SENEGAL'S JUNE BOND ISSUANCE FALLS SHORT

UNCLAS SECTION 01 OF 02 DAKAR 000813 SIPDIS DEPARTMENT FOR EBB/IFD/ODF, A/EPS AND AF/W ABU DHABI FOR TREASURY/GRIFFERTY TREASURY FOR RHALL AND DPETERS E.O. 12958: N/A TAGS: EFIN ECON EINV PGOV SG SUBJECT: SENEGAL'S JUNE BOND ISSUANCE FALLS SHORT REF: A. 07 DAKAR 1379 ¶B. DAKAR 661 DAKAR 00000813 001.2 OF 002 ¶1. SUMMARY: On June 19, Senegal's Ministry of Finance launched two treasury debt products through the regional central bank. The result was disappointing for the government, with only USD 155 million purchased out of the total issuance of USD 238 million. The GOS is planning to use this revenue to help cover arrears totaling approximately USD 357 million owed to private sector contractors and suppliers. This is the first time that Senegalese Treasury Bonds have not been fully subscribed, raising new concerns about country's ability to attract investors. Questions have also been raised about the regional market's liquidity. Senegal's Minister of Finance initially blamed a local bank for not keeping its promise to purchase the bonds, but the President of Senegal's banking association called the Minister's actions "illegal" for predicting the results of the offering before its issuance. END SUMMARY. SENEGAL GOES TO THE MARKET BUT COMES UP SHORT -------------- - ¶2. On June 19, under the auspices of the West African Central Bank (BCEAO),the GOS launched a CFA 40 billion (USD 95 million) Treasury Bond offering and CFA 60,000 (USD 143 million) in debenture obligations. Two days before the offering was made public, Finance Minister Abdoulaye Diop expressed optimism and declared that he had received commitments from financial institutions to purchase as much as USD 257 million in bonds. In the end, however, the issuance was not entirely successful; the Treasury bonds were fully purchased, but the debenture instrument sold only CFA 25 billion (USD 60 million). No doubt the Minister was expecting that GOS debt products remained as popular as in the past. Last year a Senegal issuance of approximately USD 100 million in Treasury Bonds was quickly oversubscribed (Ref A). ¶3. Diop expressed surprise at the weak response, and claimed, "This is the first time we have witnessed a negative result from a bond issuance." He admitted that his ministry had solicited support from local banks before the issuance. Diop went so far as to name and blame the Compagnie Bancaire de l'Afrique de l'Ouest (CBAO),which is controlled by the Moroccan Attijari Bank, of not meeting its pledge, "despite the strong commitment of [the bank's] General Manager." A WEAK DEMAND OR A MORE SERIOUS INDICATOR? -------------- ¶4. Abdoul Aziz MBaye, the President of Senegal's Bankers' Association, who is also the General Manager of Attijara Bank, was quick to criticize Minister Diop. He noted that it is "illegal" for the Minister to publicly announce that he had consulted with the financial institutions to obtain purchase commitments before issuing the bonds. According to MBaye, Senegal must better organize the timing of its bond issuances since many WAEMU countries were issuing bonds at the same time. According to MBaye, the region is facing diminished liquidity, and the GOS can no longer assume that the purchase of its government debt is a priority for regional financial investors. ¶5. Following the poor results of the debenture instrument, there was much speculation in the press on whether the GOS is losing credibility in its management of public finances, especially after recent public criticism by the IMF Resrep and revelations of the government's huge arrears in payments to the private sector (Ref B). In response, Minister Diop was defensive and uncharacteristically bellicose: "our government is not bankrupt. A State which can collect CFA 90 billion (USD 214 million) a month in revenues, pay a monthly wage bill of CFA 30 billion, and commit CFA 60 billion for its operating budget cannot be bankrupt." MinFin Diop minimized the disappointing bond operation, stating, "I need only to collect two days of revenues to pay my internal debt. Our financial situation is under control." COMMENT -------------- ¶6. Despite Minister Diop's positive spin, the undersubscribed issuance is another in a string of blows to Senegal's public finances. It is still not clear how the government will pay its overdue bills, which is a key requirement of its Policy Support Instrument with the IMF. Companies are complaining publically, but are being drowned out by the broader populace, which is demanding relief from rising food and energy prices. Even though a number of WAMEU countries were issuing similar bonds at the same time, Senegal could, in the past, count on its offering to be the top priority for the region's financial institutions. We are also concerned that the lack of response indicates a significant decrease in liquidity for banks in the region from just one year ago, potentially adding to DAKAR 00000813 002.2 OF 002 the difficulties faced by the private sector to find reasonable financing for capital investments. SMITH