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