Senegal Bonds Beating Debt From Lagos to Lusaka: Africa Credit

Senegalese President Macky Sall’s push to increase spending on power and water projects to boost economic growth is rewarding bondholders with sub-Saharan Africa’s best performance.

Since coming to power in the West African nation in 2012, Sall, 52, shut or combined 59 state agencies and allocated more money to curb widespread utility cuts in the capital, Dakar. He audited the administration of his predecessor, Abdoulaye Wade, and set up a court to try economic crimes while reducing Senegal’s inflation rate to what the International Monetary Fund predicts will be the lowest after Mali in Africa this year.

“Investors are likely to see Senegal’s Eurobonds as more secure than those offered by other African countries, due to the government’s dogged focus on economic reform,” Sarah Tzinieris, principal Africa analyst at Bath, U.K.-based risk analysis company Maplecroft, said in an e-mailed response to questions Jan. 9. “The government’s strongly pro-business focus and ability to see the bigger economic picture will in turn boost investor confidence in the country’s Eurobonds.”

Senegalese debt returned 9 percent in the six months to Jan. 10, the best among benchmark sub-Saharan African Eurobonds, according to Bank of America Merrill Lynch indexes. Rwanda’s $400 million bond, which returned 14 percent in the period, falls short of the $500 million threshold to be eligible for inclusion in JPMorgan Chase & Co.’s emerging-markets bond index. JPMorgan’s gauge of African sovereign bonds declined 2.1 percent over the period.

Democracy Tradition

Senegal has the second-largest economy in the eight-nation West African Economic and Monetary Union and is the only country in the region apart from Cape Verde that’s never had a military overthrow the government. Neighboring Mali is rebuilding after a military coup in April 2012 and an Islamic insurgency. Guinea Bissau, which also borders Senegal, postponed elections to replace the interim administration in power since a military takeover two years ago.

The transition from Wade to Sall “presents a key incentive to investors in contrast to the insecurity characterizing much of West Africa,” Tzinieris said.

Yields on Senegal’s debt dropped after Sall, a former prime minister under Wade, defeated his former ally who at 85 was Africa’s oldest leader after Zimbabwe’s Robert Mugabe when he left office.

Growth Forecast

Wade ended four decades of one-party rule in the former French colony when he was elected in 2000. He was later criticized by an opposition group for seeking a third term after tenures were capped at two. Departments set up or planned by Wade, including a body to protect the desert that was never implemented and an authority for new ports that the country’s auditor general determined weren’t feasible, were among agencies closed by Sall.

Yields on Senegal’s notes rose six basis points, or 0.06 percentage point, to 6.93 percent by 3:21 p.m. in Dakar. The premium buyers demand to hold Senegal’s notes rather than similar-dated Treasuries fell 98 basis points in the six months to yesterday. That compares with a decline of 138 basis points for Rwandan debt and 46 basis points for Nigeria.

Senegal’s economy, which earns much of its foreign currency from exports of fish and peanuts, is forecast to expand 4.6 percent this year from 4 percent in 2013. Inflation is set to average 1.6 percent, compared with 1.2 percent last year, according to the International Monetary Fund. The CFA franc currency, shared by the monetary union and pegged to the euro, gained less than 0.1 percent to 482.64 per dollar.

Tax Base

The government estimates the budget deficit will equal 4.9 percent of gross domestic product next year and less than 5 percent in 2015 as current expenditure will be cut, Finance and Economy Minister Amadou Ba, said in a written reply to questions on Dec. 19. Senegal is banking on a boost in revenue as the nation’s tax authority is modernized and foreign investors lured to set up business, he said.

Senegal’s current-account deficit, the broadest measure in the trade of goods and services, probably widened to 10.3 percent of GDP this year, according to IMF estimates. Funding the gap is reliant on external grants to the government, which is a source of vulnerability, Stuart Culverhouse, chief economist at London-based investment bank Exotix Ltd., said by phone Dec. 18.

Still, Senegal compares favorably to West African peer Ghana, which is struggling to narrow its budget deficit to 8.5 percent of gross domestic product this year from 10.2 percent in 2013, according to the Finance Ministry. Ghana’s Eurobond yield gained 52 basis points since the issue in July.

Senegal’s performance “will be the fiscal story,” Culverhouse said. “The fact that yields come in at 6.7 percent where Ghana’s still over 8 percent suggest that people are rewarding Senegal for some of those recently solid metrics compared with Ghana which is going off the rail on the fiscal front.”

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