Senegalese bonds plunged to fresh record lows, placing the West African nation into debt-distress territory, according to a measure widely considered to be the threshold that locks countries out of global capital markets.

The sovereign risk premium on Senegal’s bonds over US Treasuries widened to 1,077 basis points on Wednesday, according to indicative intraday quotes from JPMorgan Chase & Co. indexes. That places the country among other African issuers whose debt is trading at or near 1,000 basis points, seen as a marker of distress. Mozambique’s spread is at 965 basis points, and Gabon’s earlier this month traded above the threshold.

Trio of African Nations Face Debt Distress

Spreads signal a rise to distress levels

Source: JPMorgan Chase & Co.

Note: Latest data for the spread indexes are intraday and indicative. Closing levels can be different.

Senegalese bonds have weakened sharply this week after the International Monetary Fund ended a visit to the West African nation without an agreement on a new funding program, and the nation’s government signaled opposition to any restructuring. The country’s previous $1.8 billion IMF package was frozen last year after the government disclosed hidden debts estimated at $7 billion.

“It is clear that a significant probability of a debt restructuring is priced into Senegal’s bond and that this has increased again after the IMF statement on Nov. 6,” said Mark Bohlund, a senior credit analyst at REDD Intelligence. “This means that Senegal cannot access the eurobond market at the present.”

Prime Minister Ousmane Sonko during the weekend ruled out any debt restructuring to address the undisclosed borrowing. That triggered a selloff of Senegalese dollar bonds on Monday that continued on Wednesday, with the yield on the country’s 2031 bonds jumping 122 basis points to 16.87% by 12:19 p.m. in London. The rate has now increased almost 300 basis points since Nov. 7.

Haircuts

The IMF Tuesday said it has explored several options with Senegal, and it was now up to the nation’s government to decide how to deal with “significant debt vulnerabilities.”

To stabilize its debt, Senegal will require a primary surplus of 2% of gross domestic product and its creditors will have to accept haircuts, according to Yvonne Mhango, an economist at Bloomberg Economics wrote Wednesday in a report.

“Even with deep fiscal retrenchment, the country’s debt burden will remain unsustainable without cuts from eurobond holders and other creditors,” she said.

Senegal’s bonds are trading at “stressed levels,” Maciej Woznica, a fixed-income portfolio manager at Coeli Frontier Markets said on Tuesday. There’s a risk of “potentially more pain in short-dated bonds,” he said.

The extra yield that investors demand to hold African debt over similar-dated US Treasuries has fallen in recent years as nations from Ghana to Zambia pursued economic reforms. Almost a dozen countries have tapped the IMF since 2020 for $69 billion worth of funding.

Foreign investors ideally want to see a new IMF program for Senegal, but with realistic goals and parameters, according to Anthony Simond, investment director for emerging market debt at London-based Abrdn Investments Ltd. He ruled out the risk of wider impacts on the rest of the continent as a result of Senegal’s woes.

“Senegal is not a systemic problem,” Simond said. “Most countries in Africa are doing well: decent growth prospects, solid fiscals, reduced debt levels and increasing reserves.”