Optimal Default in a Small Open Economy: Senegal’s Hidden Debt Crisis

Hidden public liabilities can reprice sovereign risk abruptly upon revelation. We study optimal default following such a revelation in a quantitative sovereign default model and apply the framework to Senegal’s 2024 debt audit, which revised government debt upward by 50 percentage points of GDP. The revelation enters as an exogenous upward shift in the inherited debt stock within a small open economy with long-duration debt and default costs disciplined by Senegal’s monetary-union constraints. Under our baseline calibration, the corrected debt stock exceeds the model’s repayment region, implying that default would have been optimal from 2023 onward—before the audit was conducted. Since Senegal has continued to repay, we also consider a no-default calibration that matches post-revelation spread dynamics. Rationalizing repayment requires income dynamics more volatile and less persistent than historical estimates, consistent with optimism about mean reversion or gambling for redemption. This calibration places Senegal near the default boundary, where a 3 percent adverse income shock would make restructuring optimal within a year. Both calibrations yield the same conclusion: the hidden-debt revelation moved Senegal from moderate fiscal risk to acute vulnerability.