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
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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
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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