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Transcript of Debt Sustainability Analysis March 2010 IMF and World Bank Nicholas StainesAntonio Nucifora IMF,...
Mozambique
Debt Sustainability Analysis
March 2010
IMF and World Bank
Nicholas Staines Antonio NuciforaIMF, African Department World Bank, Africa Region+1-202-623-4431 +258 [email protected] [email protected]
1
OutlineThe Government has expressed interest in foreign borrowing on non-concessional terms to finance investment.This presentation shows the results of a preliminary Debt Sustainability Analysis (DSA) for Mozambique. A baseline scenario based on the current
macroeconomic and external borrowing projections.
A scenario with a sustained scaling-up of borrowing, illustrating the key issues and risks of non-concessional borrowing (NCB).
A scenario with a temporary scaling-up.Highlights that debt sustainability depends on
the selection of good investment projects and the borrowing terms.
2
What is a DSA?The DSA is a tool to assess whether a
country’s borrowing plans are viable.It compares debt trajectories to ‘sustainable
ceilings’ in debt indicators (based on the capacity to make repayments).
The analysis is based on data and assumptions about: macroeconomic outlook;existing debt stocks and projections for new
borrowing;assumptions about debt relief, new borrowing
terms, and investment-growth relationship;The following scenarios are purely illustrative
and to be viewed cautiously—they are not projections.
3
Ceilings and Indicators in 2008
4
Mozambique: DSA Ceilings and Indicators at end-2008Indicator Ceiling Mozambique
NPV, percent of GDP 40 12.6NPV, percent of fiscal revenues 240 78.8NPV, percent of exports G&S 150 37.8 External debt service, percent of GDP None 0.5External debt service, percent of fiscal revenues 30 2.9External debt service, percent of exports G&S 20 1.4 Nominal Public External Debt Stock, US$m 3,243Nominal Public External Debt Stock, percent of GDP 33.6NPV of Public External Debt Stock, US$m 1,229NPV of Public External Debt Stock, percent of GDP 12.7
Sources: Mozambican authorities and Fund and Bank staff estimates
A. Baseline
5
Macroeconomic FrameworkNo new NCB beyond the Portuguese Credit Line
(PTL).Projections assume real GDP growth around 6.5%.Inflation remains steady between 5% and 6%.The real exchange rate remains stable.Current account balance improves relative to GDP,
as trade and income balances strengthen.Net aid resources decline as a share of GDP and its
composition shifts towards borrowing.Projections assume an increased fiscal reliance on
domestic resources relative to GDP: (i) rising domestic revenue effort, stabilizing around 21% of
GDP (ii) gradual decline in primary domestic deficit by about 2% of
GDP(iii) modest use of domestic financing rising to about 1% each
year
6
Baseline Key Results External public debt:Mozambique continues to face a low risk of external
debt distress.The NPV and debt service ratios on external public
debt are all well below their respective thresholds.
Portuguese credit lines (PTL) :The PTL deteriorates the NPV and debt service
ratios through the medium term.
Central government domestic debt:Central government domestic debt indicators also
projected to remain low.7
External Debt Indicators
8
10
15
20
25
30
35
40
2008 2013 2018 2023 2028
NPV of Public External DebtPercent of GDP
Central Government + PTL
Central Government
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2008 2013 2018 2023 2028
Public External Debt ServicePercent of GDP
Central Government + PTL
Central Government
Fiscal Indicators
9
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.02008 2013 2018 2023 2028
Central Government Primary Domestic BalancePercent of GDP
0
1
2
3
4
5
6
7
8
9
10
2008 2013 2018 2023 2028
Central Government Domestic DebtPercent of GDP
B. Sustained Scaling-Up
10
AssumptionsAssumes sustained external NCB of 2.5% of GDP
per year above baseline.
Assumption of the growth impact of investments: increasing grant- financed investment by one percent of GDP raises growth by 1/3 percentage points.
All borrowing through the budget. Compare borrowing on concessional (CB) and on non-concessional terms (NCB).
Borrowing terms: CB: Highly concessional borrowing IDA terms (10 years
grace, 40 years maturity, at 0.75% interest). NCB: highly non-concessional commercial terms (NCB, 1
year grace, 10 years maturity, 9% interest).CB terms ‘cheap’ relative to growth impact, NCB
terms ‘expensive’ relative to growth impact.11
Impact on WelfareHigh-return investments
seem valuable as the sum (NPV) of the output gains exceeds the borrowing costs.
Additional GDP more than covers debt service (but less so for NCB).
The problem is: who receives the benefits and pays the debt service costs?
12
0
2
4
6
8
10
12
14
16
18
20
2010 2015 2020 2025 2030
Incremental GDP and Debt Servicewith Concessional Borrowing
Percent of Baseline GDP
Incremental GDP
Incremental Debt Service
0
2
4
6
8
10
12
14
16
18
20
2010 2015 2020 2025 2030
Incremental GDP and Debt Servicewith Non-Concessional Borrowing
Percent of Baseline GDP
Incremental GDP
Incremental Debt Service
Impact on Budget FinancingThe investment affects the budget financing needs: it generates additional revenues (user charges or general taxes) but also additional debt service costs.Concessional Borrowing requires less financing. Allows less
borrowing or a larger primary domestic deficit (reduce revenues/raise spending). It generates fiscal space. This boosts private sector activity and growth.
Non-Concessional Borrowing requires more financing. Requires more borrowing or a smaller primary domestic deficit (raise revenues/reduce spending). This reduces private sector activity and growth.
Focusing on NCB, how can this higher financing need be met?
13-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
2010 2015 2020 2025 2030
Additional Government Financing RequirementsDebt Service Less Incremental Tax Revenues
Percent of Baseline GDP
Concessional Borrowing
Non-Concessional Borrowing
(a) By Higher Domestic Borrowing
14
Meeting additional financing requirements of NCB with domestic borrowing:Negative impact on growth.Raises NPV of external debt
close to the GDP threshold. External debt sustainability
vulnerable to shocks (exceed ceilings).
Results in large increase in domestic debt and interest costs.
Danger of a domestic debt spiral
0
5
10
15
20
25
30
35
40
2010 2015 2020 2025 2030
NPV External DebtPercent of GDP
Baseline
NCB
0
5
10
15
20
25
30
35
40
2010 2015 2020 2025 2030
Domestic DebtPercent of GDP
Baseline
NCB
(b) By More External Borrowing
15
Meeting additional financing requirements of NCB with more external borrowing:Raises NPV of external
debt above the GDP threshold.
And requires a large contraction in the non-interest current account balance. This would need a large FX depreciation.
Would threaten external stability.
-16
-14
-12
-10
-8
-6
-4
-2
02010 2015 2020 2025 2030
Non-Interest Current Account, Percent of GDP
Baseline
NCB
0
5
10
15
20
25
30
35
40
45
2010 2015 2020 2025 2030
NPV of External DebtPercent of GDP
Baseline
NCB
Ceiling
(c) By Reducing Primary Domestic Deficit
16
Meeting additional financing requirements of NCB by reducing the primary domestic deficit:Negative impact on growth
(as either revenues are raised or other spending reduced).
Raises NPV of external debt close to GDP threshold. External debt sustainability vulnerable to shocks.
Requires a large reduction in the primary domestic deficit of about 1.7% of GDP.
Unlikely to be feasible.
0
5
10
15
20
25
30
35
40
2010 2015 2020 2025 2030
NPV of External DebtPercent of GDP
Baseline
NCB
-6
-5
-4
-3
-2
-1
02010 2015 2020 2025 2030
Primary Domestic BalancePercent of GDP
Baseline
NCB
C. Sensivivity
17
Less Severe Borrowing Terms
Moderate borrowing terms, say NCB with 4% (instead of 9%) interest:Significantly improves
the external debt indicators and room for borrowing.
Allows a smaller contraction of the primary domestic balance.
Highlights key importance of accessing better borrowing terms.
18
0
5
10
15
20
25
30
35
40
2010 2015 2020 2025 2030
NPV of External DebtPercent of GDP
NCB Medium Terms NCB Baseline
-6
-5
-4
-3
-2
-1
02010 2015 2020 2025 2030
Primary Domestic BalancePercent of GDP
NCB Medium Terms NCB Baseline
Higher Growth ImpactSimulate higher growth impact of investments at 0.8 percentage points (instead of 0.35): Improves external debt
indicators Allows large expansion of the
primary domestic deficitHighlights key role of:
Quality of public investment and its selection process.
Good business environment to enhance crowding-in effect of public investment.
The opposite also holds: the unproductive use of resources will have a large adverse impact.
19
0
5
10
15
20
25
30
35
40
2010 2015 2020 2025 2030
NPV of External DebtPercent of GDP
NCB High Growth NCB Baseline
-6
-5
-4
-3
-2
-1
02010 2015 2020 2025 2030
Primary Domestic BalancePercent of GDP
NCB High Growth NCB Baseline
D. Temporary Scaling-Up
20
A Cautious ApproachA sustained scaling-up of investment financed by non-concessional borrowing poses large risks. In view of these risks, a more cautious approach may be warranted:
Assumes a temporary scaling-up of borrowing on NCB terms by 2.5% of GDP (approx. $300m) each year during 2011-2015.
This would deteriorate the debt indicators, but leave scope for adjustment.
21
External Debt Indicators
22
10
15
20
25
30
35
40
2008 2013 2018 2023 2028
NPV of Public External DebtPercent of GDP
Public SectorCentral GovernmentCentral Gvt, ex NCB
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2008 2013 2018 2023 2028
Public External Debt ServicePercent of GDP
Public SectorCentral GovernmentCentral Gvt, ex NCB
Conclusions
23
High RisksThough the scenarios are only illustrative, some key points emerge:A sustained scaling-up of infrastructure
investment financed by foreign borrowing on commercial terms poses many risks. Costly foreign borrowing can generate a vicious
domestic debt cycle, external instability, or require a large fiscal adjustment.
A sustained increase in borrowing will make Mozambique’s debt sustainability vulnerable to shocks.
Investments should preferably be financed by reducing the primary domestic deficit (raising revenues or reducing non-priority spending). 24
Key Issues and Way ForwardThe impact of high sustained NCB will depend
on: The borrowing terms. The productive use of investments to raise growth.The promptness of fiscal adjustment to maintain
domestic and external debt sustainability.The presumption should be for caution in case
the resources are not used productively.A cautious approach would be to scale up
investment temporarily for priority projects with high growth impact.
If investments are highly productive and increase the growth rate, then more borrowing will become possible.
25
Thank You
26