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Cablegate: Global Financial Crisis Impact On Senegal

VZCZCXRO0250
PP RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHDK #1318/01 3181715
ZNR UUUUU ZZH
P 131715Z NOV 08
FM AMEMBASSY DAKAR
TO RUEHC/SECSTATE WASHDC PRIORITY 1433
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHLMC/MCC WASHDC
RHEHNSC/NSC WASHDC
RUEHZO/AFRICAN UNION COLLECTIVE

UNCLAS SECTION 01 OF 03 DAKAR 001318

SIPDIS

DEPT FOR EBB/IFD/ODF, AF/EPS AND AF/W
TREASURY FOR RKLEIN, RHALL AND DPETERS

E.O. 12958: N/A
TAGS: EFIN ECON EAID EMIN SG
SUBJECT: GLOBAL FINANCIAL CRISIS IMPACT ON SENEGAL

REF: DAKAR 1298 (NOTAL)

DAKAR 00001318 001.2 OF 003


1. Summary: As the White House prepares to host the G-20 Summit to
address current risks to the global economy, the likely impact on
Senegal of the financial crisis is mixed. Neither Senegal nor the
central bank of the Franc CFA monetary zone are holding the
sophisticated mortgage and debt instruments that triggered the
crisis. However, there is tremendous concern about the local impact
of global economic slowdown, particularly in Europe and the U.S. In
typically understated manner, the IMF told donors recently that
Senegal "could witness a significant toll" from the global crisis.
Senegal is already facing a serious liquidity shortage for both the
private sector and much-needed government financing. Local experts
believe that in the medium term, Senegal could experience a
considerable drop in the flow of foreign direct investment. It is
likely that decreases in remittances from abroad will increase
poverty rates throughout the country. President Wade has criticized
the summit for not including more African representation, and has
expressed concern that the Western response to the crisis will
reduce assistance to Africa. End summary.

LITTLE WORRY FROM "TOXIC" DEBT INSTRUMENTS
------------------------------------------
2. Among Econ Section interlocutors, including senior Ministry of
Finance officials and the President of Senegal's Professional
Bankers' Association, the impact of the world financial crisis in
Senegal and the Franc CFA zone of the West African Economic and
Monetary Union (WAEMU) would be weak, if not nonexistent with regard
to mortgage-backed assets, derivatives, and other sophisticated
financial instruments. Senegalese banks hold very little, if any,
of those types of assets, nor have they created similar products or
credit swaps for local investors. According to Ms. Khady Sy,
Director of the BRVM (the regional stock exchange), the immediate
effects of the financial crisis should be minimal since WAEMU's
financial market is not as sophisticated as the markets in the US
and Europe, especially when it comes to the securitization of
mortgage bonds.

3. Since September 1, the BRVM 10, which is the index of the
exchange's top 10 firms, has risen 23 percent and posted generally
positive daily results. Bonds have been increasingly popular with
WAEMU investors. Sy noted that several foreign investors are
participating actively in the growth of the BRVM because of
high-performing yields of 5-15 percent and investor protection
because of the listed firms' weak integration into the world
economy. [Note: the BRVM is a very small exchange with 38
companies from the region currently listed. Stock market
capitalization is approximately USD 6.7 billion, and its bond
holdings are approximately USD 1 billion. End note.]

4. Pierre Ndiaye, Director of Research at the WAMEU central bank,
the BCEAO, noted that the BCEAO has not predicted any direct major
risks from the crisis. According to Ndiaye, "the lack of
integration of WAEMU's financial system in the rest of the world has
been an advantage for local and banks and the BCEAO." Ndiaye argued
that in contrast to large Western banks, Senegalese banks are
neither engaged in high-risk lending systems nor significantly
involved in a system of inter-bank loans.

ACCESS TO CREDIT
----------------
5. The most immediate impact for Senegal has been the resulting
credit crunch. As noted in Reftel and previous reports, the GOS
needs to find new financing to close a serious budget deficit.
Ministry of Finance officials have confirmed that to date they have
been unable to secure significant financing from local banks due to
an overall drought in liquidity. Even where new credit might be
available outside the WAMEU zone, Senegal does not have much room to
maneuver since, under its Policy Support Instrument (PSI) program
with the IMF, the government agreed to not secure any new
non-concessional loans. The higher cost of credit could also slow
new and existing private investment projects, and also for Dakar's
new toll road, which is uniquely authorized non-concessional
financing under the PSI.

6. According to contacts at Dakar's regional Citibank office, local
liquidity is currently severely restricted, due in part to
contractions in access to global credit for local affiliates of
international banks. A larger problem for local liquidity however
is the GOS's current budget crisis and arrears to the private
sector, which has already sucked up most of the available local
credit. The GOS is reportedly calling on some local banks
accelerate repayment of existing debt holdings in order to make more
funds available in the market.

DAKAR 00001318 002.2 OF 003

SLOWING OF INVESTMENT
---------------------
7. Tighter credit and slowing global economic output are already
impacting investment in Senegal. The BCEAO's NDiaye stated that
"Senegal's GDP growth will suffer because foreign investment will
dry up as a result of the crisis." Commercial Attaches at
diplomatic missions have noted that many current private projects
have already scaled back investment and extended completion dates.
A Canadian diplomat noted that a broad range of mining firms are
facing immediate liquidity problems as well as diminishing demand.
AcerMittal has reportedly slowed work on its USD 2 billion-plus
investment in new iron ore mines and related infrastructure. [Note:
our Canadian colleague also noted that mining companies with excess
liquidity are currently "on a shopping spree," buying up suddenly
weakened competitors both in Senegal and globally. End note.]

8. Since Senegal is not an exporter of oil or other commodities
whose price will likely continue to fall in the near term, the
country may avoid the drastic drops in economic output and foreign
exchange earnings that will likely impact other African countries.
However, our Citibank contact expects that an even more significant
drop in investment and financing could happen in late 2009 and 2010,
as the repercussions of the major economy slowdown begin to hit the
developing world.

AN ECONOMY RELIANT ON REMITTANCES
---------------------------------
9. NDiaye and others have noted that higher unemployment in Europe,
North America and other places could result in a significant decline
of remittances to Senegal. Though it is premature to tell how much
remittances from the estimated one million Senegalese living abroad
have already decreased, Abdou Fall, Manager of the Western Union in
Medina (Dakar's most populated neighborhood) said the remittances
are diminishing: "we used to receive 250 to 300 customers per day,
but recently the number has been falling to 50 customers per day."

10. On November 7, Johannes Mueller, the head of the IMF's PSI
review mission told donors that they will likely decrease their 2008
and 2009 estimates for remittances. Mr. Sogue Diarisso, the
Director of the GOS's main economic research and policy bureau
(DPEE), explained that formal remittances, which have been estimated
at more than USD 1 billion per year, account for ten percent of
Senegal's GDP. An estimated nine percent of Senegalese families
receive these transfers directly, and a significant reduction in
available funds will lead to a marked increase in poverty. With
informal remittances estimated to total almost as much as formal
transfers, economic constriction and job losses in the U.S. and
Europe will have a noticeably negative impact on Senegal's GDP and
poverty rates.

CONCERNS ABOUT FALLING ASSISTANCE LEVELS
----------------------------------------
11. The BCEAO's NDiaye and many other contacts and commentators
have are worried about an expected decline of foreign assistance
(grants, loans, and project assistance) if the crisis continues in
the medium term -- because of the large budget commitments by
western governments to restructure their banking sectors and prop up
their economies. In particular, according to Ndiaye, the decrease
of donor assistance from abroad "would threaten Senegal's economic
and social programs to improve health, education and infrastructure
projects, given that Senegal is among one of Africa's top recipients
of foreign aid." The IMF's Mueller noted a similar apprehension,
and directly linked reduced aid flows to lower medium-term economic
growth forecast.

12. President Wade has publicly criticized President Bush's
November 15 G-20 Summit on the global financial crisis for not
including a broader representation of African leaders. In addition,
Wade recently asserted that "the African continent is not worried
about the crisis, but our major concerns are how to survive and
improve our living conditions -- build our agriculture and road
infrastructure projects when the West is disbursing several billion
dollars to support its financial system and its economy."

COMMENT
-------
13. The WAMEU zone should remain fairly well isolated from the
direct impact of firms and institutions holding "toxic paper," but
Senegal remains vulnerable in a number of ways to a global downturn.
Senegal's current budget crisis and large internal debt will make
it even more difficult for the Wade administration to respond to the
threat of a slowing economy and increasing poverty.


DAKAR 00001318 003.2 OF 003


BERNICAT

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