DAKAR, Sept 24 – Senegal’s planned restructuring of its foreign-currency debt is unlikely to create significant losses for major commercial banks in sub-Saharan Africa because of their limited exposure to the country’s international debt, S&P Global Ratings said.
However, the ratings agency warned that Senegal’s substantial stock of domestic debt leaves open the possibility of a broader restructuring that could increase credit costs for some regional lenders.
Senegal’s government announced earlier this month that it intends to seek a debt treatment as part of efforts to restore debt sustainability and secure a new $2.2 billion IMF programme. The IMF has confirmed a staff-level agreement for a 36-month Extended Credit Facility arrangement, subject to further approvals and financing assurances.
The planned treatment is expected to exclude obligations denominated in the regional CFA franc, according to the government’s approach outlined in the source material. That would leave foreign-currency creditors potentially exposed to changes in principal, interest or repayment terms.
S&P said banks including Ecobank Transnational, FirstBank of Nigeria and United Bank for Africa have exposure to Senegalese sovereign debt, but their holdings are concentrated in local-currency obligations and represent a relatively small portion of their balance sheets.
“Senegal’s plan to restructure foreign-currency denominated debt won’t hurt rated banks in Sub-Saharan Africa,” S&P said in its note. “That’s because the banks are only exposed to local-currency debt and have limited exposure to Senegal sovereign debt.”
Domestic Debt Remains the Key Banking Risk
The more significant concern for regional lenders would arise if Senegal eventually extends its debt treatment to domestic obligations.
S&P estimates Senegalese local-currency government debt represents approximately 1.5% to 3% of the total assets of the affected banks.
Under a scenario involving a 30% reduction in principal, S&P estimates that credit losses at the affected banks would increase by between 1 and 3 percentage points, while pretax profit would decline by an average of 22%.
Even under a more severe scenario involving a 70% principal haircut, S&P said the banks would be able to absorb the resulting losses through earnings and remain above regulatory capital requirements. Pretax profit would nevertheless fall by an average of approximately 50%.
The assessment comes as Senegal works to establish the terms of its debt treatment. The IMF’s September agreement with the government identified debt sustainability and improved public debt management as key elements of the proposed programme.
Senegal has indicated that it intends to use an enhanced version of the G20 Common Framework for the restructuring, although the government has provided limited detail on how its proposed approach would differ from the existing mechanism.
The IMF says the Common Framework can accommodate different forms of debt treatment, including deeper restructuring where debt is unsustainable and repayment reprofiling where the primary challenge is liquidity.
For regional banks, the immediate exposure therefore remains concentrated in Senegal’s domestic debt market, while the eventual scope and terms of the government’s broader debt treatment will determine whether additional pressure emerges on bank earnings and capital.
