Senegal: S&P Issues G20 Common Framework Debt Downgrade

• S&P downgraded Senegal's credit rating to CC on September 4, following the announcement of its G20 Common Framework debt restructuring plan.
• The downgrade reflects S&P's view that seeking G20 Common Framework relief implies a 'distressed exchange' and near-certain default on international obligations.
• Senegal's plan strategically distinguishes between foreign currency debt (to be renegotiated) and CFA franc debt (to be protected) to prevent a domestic banking crisis.
• Local banks hold substantial government debt, and renegotiating CFA franc obligations would severely impact their capital and the broader sub-regional financial stability.
• Despite protecting local debt, Senegal faces high borrowing costs domestically and significant external repayment obligations, with an IMF agreement still pending final approval.

This means that debt denominated in CFA francs will not be subject to renegotiation, whereas obligations in dollars and euros, including international bonds, foreign loans, and claims from China, are slated for restructuring.

Senegal's credit rating was downgraded by S&P on September 4, a move that came as no surprise to observers. This action followed the Ministry of Finance's publication of its Debt Treatment Plan just three days prior. While the official communication avoided explicitly stating that creditors would receive less than originally agreed, it did contain a pivotal phrase: Senegal would seek engagement with its international creditors through an enhanced version of the G20 Common Framework.

For S&P, invoking the G20 Common Framework signals an intention to ask commercial creditors to accept less favorable terms than their existing contracts. Such an operation is categorized by S&P as a "distressed exchange," which is considered a default. Consequently, the CC rating assigned by S&P indicates that while a default has not yet occurred, it is deemed almost certain. Notably, previously identified accounting discrepancies, known since 2024, had not been sufficient to trigger such a severe downgrade; it was the specific procedure outlined in the plan that led to this assessment.

The downgrade saw Senegal's foreign currency rating drop three notches, from CCC+ to CC, while its CFA franc rating fell only one notch, from CCC+ to CCC. This disparity highlights a crucial distinction made by the Senegalese government. S&P's assessment effectively registered a boundary drawn by the state itself, rather than judging the country's overall solvency. This means that debt denominated in CFA francs will not be subject to renegotiation, whereas obligations in dollars and euros, including international bonds, foreign loans, and claims from China, are slated for restructuring.

This decision, which differentiates between local and foreign currency debt, represents the most significant policy choice made by the government since 2024. It is rooted in a critical assessment of the domestic banking sector. Local banks hold public securities valued at three times their own equity, and for Senegalese banks specifically, state debt constitutes 12% of their total assets. Any attempt to renegotiate CFA franc debt would severely impact these institutions, potentially wiping out their capital before providing relief to the national treasury.

The Minister of Finance faced a stark choice: touching CFA franc debt would transform a state-level crisis into a banking crisis, with potential ripple effects across the entire sub-region. This strategic boundary was thus dictated by the financial health of the banks, rather than an abstract notion of national sovereignty. This situation presents a paradox: typically, a state protects its national currency debt because it can, in extremis, print the money to repay it. However, Senegal cannot do this with the CFA franc, as it is issued by the BCEAO, a common central bank for eight countries.

Despite not controlling its issuance, Senegal is protecting its CFA franc debt precisely because its banks would not survive a loss on these securities. This creates a challenging dynamic where the country shields debt in a currency it does not control, seemingly for protection, yet the regional market lends to the state at an average rate of 7.43% for terms of two years and four months. In 2025, Dakar borrowed 2,224 billion CFA from this market and plans to borrow an additional 4,209 billion CFA in 2026. This approach effectively safeguards the most expensive and immediate lenders, while the domestic debt accumulation continues.

While the Debt Treatment Plan aims to alleviate external pressures, it risks perpetuating the domestic debt cycle. The arithmetic remains daunting: international bonds alone account for 3,133 billion CFA, out of a total external debt of 16,894 billion CFA. The state faces a repayment obligation of 5,490 billion CFA in 2026 alone. Even significant concessions from international bondholders would only partially ease this immense burden.

Other creditors are acutely aware of this situation, operating under the principle that no one will accept losses if another party is repaid in full. This poses a significant challenge for Dakar, which is asking Exim Bank of China, its largest bilateral lender with 1,380 billion CFA in claims, to make an effort, while sub-regional banks are slated for full repayment. The precedent of Zambia, which took four years to navigate similar debt discussions, suggests that Senegal's hope for an accelerated procedure may encounter the harsh realities of creditor negotiations. Furthermore, an agreement with the IMF, estimated at approximately 2.2 billion USD over three years, has been reached at a technical level but awaits final approval.

Source: Original reporting via La Tribune Afrique