike the period 1973-1975
• Member of the ICSID (International Centre for
  Settlement of Disputes)
• In order to qualify for investment incentives,
  small and medium size firms are required to
  invest at least 5 million CFA, employ at least 3
  Senegalese nationals full time
• Transparent regulatory system, government favours
  the principles of free competition
• Corruption is an obstacle for FDI in Senegal -
  corruption can range from large scale customs
  fraud to bribes taken by inspectors

35
Investment Climate

• Bilateral investment treaty in 1983 with US and
  similar agreements for protection of investment
  with France, Switzerland, Denmark, Finland,
  Spain, Italy, South Korea, Romania, Japan and
  Australia
• France is the most important foreign investor
  (235 subsidiaries of French groups are present in
  Senegal)
• Other FDI investors are Canada, Morocco, Swiss,
  Taiwan
• Limited FDI in Africa because of significant
  problems involving political instability, high
  debt levels, health and poverty related human
  development issues and regional conflicts.
  Senegal suffers from the general lack of foreign
  investor interest in the region
• FDI in Senegal in 2002 was only 92 m US

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Infrastructure

• Well-performing telecommunications sector
• Comparably cheap and dense communication network
• Transportation means insufficient in spite of
  some progress
• Two new railway lines
• Trans-Mauritanian highway
• Energy
• High electricity prices
• Energy imports

37
Structural Reforms

• Fiscal reform (simplification and equality of
  fiscal system)
• New investment code (lead investment to growth
  sectors)
• Civil servant recruitment
• Improved control of financial sector (especially
  micro-finance)
• Privatisation
• Sodefitex - cotton industry (completed in 2003)
• Transrail railway (completed in 2003)
• Sonacos groundnut industry (expected for 2004)
• Sénélec electricity (expected for 2004)

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VII. The PEANUTS Market
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PEANUT PRODUCTS MARKET

• Senegal is the world 6th producer of peanuts and
  the 1st in Africa. Groundnut production accounts
  for 12 of the countrys total exports.
• In 2003, total production amounted at 400.000 t
  which is far below the 900.000t cultivated during
  the 60s.
• This deficit is due to the substitution by other
  vegetable oils on the world market, uncertain
  rainfalls, soil depletion and the disengagement
  of the state in terms of inputs.
• The countrys peanut oil is confronted to the
  competition of other oil coming from northern
  countries, of which agriculture is strongly
  subsidized.
• Consequently, the country has begun to diversify
  the oil-oriented peanut production towards mouth
  peanuts, which offer better exports prospects.
• In this context, Senegal aims to further
  penetrate the EU market, the EU being the worlds
  largest peanuts importer.

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PEANUT PRODUCTS MARKET
- Market prices on the groundnuts oil market are
decreasing
41
PEANUT PRODUCTS MARKET

• - Better prospects in the market for mouth
  peanuts

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VIII- Debt sustainability
43
Debt Composition

Source The World Bank

• Multilateral lenders (IMF, IDA, etc.) account
  for the major part of Senegals external debt

44

Total External debt

• As a consequence of the HIPC initiative,
  external debt is expected to drop from 3.6
  billion US in 2001 to 2.9 billion US in 2004

45

Solvency Ratios
Source COFACE
46

Solvency Ratios
Source COFACE
47

Debt service ratio ( of GS)

• The Debt-service ratio will fall from 11.6 in
  2002 to 4.6 in 2004

48

Import coverage ratio

• However, Senegals foreign reserves cover only
  about 2 months of imports

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Financial Position in the IMF as of 31/12/2003

• I. Membership Status Joined August 31, 1962
• II. General Resources Account SDR million
  Quota
• Quota
  161.8 100.00
• Fund holdings of currency
  160.33 99.09
• Reserve position
  1.48 0.92
• III. Latest Financial Arrangements
• Type Approval Expiration
  Amount Approved Amount
• Date Date
  (SDR m ) Drawn
• PRGF Apr 28,2003 Apr 27, 2006
  24.27 3.47
• PRGF Apr 20,1998 Apr 19, 2002
  107.01 96.47
• PRGF Aug 29,1994 Jan 12, 1998
  130.79 130.79

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Financial Position in the IMF as of 31/12/2003

• iv. Projected Payments to Fund (SDR m)
• 2004 2005
  2006 2007 2008
• Principal 33.29 31.15
  26.16 23.75 17.86
• Charges/Interest 1.01 0.84
  0.69 0.57 0.47
• Total 34.30 31.99
  26.85 24.31 18.33

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Implementation of HIPC initiative

• I. Commitment of HIPC assistance
• Decision point date
  June 2000
• Assistance committed by all creditors (US m)
  488.3
• Of which IMF assistance (US m)
  42.3
• (SDR
  m) 33.8
• IDA assistance (US m)
  149
• Completion point date
  Floating
• II. Disbursement of IMF assistance (SDR m)
• Interim assistance
  13.24
• Completion point balance
  -
• Total assistance disbursed to the member
  13.24

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Index of external payment arrears
Source Coface

• Deterioration of company payment behaviour in
  2003 particularly concerned the electrical
  capital goods and equipment sector
• Continued strong growth in 2004 should permit a
  stabilisation of payment incidents

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IX- Ratings Rankings
54

• Heritage Foundation Index of Economic Freedom
  2003 (Top 150)

• The Heritage Foundation rates Senegal 80th of
  160 countries, belonging to the category of
  Mostly unfree countries

55

• UNDP Human Development Index

• UNDP rates Senegal 156th of 133 countries,
  belonging to the category of Low human
  development

56

• Transparency International Corruption
  Perceptions Index 2003

• TI rates Senegal 76th of 133 countries, close to
  Ghana and Morocco

57

• International Country Risk Guide Corruption Index

• Highly clean

• Highly corrupt

• Senegals perceived level of corruption has not
  changed since 1984

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EUROMONEY

• HIGHER RISK

• LOWER RISK

• The overall risk situation is assumed to improve
  slightly

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X-Overall Risk Assessment
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Overall Risk and Opportunity Assessment

• Strengths
• Political stability under President Abdoulaye
  Wade
• CFA Franc zone and domestic monetary stability
• Backing by the international community (IMF, WB,
  EU)
• Continued economic diversification
• Accelerated regional integration (energy,
  transportation) has attracted foreign investors

• Weaknesses
• 60 of Senegals working population depends on
  agriculture (20 of GDP) and on changing weather
  conditions
• Unemployment and poverty generate social
  tensions
• Delays in restructuring the private sector
• Dependence on financial support by the
  international community
• Separatist war in Casamance region results in
  refugees and cross-border raids

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Country Risk overview
Social Political stability
Economic growth prospects
Domestic financial stability
External competitiveness
62
Country Risk overview (II)
Balance of payments sustainability
Debt servicing capacity
Overall MT perspectives
63
Main Sources

• SENEGALESE AUTHORITIES
• IMF
• WORLD BANK
• THE UNITED NATIONS
• CIA
• BANQUE DE FRANCE
• EBSCO
• TRANSPARENCY INTERNATIONAL
• CIRAD
• CICES
• MRCI
• AIG
• THE HERITAGE FOUNDATION
• COFACE
• EUROMONEY