Source: The Conversation – Africa – By Daniel Cash, Reader in Law, Aston University
Senegal’s dramatic two-notch credit rating downgrade in February 2025 by the credit rating agency Moody’s was followed by a Standard & Poor’s downgrade in July.
Moody’s decision marked a three-notch deterioration in Senegal’s rating in four months. The scale of the revisions was rare, especially for countries not already in default or active restructuring.
The ratings collapse triggered a selloff in Senegal’s Eurobonds. It also cast a shadow over the country’s ongoing negotiations with the International Monetary Fund.
More broadly, it sent a signal about how the credit rating agencies are now responding to governance failures, not just macroeconomic trends. For others watching closely, this was not just a market correction, it was a warning.
So why did it happen?
A report released by Moody’s in July 2025 on “large, unaccounted for debt increases” provides context. The report looked at how fiscal transparency failures – situations where governments provide incomplete, outdated or inaccurate information about their debts and budgets – undermine sovereign creditworthiness. This applies globally, not just to African countries.
Moody’s research centres on stock-flow adjustments. This is the gap between how much a government’s total debt rises in a year, and what that increase should be, based on the officially reported budget deficit. In other words, if a country runs a US$5 billion deficit, you would expect its debt to rise by about US$5 billion. When that debt increases by much more (or less), it suggests that something is missing or misreported in the official data.
The research demonstrates a clear correlation between large stock-flow adjustments and weaker governance scores.
Moody’s downgrade of Senegal’s sovereign rating, and its research report, underscore how transparency and governance issues are increasingly influencing sovereign credit assessments. Rating agencies have improved their methodologies to capture these risks. Governance factors now represent about 25% of sovereign ratings across major agency frameworks.
In addition, transparency issues are showing up as a stumbling block in debt restructuring negotiations. Zambia’s restructuring process took 3.5 years (2021-2024), partly due to transparency complications. Ethiopia’s ongoing restructuring (since 2021) demonstrates similar challenges. For its part, Ghana’s relatively faster process benefited from greater initial debt transparency.
As a researcher who has looked closely at the working of rating agencies, I suggest that Moody’s comprehensive analysis provides governments with a diagnostic tool as well as an early warning system for potential transparency issues.
The message for sovereign debt managers is clear: in an era of enhanced transparency requirements and sophisticated rating methodologies, the quality of fiscal data has become inseparable from creditworthiness.
Early warning signs
Moody’s research found that large and persistent stock-flow adjustments often signal weak fiscal transparency. And that, over time, they reflect incomplete reporting and weak expenditure controls.
Critically, Moody’s noted that
frontier markets in Sub-Saharan Africa and Latin America have experienced the biggest stock-flow adjustments over the past decade.
There are many technical drivers behind stock-flow adjustments. Many are often legitimate. These can include debt management operations, asset acquisitions, arrears clearance and statistical revisions.
But Moody’s research pointed out that these technical reasons accounted for only half of the stock-flow adjustments. The other half remained unexplained – an indicator Moody’s treats as a serious red flag for fiscal credibility.
Senegal’s transparency failures
Senegal’s situation exemplifies how transparency gaps can rapidly destabilise sovereign credit profiles.
Following the March 2024 election audit findings by Senegal’s Inspectorate of Public Finances, its Court of Auditors report revealed “substantially weaker fiscal metrics” with “central government debt at close to 100% of GDP in 2023, around 25 percentage points higher than previously published”.
The scale of the revisions was unprecedented: debt-to-GDP ratios jumped from a reported 74.4% to 99.7% for end-2023. The fiscal deficit was revised upward from 4.9% to 12.3% of GDP.
Moody’s assessment was unambiguous:
The scale and nature of the discrepancies portray a much more limited fiscal space and higher funding needs than previously thought, while also indicating material past governance deficiencies.
The rating impact was swift and severe. Moody’s downgraded Senegal’s rating to B3 from B1 in February 2025, changing the outlook to negative, following an earlier downgrade from Ba3 in October 2024.
Senegal’s debt metrics reflect the severity of the fiscal challenge. The International Monetary Fund estimates Senegal’s debt reached 105.7% of GDP by end-2024, with gross financing requirements – the total amount the government needs to repay and borrow again to keep functioning – projected at around 20% of GDP in 2025 by the Senegalese budget.
The International Monetary Fund suspended its US$1.8 billion Extended Credit Facility in June 2024 following the misreporting discovery. However, the fund, in a note on negotiations during an August 2025 staff visit that was focused on working with Senegal in light of the post-election audits, wrote:
The IMF staff team commended the Senegalese authorities on their commitment to fiscal transparency and accountability, following their disclosure of the large misreporting that occurred over the past few years.
Troubling patterns
Moody’s emphasises that stock-flow adjustments occur across all regions and income levels. But the persistence and magnitude differ significantly by region. Recent African cases demonstrate particularly troubling patterns.
Some examples include:
Why this matters
The economic logic of the correlation between large stock-flow adjustments and weaker governance scores is straightforward. Persistent positive stock-flow adjustments indicate that fiscal deficits may not accurately represent government financing needs. As Moody’s explains:
when stock-flow adjustments are positive, a higher primary balance is required to stabilise debt over the long term.
This creates both fiscal and credibility challenges that rating agencies must incorporate into their assessments.
For countries with histories of significant adjustments, Moody’s notes it may
make a more negative assessment of fiscal policy effectiveness.
Transparency matters too because a lack of it can complicate debt restructuring efforts. An example is negotiations under the G20 Common Framework, which aims to coordinate debt relief among official and private creditors.
The process depends on clear and comprehensive debt data to determine how much relief is needed, and who should provide it. When key debts are hidden, disputed, or poorly recorded, the entire negotiation slows down, or stalls entirely.
The way forward
The convergence of rating methodology enhancements and transparency requirements creates both challenges and opportunities for sovereign borrowers.
Improving fiscal data systems is no longer merely a technical accounting exercise. It’s a strategy for maintaining market access and creditworthiness.
The rating agency response suggests this trend will intensify.
For emerging and frontier market sovereigns, there are clear incentives for transparency improvements. Research shows governance improvements lead to decreased “spreads” in the market, while poor governance adds 50-200 basis points to sovereign spreads.
In other words, for sovereign borrowers, it pays to demonstrate better governance; investors clearly respond positively to the prospect of investing in borrowers who have clearly defined and transparent governance structures.
From warning to opportunity
Senegal’s case illustrates how transparency failures can trigger rapid and severe credit deterioration. But it also demonstrates the rating agencies’ increasing sophistication in detecting and penalising such weaknesses.
Sovereign borrowers shouldn’t view enhanced transparency requirements as burdensome oversight. They are opportunities to reduce borrowing costs.
– Senegal’s rating downgrade: credit agencies are punishing countries that don’t check their numbers
– https://theconversation.com/senegals-rating-downgrade-credit-agencies-are-punishing-countries-that-dont-check-their-numbers-261583
