(Bloomberg) -- Senegal spooked investors with a planned probe of the previous government’s fiscal accounts but the country’s longer-term economic prospects remain positive and may provide support for its bonds, analysts and investors said.
The yield on the west-African nation’s sovereign notes due 2048 climbed as much as 34 basis points in early trading on Friday before paring about half of the the move to 9.68% as of 12:00 p.m. in London. The bonds were still the worst performers in a Bloomberg index of emerging and frontier sovereign dollar debt on Friday.
The selloff ensued after the government said it would scrutinize whether the previous administration presented an unrealistic picture of the country’s finances. While the market’s move may reflect concerns about the commitment to service high debts inherited from the previous period, the outlook appears more optimistic, according to Mark Bohlund, a senior credit research analyst at REDD Intelligence.
“I think the eventual upside for Senegal’s Eurobonds are tightly tied to signs of an adherence to more orthodox economic and fiscal policy,” Bohlund said. A potential staff-level agreement and board approval of the second and third reviews of a International Monetary Fund program could also boost the bonds, he added.
Senegal’s public debt — on average at 76.3% of gross domestic product — was higher than the 65.9% previously reported for the last five-year term of President Macky Sall, Prime Minister Ousmane Sonko said in Dakar on Thursday.
The budget deficit during the period that ended in 2023 on average represented 10.1% of GDP, almost twice as much as the recorded shortfall of 5.5%, according to Economy Minister Abdourahmane Sarr.
The current government “appears frustrated with the fiscal constraints imposed by the high debt load and its limited access to financing,” said Bohlund. “This has been aggravated by the surprisingly low government revenue performance in the first half of 2024.”
Last week, the IMF warned that Senegal’s fiscal position was expected to deteriorate. The lender highlighted the urgent need for reforms, including cutting subsidies and streamlining tax exemptions to improve public finances and reduce debt.
“We think it is questionable how much of this the government will be able to implement, and how quickly,” said Stuart Culverhouse and Jamie Fallon, researchers at Tellimer Ltd.
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President Bassirou Diomaye Faye, who won a presidential vote in March by a landslide, is seeking to reassure voters and investors that he can fulfill his pledges to tackle corruption, ease a cost-of-living crisis and review oil and gas contracts with Senegal’s foreign partners.
The new administration, looking for funding to implement its economic program, won an early endorsement from international investors by successfully raising $750 million in Eurobonds in June.
“Clearly the current new government is trying to paint a picture — which might be true — that the last government did not tell the truth and was corrupt,” said Søren Mørch, portfolio manager at Danske Bank AS. “Whether true or not, Senegal’s strong institutions, the CFA, oil and gas development, all point to a picture where there is a narrative for a positive story.”
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--With assistance from Katarina Höije.
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