IMPACT OF GLOBAL FINANCIAL CRISIS ON SENEGAL

UNCLAS SECTION 01 OF 02 DAKAR 000062

C O R R E C T E D C O P Y (CAPTION, TEXT PARA 11)

SIPDIS

DEPT FOR AF/W, AF/EPS, EEB/IFD/OMA AND EBB/EPPD
TREASURY FOR OIASA/IDB:EBARBER

E.O. 12958: N/A
TAGS: EFIN ECON EAID SG
SUBJECT: IMPACT OF GLOBAL FINANCIAL CRISIS ON SENEGAL

REF: A) 08 STATE 134459, B) 08 Dakar 1432,
C) 08 Dakar 1431, D) 08 Dakar 1318

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1. Summary: In response to REF A request, Post updates its
reporting on the impact of the global financial crisis on Senegal
(REF D). Senegal's financial sector and businesses are facing a
severe tightening of local credit -- the result of both the
government's poor budget control and the global decrease in
liquidity. There are signs that the local population is losing
confidence in Senegal's banking sector. The global slowdown and
increased levels of unemployment in the U.S. and Europe are already
diminishing the amount of remittances being sent to families in
Senegal, and poverty-related problems will increase as a result.
The government needs to quickly impose budget discipline and avoid
exacerbating the current commercial liquidity problem. End
summary.

MACROECONOMIC INDICATORS DETERIORATING
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2. Macroeconomic indicators show that the Senegalese economy slowed
in 2008 with annual GDP growth estimated at 3.9 percent, compared to
earlier projections of six percent. 2008 inflation is estimated at
six percent compared to the government's target of three percent.
Senegal's current account deficit reached 12.5 percent of GDP
compared to 10.5 percent in 2007. Key export sectors fishing,
peanuts, cotton, and unprocessed phosphates have shown significant
decreases in export value as a result of unfavorable world prices,
market contraction, and weak demand from African countries. On the
import side, consumer, business, and the government's budget were
hit hard by last summer's increase in world food and petroleum
prices. As expected, trade among the West African Economic Monetary
Union (WAEMU) member states increased with the crisis. Importers
have found it cheaper to purchase goods (fruits, vegetables) from
the CFA franc zone countries, especially Cote d'Ivoire, rather than
from more distant countries.


3. The liquidity in local commercial banks is minimal, due in part
to the global credit crunch and in part to the Government's internal
debt which increased in 2008 because of USD 218 million in
off-budget spending and outstanding unpaid bills of USD 335 million
owed to the private sector. There are reports that international
banks and multinational corporations have pulled out much of their
cash holdings from local affiliates. For the past six months, it
has been very difficult for either the government or private
companies to expand or secure lines of credit from local banks.


4. In early 2009, the signs are not good that the government has a
clear plan for dealing with a financial crisis whose biggest impact
on the country may be yet to come. President Wade is promising
lower prices on many key consumer items and proposing major new
public works projects. However, the government does not have the
budget, the donor support, or affordable credit to carry out these
programs. Nor is there any plan in place to prop up the local
banking sector, despite the fear that property and other private
assets, many tied to commercial loans, may drop in value the coming
months.

DOMESTIC INDUSTRY'S UNEVEN PERFORMANCE
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5. The textile industry and the food processing industry are
suffering from lower consumer demand. The food industry association
reported a sales decline of more than 22 percent in 2008.


6. Senegal's construction sector has had a difficult time
weathering the duel storms of slowing demand due to global
conditions and deteriorated cash and credit options due to the
arrears owed to the sector by the government. "The construction and
public work sectors, once a driver of the Senegalese economy, are
experiencing a complete meltdown fueled by domestic debt," said
Abdou Mbaye, Chairman of the Senegalese Professional Association of
Banks and Financial Institutions (APBEF).


7. According to Omar Diop, General Secretary of Senegal's Banking
Association, the global financial and credit crisis has also
considerably increased capital flight and lowered the reserve
position of the country's major commercial banks. Diop noted that
many customers have now withdrawn their deposits in the banks in
fear of possible collapse of the country's banking system following
reports of bank failures in the West. This fear was exacerbated by
the news out of France in January 2008 about large losses at Societe
Generale, whose Dakar affiliate is one of Senegal's largest banks.
A salesman specializing in commercial and personal safes stated,
"the current situation is very unusual; we sold out our entire stock
of safes between October and November."


8. Some domestic industries have maintained fairly steady
production levels and are coping well with the crisis. After a long
struggle to secure new financing finally succeeded in June 2008, the
ICS phosphates company's production of fertilizer increased 102
percent. Though the market for unprocessed phosphates remains

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depressed, total export values grew thanks to a long-term contract
with India, market expansion to Iran, Nigeria, Turkey, and strong
demand from Mali, Benin, and Burkina. Senegalese cement producer
Sococim has seen a drop in local demand, but has still increased
production 12 percent in 2008 by expanding exports to neighboring
countries.

FEAR OVER A DROP IN REMITTANCES
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9. Karim Diop, the Director of SAGEF, a real estate company
specialized in low-income housing, stated that the construction of
family housing will take a dive as the financial crisis affects
Senegalese expatriates, given that the flow of transfers will
decline sharply. According to the Banking Association's Diop,
remittances from overseas Senegalese have dropped 20 percent from
October to December 2008. A prolonged drop in these funds, which
are a major source of foreign currency for the Treasury and income
for the country's poorer population, will lead to not only a
reduction in investment, but also a rapid deterioration in social
indicators, including an increase in poverty, malnutrition, and
illness, and a decrease in school attendance. "Our households adapt
to the rhythm of the western economies. Our three sons who live in
Italy used to send USD 800 each month, but recently they have only
been able to send USD 200 for their wives. Now we have to cut down
on expenses. We are trying to keep an eye on the electricity we use
and the water we drink," stated Oulimata Niang, mother of the
emigrants.

DONORS BRING NEW FUNDS TO THE GOVERNMENT
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10. For the GOS, getting out of its current budget deficit has
proved considerably more difficult than digging the hole, as
reported in REFs C and D. The government's poor fiscal management
has been exacerbated by the global credit crunch. It has been very
difficult for the government to raise funds over the past six months
because of the lack of liquidity in local banks, and a depressed
regional market for treasury bonds.


11. On December 19 Senegal's second review under its IMF Policy
Support Instrument (PSI) was approved (not without difficulty),
opening the door to new donor assistance. To help the GOS close its
internal debt by paying its private sector arrears, the IMF board
approved USD 75.6 million under the Exogenous Shock Facility and the
French Development Agency provided a non-concessional loan of
approximately USD 182 million. (Both of these measures will be
disbursed in two tranches, with a successful 3rd PSI review a
requirement for the second payment.) The African Development Bank
(AfDB) and the Netherlands agreed to disburse USD 23 million and USD
14.5 million respectively in direct budget support.

COMMENT: WHAT'S NEXT
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12. Senegal has not yet been hit hard by the toxic assets dynamic
of the financial crisis, but various repercussions are impacting the
country's financial sector, its businesses, the government's budget,
and anti-poverty efforts. In 2009, Senegal has the potential for
good agriculture receipts and will benefit from some new foreign
investments, which could help the country's economic growth reach
closer to five than two percent. However, the government's goal,
supported by many donors, of sustained growth of seven percent or
higher, is not on the horizon.

BERNICAT