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SENEGALIAN SNAPSHOT 2015 Quarter 1 Inflation – Inflationary pressures in Senegal have been muted for some time now, with the CPI falling by an average of 1.1% in 2014, down from an average increase of 0.7% in 2013. The headline index should return to a higher, albeit still relatively tame by African standards, growth trajectory this year. The reason for this is a slight uptick in the international crude oil price and a spill-over of inflationary pressures from its major trading partners. Growth – We expect Senegal’s real GDP growth rate will accelerate to 4.5% this year, from 3.5% last year on the back of structural reforms emanating from the Plan Sénégal Emergent (PSE) and an increase in foreign direct investment (FDI). National development plan - Senegal is in the process of its third Poverty Reduction Strategy for 2013-17 renamed the National Strategy for Economic and Social Development (NSESD). The plan also led to the development of a Priority Action Plan that will see heightened state intervention, increased technical and financial partners, more public-private partnerships and citizen participation. OPPORTUNITIES STRENGTHS Membership in West African Economic and Monetary Union (WAEMU) protects the country from certain external shocks and provides monetary stability; the CFA franc is fully convertible with the euro. Strong donor support and good relations with donors and the International Monetary Fund (IMF). Improving the electricity supply should boost economic activity. Investment in agriculture may improve produce and export volumes. Further exploration of deep sea oil blocks. Low tending to moderate political risk. Potential in mining - at present still mostly undeveloped, but the country has reserves of phosphates, gold, and iron. Low and stable consumer price inflation. VULNERABILITIES WHAT IS BEING DONE? Low levels of human development, implying sustained pressure on fiscal budget in the foreseeable future. Currency linked to the euro – shocks affecting the euro zone also affect the economy of Senegal. Working in close cooperation with the IMF to focus on most crucial areas of expenditure, postponing non-critical investments. Nothing. The benefits of the exchange rate peg outweigh the negatives. Renewed investment in electricity infrastructure and efficiency enhancing reforms in the energy sector are slowly being introduced. Public and foreign debt levels are quite high, exposing the economy to external New debt issuances have replaced some of the prior debt stock, making it more shocks. affordable. Severe inefficiencies in the energy sector. MEGA TRENDS Population 13,635,927 (July 2014 est.); Age 15 - 64: 54.7% Population growth rate (%) 2.48% (2014 est.) Life expectancy at birth Total population: 60.95 years; male: 58.94 years; female: 63.02 years (2014 est.) HIV/AIDS Adult prevalence rate: 0.46%; People living with HIV/AIDS: 38,702 (2013 est.) Adult literacy rate (age 15 and over can read Total population: 57.7%; male: 69.7%; female: 46.6% (2015 est.) and write) Urbanisation Urban population: 43.1% of total population (2013); Urban population growth: 3.6% (2013) Population below $1.25 (PPP) poverty line 29.6% (2011 est.) Unemployment rate 10.3% (2013) Employment (% of total) Agriculture: 77.5%; Industry and Services: 22.5% (2007 est.) Labour participation rate (% of total population ages 15+) 76.5% (2013) Business languages French, Wolof, Pulaar Telephone & Internet users Main lines in use: 343,718; Mobile cellular: 13.13 million; Internet users: 2.85 million (2013) Sources: CIA World Factbook, World Bank, ITU, UNAIDS & NKC Research 1 Total Corruption Perceptions Index 2014 (1 least, 175 most corrupt) Doing Business 2015 (1 best, 189 worst) Global Competitiveness 2014-15 (1 most, 144 least competitive) Economic Freedom 2015 (1 most, 178 least free) HDI Ranking 2013 (1 most, 187 least developed) 175 69 189 161 144 112 106 178 187 163 0 Source: NKC Research Senegal 20 40 60 80 100 120 140 160 180 200 Risk environment / Risk outlook S&P Fitch Moody’s B+/Stable N/R B1/Positive Standard and Poor’s (S&P) released its latest sovereign credit rating statement on Senegal on 19 December 2014. The rating agency affirmed Senegal’s “B+/B” long- and short-term foreign and local currency ratings, keeping both ratings on a stable outlook. The rating agency noted that Senegal’s sovereign credit rating remains constrained by its limited monetary flexibility and low GDP per capita. On the other hand, the rating is supported by the West African nation’s planned investment projects that are assumed to materialise over the next 12 months and promote economic growth. Moody’s Investors Service issued its annual credit report on Senegal on 7 November 2014. The rating service affirmed Senegal's “B1” bond rating (equivalent to S&P’s “B+” rating) and changed its outlook to positive. Moody’s indicated that Senegal’s outlook improved due to better medium-term growth prospects through the Plan Sénégal Emergent (PSE), which calls for gains in efficiency and resolution of infrastructure bottlenecks. Moreover, the government’s commitment to fiscal consolidation and the continued implementation of structural reforms to promote good governance and transparency also affected the outlook positively. The “B1” rating however reflects a number of challenges that constrain the rating such as the country’s low per capita income, heavy reliance on foreign assistance and glaring infrastructure deficiencies. Senegal is currently not rated by Fitch Ratings. Infrastructure Diversity of the Economy Banking Sector Electricity provision problematic Dominated by Relatively well services sector developed Continuity of Economic Policy GDP Growth Key Balances Foreign Investment Socioeconomic Development Forex Reserves Stable Moderate Current account and fiscal deficit Moderate Low Good Stock Market Listed Companies Liquidity Market Cap Dominant Sector Daily Trading Volume Regional Stock Exchange - BRVM 1 Senegalese firm Sonatel, 37 others Limited $12.05bn Communications: Sonatel accounts for 33% of total market capitalisation. N/a Capital Market Development Liquidity Maturity Range Municipal Bonds Corporate Bonds Yes Undeveloped Relatively limited 5 to 10 years No N/a Macro-economic overview Despite struggling to kick-start the country’s economy in the past, the Senegalese authorities under the leadership of Mr Sall have stepped up efforts to stimulate economic growth opportunities through the Plan Sénégal Emergent or PSE. This was affirmed in a recently completed Article IV Consultation in which the International Monetary Fund (IMF) lent their support to the country’s economic strategy outline for 2013-17. The main aim of the PSE has been to achieve higher and sustainable economic growth through structural reform, improved human development and social protection, along with improved governance, peace and security. The Fund made a number of suggestions on structural reforms to be implemented and cautioned that in order for the plan to be successful, efforts must be made to promote fiscal and debt sustainability. Furthermore, the Fund noted that emphasis must be placed on consistent reform implementation and learning from peer experience. Moreover, if the PSE is to be effective, the process of fiscal consolidation, currently underway in Senegal, should continue with the fiscal deficit predicted to decline over the medium term. This improving trend indicates that deterioration in the Senegalese fiscal metrics in the near future is highly unlikely and may have a positive impact on our future sovereign credit rating. Membership to the West African Economic and Monetary Union (WAEMU) has afforded Senegal a great deal of monetary stability. Senegal pools its foreign exchange reserves with the other seven members of the bloc at the regional central bank, which further helps to mitigate foreign exchange crises. Monetary decisions in the region are made by the regional central bank, the Banque Centrale des États de l’Afrique de l’Ouest (BCEAO). The bank has done a good job of maintaining the currency peg with the euro and keeping consumer price inflation low and stable. The consumer price index (CPI) shrunk by 0.8% on average in 2014, from a 0.7% increase the year before. CPI inflation is set to nudge higher during 2015, and at around 2.72% still remains beneath the BCEAO ceiling of 3%. 2 Economic Structure as % of GDP 2014 Estimate Source: NKC Research Agriculture/ GDP 16.7% Service/GDP 59.8% Industry/GDP 23.5% Senegal’s economy is dominated by the services sector, contributing an estimated 59.8% of GDP in 2014. This sector is an important source of growth for the economy, showing strong expansion after struggling in 2011 (due to electricity supply problems). The services sector is dominated by transport, communications, trade, tourism, and government services. Industrial activities formed approximately 23.5% of GDP last year, while agriculture contributed the remainder. If the authorities manage to sufficiently address the nation's electricity woes with the announced electricity infrastructure investments, the industrial sector could potentially be put on a higher growth trajectory over the long term. Real GDP Growth & Net FDI/GDP 2.2 5.0 Source: NKC Research 4.5 2.1 4.0 2.0 3.5 1.9 3.0 1.8 2.5 1.7 2.0 1.6 1.5 1.5 2009 2010 2011 2012 2013 2014E 2015F 2016F GDP Growth (y-o-y, %) (lhs) Net FDI/GDP (rhs) Senegal’s real GDP growth has been sluggish in recent years, which has hampered inclusive economic growth and widespread poverty reduction. The 2014 GDP growth performance was handicapped by a poor business climate, struggling energy sector, underdeveloped infrastructure, low efficiency of public spending, regional droughts and the spill overs from Ebola. We expect Senegal’s real GDP growth rate will accelerate to 4.5% this year, from 3.5% last year on the back of structural reforms emanating from the PSE and an increase in FDI. There are definite signs that foreign interest in Senegal is picking up and we expect this trend to continue over the medium term as implementation of PSE reforms accelerates. We expect FDI to come in at an estimated 2.16% of GDP this year, declining somewhat to 2.03% of GDP in 2016. Exports ($ bn) Imports ($ bn) 2014E 2015F 2016F Main Imports: % share of total Mineral fuels, oils & distillation products 2014E 2015F 2016F Mineral fuels, oils & distillation products 24.20 29.41 28.23 Cereals 8.10 9.67 9.10 Machinery & boilers 7.90 9.00 8.72 Vehicles other than railway, tramway 6.28 7.15 6.93 Cereals Machinery & boilers Vehicles other than railway, tramway Mineral fuels, oils & distillation products Main Exports: % share of total Fish, crustaceans, molluscs & aquatic invertebrates Gold Inorganic chemicals, precious metal compounds & isotopes Source: NKC Research 0.0 0.5 1.0 1.5 2.0 2014E 2015F 2016F Mineral fuels, oils & distillation products 15.09 17.36 16.40 Fish, crustaceans, molluscs & aquatic invertebrates 9.53 10.49 9.47 Gold 8.66 9.80 9.17 Inorganic chemicals, precious metal compounds & isotopes 4.69 6.25 5.79 Senegal’s exports increased by 0.8% y-o-y during the first 11 months of 2014 despite phosphoric acid and gold dragging down export numbers for most of the year. Exports of fish products picked up during the latter half of 2014 contributing to the slight improvement in export figures. As for imports, the West African nation imported 1.2% y-o-y less goods up until November 2014. The main import categories included cereals (8.02% of total imports) and petroleum products (23.95% of total imports). Senegal’s dependence on imports for its food and fuel needs puts the West African nation in an extremely vulnerable position, susceptible to adverse weather in the region and international oil price shocks. In this regard though, the sharp fall in oil prices will have a positive impact on the Senegalese trade balance as oil imports will become much cheaper during 2015. 3 Current Account & Budget Balance (% of GDP) 0.0 -2.0 -5.0 -4.0 -10.0 -6.0 Source: NKC Research -15.0 -8.0 2009 2010 2011 2012 2013 2014E 2015F 2016F Current Account/GDP (lhs) Budget Balance/GDP (rhs) The West African nation’s trade deficit is expected to come in at around $2.74bn this year, narrower than the 2014 estimate. With regard to invisible receipts, Senegal is amongst the African nations that receive the highest level of remittances as a ratio of GDP. The country attracts remittances to the equivalent of around 11% of GDP, which helps to offset the wide structural trade deficit. Nevertheless, Senegal still runs considerable current account deficits. Senegal’s current account deficit is primarily financed by external debt, and partially by FDI and foreign exchange reserves. Senegal’s current account deficit narrowed to 9.3% of GDP in 2014 from 9.7% of GDP the year before. This shortfall is expected to shrink further during 2015 to 9.2% of GDP due in part to significantly lower oil prices as Senegal is a net importer of petroleum products. On a separate note, the budget deficit is expected to narrow to 4.7% of GDP this year, from 5.1% of GDP in 2014, on the back of the Senegalese government’s commitment to fiscal sustainability. Average CPI (% change, y-o-y) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 Source: NKC Research 2009 2010 2011 2012 2013 2014E 2015F 2016F Inflationary pressures in Senegal have been muted for some time now, with the CPI falling by an average of 1.1% in 2014, down from an average increase of 0.7% in 2013. As such, headline inflation continues its slide and the lower food and transport costs are good news for Senegalese consumers. That said, the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO) has noted a slight uptick in regional inflation in its February 2015 bulletin on West African Economic and Monetary Union (WAEMU) monetary statistics. This comes as a result of both a slight increase in the international crude oil price over the past two months and food price increases in the largest economy in the region – Ivory Coast. Since the WAEMU region is Senegal’s major trading partner, inflationary pressures in the region may have a spill-over effect in the months to come, with the average inflation for 2015 probably ending in positive territory. CONTACT DETAILS KPMG NKC NKC Independent Economists CC Ndiaga Sarr – designation is Partner Tel +221 338 492 705 Email [email protected] 12 Cecilia Street Paarl, 7646, South Africa P O Box 3020, Paarl, 7620 Tel: +27(0)21 863-6200 Fax: +27(0)21 863-2728 Email: [email protected] GPS coordinates S33°45.379' E018°58.015' The foregoing information is for general use only. NKC does not guarantee its accuracy or completeness nor does NKC assume any liability for any loss which may result from the reliance by any person upon such information or opinions. KPMG Sénégal, cabinet sénégalais d’audit et de conseils, membre du réseau KPMG de cabinets indépendants adhérents de KPMG international Coopérative (« KPMG International »), une entité de droit suisse. 83, Boulevard de la République – Immeuble Horizons, 3ème étage – BP 2395 – Dakar - SENEGAL L'opinion de KPMG, est que la communication non cryptée par l'intermédiaire de l'Internet ne doit pas être considérée comme sécurisée. 4