Opening up Senegal to the international capital markets is one of the achievements of the country’s finance minister, following years of hard-fought fiscal reforms
When Senegal issued a $500 million Eurobond this May, finance minister Abdoulaye Diop rightly received much of the praise. The issue, four times over-subscribed, put the West African nation firmly on the international finance map. It was also a vindication of several years of hard-fought fiscal reform efforts. And it provided fresh funds for much-needed infrastructure development.
Aside from opening the doors to international capital markets, under Diop’s stewardship Senegal’s budget deficit fell to 4.5% of GDP, from 4.9% in 2009, while revenue collection rose by 11%.
Senegal became the first African country to sign a PSI (policy support instrument) with the IMF last December, and in April the IMF said Senegal was the first Francophone African country to feature among “pioneer markets”, so called due to their growth dynamics, natural resources and financial market development
“Senegal managed to access the international capital markets to finance potential growth sectors thanks to our sound macroeconomic framework,” Diop tells Emerging Markets. A total of 125 Asian, American and European investors, including some of the biggest global institutional names such as Pimco, BlackRock, Ashmore and BTG, subscribed to the issue, “a first for an African country”, and a reflection of international investors’ “faith in the signature of the Senegalese government and its stability”, he says.
Nevertheless, there are signs that Senegal’s political stability may be under threat. Political fever has engulfed the West African country ahead of next year’s polls, when 85-year-old President Abdoulaye Wade intends to seek re-election.
Proposals to amend the constitution to reduce the share of the vote required for a successful candidate to 25% from the current 50% threshold prompted violent protests in the capital, Dakar, in June, with opposition politicians suggesting that the move was aimed at installing President Wade’s son, Karim, as the next president. The proposal has since been dropped, while mass protests have been banned, but critics continue to cry foul.
Diop acknowledges that these tensions had sent “a negative signal to investors”, but insists that the country’s “mature democracy would ensure that peace would be preserved. The Senegalese people are mature, and the authorities are responsible, so investors shouldn’t have any particular fears.”
But pressure to demonstrate largesse in the run-up to February’s presidential elections means that Diop is walking a tightrope when it comes to balancing this year’s budget. The IMF has already signalled concern at the “somewhat higher than projected fiscal deficit” this year.
Diop says the deficit will temporarily widen to 6.9% of GDP in 2011, much higher than the 4.5% deficit that was posted last year, and the African Development Bank’s 5.8% forecast. Diop says his own original estimate stood at 4.8%. However, he insists the deficit would fall back below 4% by 2015.
He says the PSI would also serve as a safeguard against excessive public expenditure ahead of the elections. “I do not have any margin of manoeuvre in the budget. There’s nothing to fear about this fiscal slippage. The PSI programme does not allow any deviation... It is a programme designed to send a positive signal to the capital markets,” he says.
In addition, Diop says he intends to tap the Islamic debt market “shortly” to raise an additional $200 million for budgetary support purposes. “We want to deepen the sub-regional financial market. Maybe we can try and seek new sources of financing, such as Islamic debt that could attract foreign investors. This would be the first time that an African state has issued a sukuk bond to finance its programme,” he says.