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Republic of Equatorial Guinea: Staff Report for the 2010 Article IV Consultation—Debt Sustainability Analysis

Author(s):
International Monetary Fund
Published Date:
May 2010
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Equatorial Guinea— External Debt Sustainability Analysis

1. Equatorial Guinea’s external debt is projected to remain low and sustainable over the medium term. A debt sustainability analysis (DSA)—using the middle income country template—also demonstrates that the country’s external debt would remain well below the CEMAC convergence criteria of 70 percent of GDP under all stress-test scenarios (Figure 1).

Figure 1.Equatorial Guinea: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Source: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Figures in the boxes represent average projections forthe respective variables in the baseline and scenario being presented. Permanent 1/2 standard deviation shock applied to the growth rate. Permanent 1 standard deviation of Libor applied to the real interest rate.

2/ The current account shock demonstrates the permanent effect of a US$ 20 reduction in the oil price from the baseline and a proportional reduction in the price of derivatives starting in 2010.

3/ One-time real depreciation of 30 percent occurs in 2010. Combined shocks on the growth rate, real interest rate and current account.

2. Notwithstanding, it is worth noting that the authorities have begun borrowing again in the context of implementing their large public investment program—a policy shift. As a result, external debt is expected to rise to about 12 percent of GDP in 2012 before resuming a declining trend. By 2015, external debt would amount to just below 6 percent of GDP (less than 1 percent of GDP in 2008, Table 1).

Table 1.Equatorial Guinea: External Debt Sustainability Framework, 2005-15(In percent of GDP, unless otherwise indicated)
ActualProjections
20052006200720082009201020112012201320142015Debt-stabilizing non-interest current account 6/
Baseline: External debt3.01.61.10.75.17.49.912.110.78.65.5-3.1
Change in external debt-3.2-1.4-0.5-0.44.42.32.52.1-1.4-2.1-3.1
Identified external debt-creating flows (4+8+9)-18.8-25.6-18.3-6.35.6-4.23.95.24.54.44.5
Current account deficit, excluding interest payments6.2-7.1-4.3-9.115.84.412.09.58.37.67.2
Deficit in balance of goods and services-43.8-53.7-51.6-47.3-12.2-27.8-20.8-20.1-20.2-19.8-18.3
Exports87.486.881.978.869.963.260.357.153.649.746.3
Imports43.633.130.331.657.835.339.537.033.429.928.0
Net non-debt creating capital inflows (negative)-22.8-18.1-13.63.1-10.7-8.8-8.3-4.7-4.1-3.6-3.1
Automatic debt dynamics 1/-2.2-0.4-0.4-0.30.50.10.20.40.30.40.3
Contribution from nominal interest rate0.00.00.00.00.10.20.40.60.70.50.4
Contribution from real GDP growth-0.40.0-0.3-0.1-0.10.0-0.1-0.1-0.3-0.1-0.1
Contribution from price and exchange rate changes 2/-1.8-0.4-0.1-0.30.4
Residual, incl. change in gross foreign assets (2-3) 3/15.624.317.85.9-1.26.6-1.4-3.1-5.9-6.5-7.5
External debt-to-exports ratio (in percent)3.41.91.30.87.211.716.421.119.917.211.8
Gross external financing need (in billions of US dollars) 4/0.5-0.6-0.5-1.72.00.72.12.02.12.12.1
in percent of GDP6.7-6.1-4.0-9.016.04.612.411.010.810.910.4
Scenario with key variables at their historical averages 5/7.4
Key Macroeconomic Assumptions Underlying Baseline
Real GDP growth (in percent)9.71.321.410.75.30.92.11.52.70.80.7
GDP deflator in US dollars (change in percent)42.915.47.832.4-37.026.38.73.91.11.73.2
Nominal external interest rate (in percent)0.70.60.90.712.34.65.45.95.74.94.6
Growth of exports (US dollar terms, in percent)52.116.023.641.0-41.115.16.0-0.1-2.5-4.8-3.2
Growth of imports (US dollar terms, in percent)24.3-11.319.852.721.5-22.124.3-1.2-6.4-8.2-2.5
Current account balance, excluding interest payments-6.27.14.39.1-15.8-4.4-12.0-9.5-8.3-7.6-7.2
Net non-debt creating capital inflows22.818.113.6-3.110.78.88.34.74.13.63.1

Derived as [r - g - ρ(1+g) + εα (1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes. The large residuals in 2012-2015 are due to the projected reduction in government savings during that period.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of prevous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP. Under this scenario, the debt stock turns negative starting in 2011 (i.e., Equatorial Guinea would become a net creditor). Negative values have been suppressed.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r - g - ρ(1+g) + εα (1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes. The large residuals in 2012-2015 are due to the projected reduction in government savings during that period.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of prevous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP. Under this scenario, the debt stock turns negative starting in 2011 (i.e., Equatorial Guinea would become a net creditor). Negative values have been suppressed.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

3. The new debt relates to a US$2 billion credit line from the Chinese government signed in late 2006. The loans are earmarked for infrastructure, including four projects in electrification and improvements to Bata harbor. Loan terms are non-concessional, carrying an interest rate of 5½ percent, 5 years maturity with 2 years grace. A repayment guarantee in the form of liquid deposits at the Eximbank of China equivalent to 30 percent (minimum) of the outstanding stock of debt is required. The Chinese government is also reported to have extended an offer for a US$380 million long-term loan for housing construction on more concessional terms (17 years maturity, 2 years grace, at 2 percent interest). Given the uncertainty regarding the latter loan, it is not included in the DSA, but would not alter the overall assessment.

4. Most of the stress-test scenarios indicate potential risks, but still-sustainable levels of external debt. All shocks are calibrated over the seven-year period 2003-09. The shorter calibration period is warranted given that the government only started to receive the fiscal revenues of the oil fields discovered in the mid- and late-nineties in 2003. Debt dynamics are most sensitive to an oil and hydrocarbon derivatives price shock, with a $20 reduction in the oil price and a proportional reduction in derivatives prices leading to a potential tripling of the debt stock. A similar increase in debt would arise in the event that the authorities continue to accumulate debt after 2012 at the same rate (average) as they did over 2010-12.

Table 2.Equatorial Guinea: External Sustainability Framework—Gross External Financing Need, 2005-15
ActualProjections
20052006200720082009201020112012201320142015
I. Baseline Projections
Gross external financing need in billions of U.S. dollars 1/0.5-0.6-0.5-1.72.00.72.12.02.12.12.1
in percent of GDP6.7-6.1-4.0-9.016.04.612.411.010.810.910.4
II. Stress Tests
Gross external financing need in billions of U.S. dollars 2/
A. Alternative Scenarios
A1. Key variables are at their historical averages in 2010-15 3/0.71.71.70.8
A2. Continued accumulation of debt post 20120.72.12.02.12.12.1
B. Bound Tests
B1. Nominal interest rate is at baseline plus one standard deviation of Libor0.72.22.02.12.22.2
B2. Real GDP growth is at baseline minus one-half standard deviations0.72.01.81.71.61.3
B3. Oil price US $20 lower than under baseline starting in 2010 4/0.72.52.42.83.23.8
B4. Combination of B1-B30.72.32.22.42.72.9
B5. One time 30 percent real depreciation in 20110.72.12.02.02.12.1
Gross external financing need in percent of GDP 2/
A. Alternative Scenarios
A1. Key variables are at their historical averages in 2010-15 3/4.68.26.42.3
A2. Continued accumulation of debt post 20124.612.411.010.810.910.4
B. Bound Tests
B1. Nominal interest rate is at baseline plus one standard deviation of Libor4.612.511.211.111.411.0
B2. Real GDP growth is at baseline minus one-half standard deviations4.612.411.111.010.89.0
B3. Oil price US $20 lower than under baseline starting in 2010 4/4.614.313.314.916.718.9
B4. Combination of B1-B34.614.413.715.517.619.4
B5. One time 30 percent real depreciation in 20114.620.318.017.717.816.9

Defined as non-interest current account deficit, plus interest and amortization on medium- and long-term debt, plus short-term debt at end of previous period.

Gross external financing under the stress-test scenarios is derived by assuming the same ratio of short-term to total debt as in the baseline scenario and the same average maturity on medium- and long term debt. Interest expenditures are derived by applying the respective interest rate to the previous period debt stock under each alternative scenario.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP. Under this scenario, the gross external finance turns negative starting in 2014. Negative values have been suppressed.

The current account shock demonstrates the permanent effect of a US$ 20 reduction in the oil price and a proportional reduction in the price of the derivatives starting in 2010.

Defined as non-interest current account deficit, plus interest and amortization on medium- and long-term debt, plus short-term debt at end of previous period.

Gross external financing under the stress-test scenarios is derived by assuming the same ratio of short-term to total debt as in the baseline scenario and the same average maturity on medium- and long term debt. Interest expenditures are derived by applying the respective interest rate to the previous period debt stock under each alternative scenario.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP. Under this scenario, the gross external finance turns negative starting in 2014. Negative values have been suppressed.

The current account shock demonstrates the permanent effect of a US$ 20 reduction in the oil price and a proportional reduction in the price of the derivatives starting in 2010.

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