Republic Of Congo: Joint IMF and World Bank Debt Sustainability Analysis
Author: International Monetary Fund
Publication Date:
02 Mar 2009
eISBN:
9781451808681
Language:
English
Keywords:
ISCR; CR; growth facility; price; food price; authority; Three-Year arrangement; oil GDP; creating flow; burden ratio; debt-to GDP; sustainability framework; Fiscal stance; Oil prices; Public and publicly-guaranteed external debt; GDP increase
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The staff report for the Republic of Congo’s combined 2008 Article IV Consultation and Requests for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility is discussed. To enhance external viability, the authorities recognize the need to improve competitiveness, raise output growth through diversification, and consolidate the fiscal position. The authorities are making a concerted effort to improve the business climate, liberalize trade, deepen financial intermediation, continue reform of public enterprises, improve governance and transparency, and put in place development strategies in key sectors.

Abstract

The staff report for the Republic of Congo’s combined 2008 Article IV Consultation and Requests for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility is discussed. To enhance external viability, the authorities recognize the need to improve competitiveness, raise output growth through diversification, and consolidate the fiscal position. The authorities are making a concerted effort to improve the business climate, liberalize trade, deepen financial intermediation, continue reform of public enterprises, improve governance and transparency, and put in place development strategies in key sectors.

VI. Introduction

1. The previous DSA was carried out during the 2007 Article IV consultation, based on the outstanding stock of debt at end-June 2006.2 The analysis concluded that, under the long-term scenario that assumes the continuation of policies prevailing in 2006, the risk of debt distress in Congo was high, even after accounting for the full unconditional delivery of HIPC and MDRI assistance.

2. Congo’s net public debt has declined significantly during the past several years.3 Three developments have contributed to this decline: (i) debt restructuring from the Paris Club; (ii) debt relief from London Club commercial creditors in 2007, which significantly lowered the stock of external arrears; and (iii) favorable world oil prices, which strengthened the external position and public finances.4

3. In 2007, total external debt is estimated at US$ 6.3 billion or 73 percent of GDP (down from 255 percent in 2004) and its net present value is slightly above US$ 5 billion (Table 1). The bulk of this debt is owed to bilateral official creditors and commercial creditors, whose shares represent 65 and 27 percent of outstanding debt, respectively; multilateral creditors only account for 8 percent. More than two thirds of domestic payment arrears (which accounted for about 99 percent of the total domestic debt) were repaid over the last two years. At end-2007, domestic debt stood at 8 percent of GDP.

Table 1.

Republic of Congo: Net Present Value of Disbursed Debt Outstanding, 2007-13

(Millions of U.S. dollars)

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Sources: Congolese authorities; and Fund staff estimates and projections.

4. Since the previous DSA, there have been important developments on Congo’s creditor relations. The authorities concluded agreements with the London Club and all but one of its bilateral Paris Club creditors, and are negotiating in good faith with the remaining commercial and litigating creditors. The authorities have reportedly paid the equivalent of 5.2 percent of non-oil GDP to the litigating creditors to keep the discussions moving forward. The authorities are cognizant of the need for comparability of treatment of creditors; and for reaching agreements that are—to the extent possible—fair to all of them.

5. The authorities are making significant progress in strengthening debt management. Although not regularly, Congo is already publishing quarterly debt service projections on the government’s website and is preparing a new external debt management strategy, in line with CEMAC regional guidelines. The strategy will benefit from technical assistance, such as the debt management performance assessment recently conducted by the government, from the regional central bank and the World Bank, following the DeMPA methodology.

VII. Key Macroeconomic Assumptions in the Baseline Scenario

6. The main assumptions underlying the DSA are based on a macroeconomic framework consistent with the proposed Poverty Reduction and Growth Facility arrangement and the authorities’ Poverty Reduction Strategy paper. In broad terms, the baseline scenario assumes (Table 2):

Table 2.

Republic of Congo: Macroeconomic Baseline Assumptions, 2008-28

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  • Real GDP growth of 3.4 percent over the long term, largely reflecting declining oil production. The baseline takes account of proven oil reserves only, which amounted to about 1.6 billion barrels at end-2006.

  • Inflation averaging 3 percent per year, in line with the CEMAC convergence criterion.

  • A trend decline in exports and a worsening external current account balance, due to a decline in oil production.

  • A strong fiscal position, mainly on account of a build up of financial assets as the counterpart to continued fiscal consolidation (see below).

  • Medium-term world oil price projections are based on the most recent WEO assumptions until 2013 (which imply prices rising from US$ 68 per barrel in 2009 to US$ 83 per barrel in 2013) and constant in real terms thereafter.

7. The fiscal stance is set to achieve long-term sustainability. In this regard, the baseline assumes a gradual reduction of the non-oil primary deficit—the program’s fiscal anchor—and a consolidation path consistent with a permanent-income hypothesis model (PIH).5 Based on this model, the sustainable non-oil primary deficit is estimated at about 3-5 percent of non-oil GDP, compared with more than 40 percent of non-oil GDP currently. Specific fiscal assumptions include: (i) a peak in oil production of 133.2 million barrels in 2010, before declining gradually; (ii) world oil prices based on the latest WEO projections until 2013 and constant in real terms thereafter; (iii) a quality discount on Congolese oil6, which is assumed to remain constant over the long term; and (iv) a real rate of return on government (financial) assets increasing gradually to about 3½ percent per year.

8. The profile of new external borrowing is consistent with the concessionary requirement under the proposed PRGF arrangement. Given that Congo has passed the IDA-only income threshold in 2007, it is assumed to receive World Bank financing on “hardened” terms from FYl 1 onwards, and to graduate to IBRD status in 2018.7 Anticipated borrowing under the June 2006 framework agreement with China is included in the analysis.8 Domestic debt is assumed to be fully amortized over the next three years.

A. External and Public Debt Sustainability Analysis

9. In the baseline DSA, Congo’s external debt burden ratios indicate a high risk of debt distress, although these ratios show a declining trend (Figure 1 and Table 3). Despite the gradual reduction in the concessionality of new loans and the decline in oil revenue, total external debt falls over time as income from financial assets offsets the revenue loss caused by the decline in oil production.

Table 3.

Republic of Congo: External Debt Burden Indicators, 2008-28

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Figure 1.
Figure 1.

Republic of Congo: Indicators of Public and Publicly Guaranteed External Debt under the Baseline Scenario and Stress Tests, 2008-281

Citation: IMF Staff Country Reports 2009, 074; 10.5089/9781451808681.002.A002

Source: Staff projections and simulations.1 The most extreme stress test is the test that yields the highest ratio in 2018. In figure b. it corresponds to a Combination shock; in c. to a Exports shock; in d. to a Combination shock; in e. to a Exports shock and in picture £ to a Combination shock

  • The NPV of debt-to-GDP ratio breaches the indicative threshold during 2008-17, then drops below the threshold in 2018 and remains there through the rest of the projection period.9

  • The debt service-to-exports and debt service-to-revenue ratios are projected to be below their respective thresholds throughout the projection period.

10. Standardized stress tests seem to point to Congo’s vulnerability to various shocks. Under the most extreme stress test, net non-debt creating flows are lower than the historical average (by one half standard deviation). Under this scenario, the NPV of external debt-to-GDP rises to 66 percent in 2013. It should be noted, however, that this shock does not constitute a particularly relevant benchmark for Congo as its economic performance during the period used to perform these tests is affected by a structural break (the civil war), and a temporary fall in oil production caused by an oil accident at the Nkossa oil platform.

11. The historical scenario displays an unfavorable evolution of Congo’s debt ratios over the medium term. Most ratios show a worsening trend and the NPV of debt-to-GDP breaches the indicative thresholds early in the projection period, before improving markedly thereafter. In the case of Congo, however, this scenario presents the same limitations as the standardized stress tests.10

12. Over the long term, total public debt evolves in a similar manner to external debt. Given the projected repayment of the remaining domestic debt obligations over the next several years, the evolution of total debt coincides with that of external debt.11 On a net basis, both stock and flow indicators display a declining trend over time.

  • The NPV of debt-to GDP becomes negative, because financial assets accumulate as a result of fiscal consolidation under the baseline scenario;

  • The debt service-to-revenue falls to 7 percent by 2028, compared with 13 percent currently.

13. Congo’s net public debt does not appear to be vulnerable to the standardized DSA stress tests (Figure 2). This is because the buildup of financial assets stemming from fiscal consolidation provides a significant cushion against shocks. However, Congo’s public debt appears vulnerable to oil price shocks and alternative assumptions on the conduct of fiscal policy (elaborated in the alternative scenario B below).

VIII. Alternative Macroeconomic Scenarios

14. Two alternative scenarios are elaborated to highlight the impact of (i) the full delivery of HIPC and MDRI relief at the completion point, which is assumed to take place in June 2010 and (ii) a combination of lower world oil prices and no fiscal adjustment.

A. Alternative scenario: HIPC and MDRI relief

15. The first alternative scenario simulates full delivery of enhanced HIPC and MDRI assistance to illustrate the importance of this debt relief for sustainabihty. Owing to earlier relief granted by London Club creditors, the remaining debt relief due at the completion point is relatively small compared to the savings from fiscal consolidation and, consequently, has only a limited impact on sustainabihty:

  • The NPV of debt-to-GDP is on average about 4 percentage points lower than under the baseline;

  • The NPV of debt service-to-exports is about lA percentage point lower compared with the baseline.

B. Alternative scenario: Lower World Oil Prices and No Fiscal Adjustment

16. The second alternative scenario simulates a two-pronged shock: lower world oil prices combined with no fiscal adjustment. Oil prices are 1 standard deviation lower over the simulation period compared with the baseline, and the non-oil basic primary deficit in percent of non-oil GDP is kept at the level recorded in 2007 (55 percent).12 Under these assumptions, the rate of debt accumulation increases; it reaches 32 percent by 2028 as oil revenue declines and income from financial assets is not sufficient to offset the combined oil shock and the lack of fiscal adjustment.

  • The NPV of debt-to-GDP breaches the indicative threshold in 2008 and remains above this level throughout the projection period, rising sharply to 290 percent in 2028.

  • The debt service indicators also deteriorate, especially during the latter part of the simulation period.

IX. Conclusion

17. Under the baseline scenario, Congo’s external debt ratios indicate a high risk of debt distress. This baseline is predicated on world oil prices at around US$ 77 over the medium term, and a path of fiscal consolidation consistent with long-term sustainability. Standardized stress tests and alternative scenarios, however, point to Congo’s vulnerability to prolonged oil price shocks and slow fiscal adjustment.

uA02fig01

Republic of Congo: Indicators of Public Debt Under the Baseline Scenario and Stress Tests, 2008-281

Citation: IMF Staff Country Reports 2009, 074; 10.5089/9781451808681.002.A002

Source: Staff projections and simulations.Sources: Country authorities; and Fund staff estimates and projections.1 The most extreme stress test is the test that yields the highest ratio in 2018.2 Revenues are defined inclusive of grants.
Table 1a.

Public Sector Debt Sustainability Framework, Baseline Scenario, 2005–2028

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and Fund staff estimates and projections.

The central government net debt is used in the analysis.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 1b.

Sensitivity Analysis for Key Indicators of Public Debt 2008–2028

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Sources: Country authorities; and Fund staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the length of the projection period.

Revenues are defined inclusive of grants.

Table 2a.

External Debt Sustainability Framework, Baseline Scenario, 2005–2028 1/

(In percent of GDP, unless otherwise indicated)

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Source: Staff simulations.

Includes both public and private sector external debt.

[r - g - r(1+g)]/(1+g+r+gr) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and r = growth rate of GDP deflator in U.S.D. terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. The high residuals in this case, reflects the accumulation of reserves (from oil production).

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2b.

Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2008–2028

(In percent)

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Source: Staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U. S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

1

This takes into account the classification of Congo as a weak performer, with an average CPIA rating for the past three years of 2.74.

2

This analysis can be found in Appendix I of Country Report No. 07/205.

3

Public debt includes central government debt only. Net debt is defined as external and domestic debt less liquid financial assets. Liquid financial assets are government deposits at the central bank, which, apart from the funds in the operations account, are allocated into one of three accounts to help manage the large oil savings: (i) short-term deposits (1-month minimum maturity), (ii) stabilization account (6-month minimum maturity), and (iii) a fund for future generations (5-year minimum maturity).

4

The agreement involved the swap of US$2.1 billion in outstanding commercial debt and arrears of US$0.5 billion in new Eurobonds maturing in 2029, implying relief of over US$1.6 billion. The participation rate was over 92 percent. The agreement was broadly consistent with the enhanced HIPC Initiative.

5

The permanent income hypothesis helps determine the level of the non-oil primary deficit that can be financed over the long term from government oil revenue, including investment income from its accumulated financial assets.

6

The discount on Congolese oil was between US$1 and US$ 25 per barrel in 2008, depending on the quality. The discount on gas is somewhat larger, between US$ 35 and US$ 55 dollars per barrel.

7

If a country maintains its Gross National Income per capita above the annual IDA operational income cutoff for two consecutive years, it receives IDA financing on “hardened” terms from the third year onwards. The concessionality of hardened terms is lower than that of regular IDA credits as the maturity is reduced to 20 years, compared with 40 years for regular IDA credits. Other conditions remain the same. Graduation to IBRD requires a country to be judged as creditworthy by the World Bank, a process that normally takes several years.

8

The authorities have provided the staffs with information on a number of infrastructure projects, which are to be financed through concessional Chinese loans amounting to about US$1 billion. No loans have been signed yet. The DSA assumes these loans are disbursed over 5 years, beginning in 2009. The authorities are negotiating financial terms for all these loans of 20-year maturity, 5-year grace period, an interest rate of 0.25 percent, with biannual repayments. The staffs estimate the grant element of these loans at about 52.7 percent. The impact of these loans on the DSA is limited (they contribute to a temporary 5-percent increase in the NPV of debt-to-GDP ratio) because (i) they account for a relatively small share of GDP (about 8 percent) and a fraction of the financial assets the government is projected to accumulate over the medium-term and (ii) are concessional.

9

In judging Congo to be at high risk of debt distress currently, the staffs have taken account of the breach of the NPV of debt-to-GDP ratio above the indicative threshold and the highly uncertain global economic environment (volatile world oil prices, and global financial crisis and slowing growth), which suggests a cautious approach, even though the long-term scenario indicates an adequate capacity to service external debt.

10

It should also be noted, more fundamentally, that the historical scenario introduced in the LIC DSA template is not well suited to oil-producing countries like Congo, which can accumulate net foreign assets well beyond prudential needs (i.e., more than the equivalent of a few months of imports). De facto, while this scenario replaces the non-interest current account deficits and FDI by their historical averages, it also assumes that the government accumulates the same level of reserves as under the baseline scenario. This latter assumption is unrealistic for a country with ample reserves: in the event the authorities were facing less favorable external developments (as assumed in the historical scenario), they would likely prefer to accumulate less reserves, rather then undertake external borrowing (and higher gross debt) to maintain the level of reserves.

11

This assumes that there is no development of a domestic bond market in the future, which is contrary to BEAC plans. This development would not, however, change the net debt and the sustainability of total public debt.

12

The oil price shock is calibrated as one standard deviation of Brent crude prices over the period 1970-2006. This reduces future oil prices by US$19 per barrel, corresponding to average prices of around US$49 per barrel in 2009.

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Cover IMF Staff Country Reports
Republic of Congo: 2008 Article IV Consultation, Requests for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries, and Financing Assurances Review: Staff Report; Staff Statement and Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Congo
Author: International Monetary Fund
Volume/Issue:
Volume 2009: Issue 074
Publisher:
International Monetary Fund
ISBN:
9781451808681
ISSN:
1934-7685
Pages:
96
DOI:
https://doi.org/10.5089/9781451808681.002
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    Republic of Congo: Indicators of Public and Publicly Guaranteed External Debt under the Baseline Scenario and Stress Tests, 2008-281

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    Republic of Congo: Indicators of Public Debt Under the Baseline Scenario and Stress Tests, 2008-281

Republic of Congo: Indicators of Public and Publicly Guaranteed External Debt under the Baseline Scenario and Stress Tests, 2008-281

Republic of Congo: Indicators of Public Debt Under the Baseline Scenario and Stress Tests, 2008-281