POPULAR SENEGAL TREASURY BOND ISSUANCE A STOPGAP MEASURE

UNCLAS DAKAR 001379 SIPDIS SIPDIS DEPARTMENT FOR EBB/IFD/ODF, AF/EPS AND AF/W TREASURY FOR DO/GCHRISTOPOLUS E.O. 12958: N/A TAGS: EFIN ECON EINV ETRD SG SUBJECT: POPULAR SENEGAL TREASURY BOND ISSUANCE A STOPGAP MEASURE REF: DAKAR 1223 SUMMARY -------------- ¶1. Through the regional central bank, Senegal recently sold approximately USD 100 million worth of treasury bonds, all of which were purchased very quickly by over-liquid commercial financial institutions anxious for investment opportunities. Individual investors were not able to directly participate. Senegal is facing a serious budget deficit, and this issuance, and a likely second round in the coming months, will be used to ease the Treasury's burden on current accounts. Unfortunately, the underlying factors contributing to Senegal's budget problems are not yet being addressed. END SUMMARY. ¶2. In an effort to minimize the detrimental impact of its budget deficit (Reftel),on June 18, Senegal, under the auspices of the West African Central Bank (Banque Centrale des Etats de l'Afrique de l'Ouest or BCEAO),launched a CFA francs (CFAF) 50 billion (approximately USD 100 million) treasury bond offering. With a face value of CFAF 10,000 (USD 20),and a minimum subscription of 100 titles (USD 2,000) at a 5.5 percent annual interest rate, all bonds were purchased within five days. ¶3. The speed at which the bonds were bought by commercial banks, insurance companies and financial institutions (that maintain the required current accounts at the BCEAO),demonstrates the vast demand for even routine investment opportunities and confirms the excess liquidity currently burdening Senegal's financial sector. Although the bond requirements were affordable for thousands of middle and upper class Senegalese who also are frustrated by the lack of local investment opportunities, only those few individuals with high-level personal relations with the acquiring financial institutions were able to directly benefit from this offering. One factor creating excess liquidity for Senegal's banks is that the BCEAO has imposed limits on the ability of banks to invest outside the WAEMU region, significantly hindering linkages to international capital markets. ¶4. The bond issuance will help the Government of Senegal finance a portion of its budget deficit at rates lower than those routinely available via commercial and international markets, given Senegal's current risk profile. Ministry of Finance officials have told EmbOffs that they plan to use the infusion of cash to finance short- and medium-term capital needs including civil servants' salaries, payment of internal debt, and the on-going road construction projects that have been suspended since April 2007. COMMENT -------------- ¶5. The rapid expansion of Senegal's budget deficit over the last two years (currently estimated at 8 percent of GDP or higher) is a serious concern to the Ministry of Finance, as well as Senegal's development partners. We expect the GOS will go forward with a second bond offering within a few months. While these bond issuances may ease a bit of the pressure on current accounts, they do little to address Senegal's underlying problems: huge subsidies to underperforming government agencies, a rapidly expanding wage bill, and poor return on expenditures due to non-competitive public contracts. END COMMENT. ¶6. Visit Embassy Dakar's Intranet site at http://dakar.state.gov/htdocs/section/econSec tion.aspx and Embassy Dakar's SIPRNET Web site at http://www.state.sgov.gov/p/af/dakar. Jacobs