S&P: Sénégal S&P Défaut Souverain Triggered by Debt Plan

• S&P recently downgraded Senegal's long-term foreign currency rating to 'CC' and local currency rating to 'CCC', both with a negative outlook, citing a high likelihood of sovereign default.
• The downgrade was triggered by Senegal's launch of an external debt restructuring plan, which S&P considers a 'distressed debt exchange' under its methodology.
• The restructuring aims to reduce public debt, projected at 117% of GDP by end-2025, to sustainable levels, a condition for a new $2.2 billion IMF financing program.
• Debt denominated in CFA francs and multilateral debt are excluded from the restructuring, placing the primary burden on external commercial creditors.
• S&P highlights a 'high' risk of payment default or debt service suspension in the coming months, linking the current crisis to a 'hidden debt' issue of $9-13 billion uncovered from 2024.

S&P views this operation as almost certain to result in what it terms a "distressed debt exchange," a scenario that, under its own methodology, constitutes a default.

Standard & Poor's recently lowered Senegal's sovereign credit ratings, citing the nation's newly announced external debt restructuring plan. The long-term foreign currency rating was reduced from 'CCC+' to 'CC', while the local currency rating moved from 'CCC+' to 'CCC'. Both ratings now carry a negative outlook, indicating potential for further downgrades, though the short-term ratings remain at 'C'.

The rating agency justified its decision by highlighting the restructuring initiative, which commenced three days prior to the downgrade. S&P views this operation as almost certain to result in what it terms a "distressed debt exchange," a scenario that, under its own methodology, constitutes a default. This assessment underscores the significant financial challenges facing the West African nation and the market's perception of its efforts to manage its substantial public debt.

This move by S&P signals a heightened risk of a sovereign default for Sénégal, a critical development for international investors and financial institutions. The downgrade reflects concerns that the proposed debt treatment will impose losses on creditors, triggering S&P's definition of a default event, even as the government seeks to stabilize its financial position.

The Senegalese government officially launched its debt treatment plan on September 1st, aligning it with the G20's Enhanced Common Framework. The primary objective of this initiative is to reduce the country's public debt, which S&P projected to reach 117% of GDP by the end of December 2025 (before re-basing), to a more sustainable level. Achieving this sustainability is a prerequisite set by the International Monetary Fund (IMF) for the approval of a new financing program by its board of directors.

Coinciding with the debt plan announcement, Dakar secured a staff-level agreement with the IMF on the same day. This agreement pertains to an Extended Credit Facility (ECF) valued at approximately $2.2 billion, to be disbursed over a three-year period. While this marks a crucial step, the finalization of the IMF program remains contingent on approval from the institution's board, adding another layer of uncertainty to Senegal's financial outlook.

A notable aspect of Senegal's restructuring strategy, as observed by S&P, is the complete exclusion of debt denominated in CFA francs, which constituted roughly one-third of the total debt stock at the end of 2025—a larger share than external commercial debt. Multilateral debt is also exempt due to the preferred creditor status of its holders. S&P interprets this selective approach as an attempt to mitigate adverse effects on the UEMOA financial system and neighboring countries within the zone.

Consequently, the majority of the restructuring burden is expected to fall on external commercial creditors holding foreign currency-denominated debt. These creditors are likely to face extended maturities, reduced interest rates, or principal haircuts. However, S&P has identified a significant execution risk: external creditors may challenge the exclusion of local currency debt. The agency also points to the existence of total return swaps, derivatives believed to be backed by CFA franc debt, which could blur the distinction between domestic and external exposure, potentially drawing domestic debt into the restructuring negotiations. Despite these concerns, Senegalese authorities have not declared a moratorium and have affirmed their commitment to honoring immediate obligations, including an interest payment on a 2048 eurobond due on September 13th.

This current financial predicament and the subsequent downgrade are set against the backdrop of a 'hidden debt crisis' that came to light starting in 2024. Audits conducted by the new administration, led by Bassirou Diomaye Faye, uncovered undeclared loans contracted between 2019 and 2023. These undisclosed borrowings are estimated to range from $9 billion to $13 billion, representing up to a quarter of the nation's economy.

The scale of this financial burden was starkly illustrated by the Ministry of Finance, which reported that 25 CFA francs out of every 100 CFA francs of state revenue were allocated solely to interest payments. Looking ahead, S&P maintains a 'high' risk assessment for a payment default or a suspension of debt service in the coming months, largely due to the indeterminate nature of the restructuring process. The agency has outlined potential further downgrades: the foreign currency rating could fall to 'SD' (selective default) if a payment delay or liability management operation is deemed a default, and the local currency rating could decline further if domestic debt becomes entangled in the restructuring or if state liquidity continues to deteriorate.

Source: Original reporting via SenePlus