St. Vincent and the Grenadines: External and Public Debt Sustainability Analysis
Author: International Monetary Fund
Publication Date:
07 Apr 2009
eISBN:
9781451840049
Language:
English
Keywords:
ISCR; CR; debt; staff estimate column; budget; NPV; estimate; sustainability analysis; distress rating; debt write-off; to-GDP ratio; stock threshold; Fiscal stance; Debt sustainability analysis; Public sector; Global
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This 2007 Article IV Consultation highlights that the economy of St. Vincent and the Grenadines is enjoying its second year of vigorous economic growth. Financial sector indicators have strengthened, but balance sheet vulnerabilities remain. Executive Directors have welcomed St. Vincent and the Grenadines’ recent strong macroeconomic performance, marked by robust economic growth, fiscal consolidation, and declining debt levels. Directors have also stressed that continued fiscal consolidation is needed to lower the public debt-to-GDP ratio, and create room to raise social spending.

Abstract

This 2007 Article IV Consultation highlights that the economy of St. Vincent and the Grenadines is enjoying its second year of vigorous economic growth. Financial sector indicators have strengthened, but balance sheet vulnerabilities remain. Executive Directors have welcomed St. Vincent and the Grenadines’ recent strong macroeconomic performance, marked by robust economic growth, fiscal consolidation, and declining debt levels. Directors have also stressed that continued fiscal consolidation is needed to lower the public debt-to-GDP ratio, and create room to raise social spending.

St. Vincent and the Grenadines’ debt sustainability analysis (DSA) suggests that a key challenge will be achieving sound public finances to ensure debt sustainability, particularly given the uncertainties relating to the new international airport financing. Staff estimates show that if sizable government borrowing is needed to finance the construction of the new international airport, public debt would be on a rising and potentially unsustainable path. St. Vincent and the Grenadines’ external debt distress rating is moderate.

VII. Background

23. Macroeconomic outcomes have strengthened significantly in recent years. Real GDP growth averaged 5½ percent during 2004-06, and reached close to 7 percent in 2006. Activity was sustained by construction, tourism and government services; partly related to preparations for the Cricket World Cup (CWC). Fiscal imbalances also improved in 2006, but remain high. Total tax revenues were strong, buoyed by higher stamp taxes and more frequent pass-through of oil prices. Current spending was lower, reflecting some reduction on wages and salaries. As a result, the overall deficit fell to 4.9 percent of GDP in 2006, but the NPV of the public sector debt remained high at around 69 percent (78 percent in nominal terms).

VIII. Underlying DSA Assumptions

24. The baseline scenario assumes continued current expansionary policies with overall deficits that are financed commercially and with some grants from nontraditional donors, such as Venezuela, Cuba, and Taiwan Province of China. Medium-term growth is projected at around 4¼ percent, driven mostly by large-scale public sector construction and tourism, given the ongoing construction of the new international airport. Under this scenario, the central government primary balance improves only modestly, with a deficit of around ⅝ percent of GDP by 2012. While the growth projections are similar to those in the 2006 Article IV consultation DSA, the fiscal projections are more conservative, partly reflecting the uncertainties surrounding the financing of the international airport.

Baseline Macroeconomic Assumptions (2007–27)

  • Real GDP growth is projected to average about 4¼ percent, which is close to the historical average (1996-2006, at around 3¾ percent). Inflation is projected to remain low, consistent with historical averages and the currency board arrangement.

  • The primary balance of the central government is projected to improve moderately, but less than envisaged in the 2006 Article IV consultation. On the revenue side, the VAT yields additional revenues of around 1½ percent of GDP by 2008, and frequent pass-through of international oil prices continues. On the expenditure side, the wage bill as a share of GDP remains at its current level, while capital expenditures remain at around 8 percent of GDP. Under this scenario, the public sector primary deficit would remain sizable (peaking at 3½ percent of GDP by 2010), and the NPV of public debt would reach about 69 percent of GDP (72 percent in nominal terms) by 2012.

  • Annual disbursements of external capital grants are expected to be around 1½ percent of GDP, consistent with the historical average.

  • Given the ongoing repricing of risk and tightening global liquidity conditions, it is assumed that average nominal interest rates on foreign debt increase to around 7 percent.

  • The current account deficit is assumed to remain high during the period when the airport is constructed and then return to a more sustainable level, due to a pickup in tourist receipts. The expansion of tourist arrivals is underpinned by an expansion of the hotel capacity of 40 percent over the medium term and the construction of the new international airport.

  • FDI is assumed to return to its historical average of around 14 percent of GDP.

IX. Evaluation of Public Sector Debt Sustainability

25. At end-2006 the NPV of public debt was high at about 69 percent of GDP (78 percent in nominal terms), albeit still among the lowest in the ECCU. Expansionary budgets in 2002–05 sharply raised the fiscal deficit and debt-to-GDP ratio. Fiscal imbalances remained high in 2006–07, owing to increased CWC-related capital expenditures.

26. The NPV of external debt stood at 39 percent of GDP, and domestic debt at 30 percent of GDP. The largest share of the external debt stock is owed to multilateral and bilateral creditors (around 55 percent of total external debt), followed by commercial creditors (around 45 percent of total external debt). In the future, most new external requirements are expected to be financed through the ECCU Regional Government Securities Market (RGSM). On the domestic front, commercial banks are the most important lenders to the government.

27. An agreement with Italy to write-off the Ottley Hall debt obligation reduced St. Vincent and the Grenadines’ NPV of public debt by about 3¼ percent of GDP (10 percent in nominal terms). This loan had been serviced by the Italian export agency, due to perceived malfeasance by the private builder-operator. The debt write-off, formalized in October 2007, will lower the NPV of debt to-GDP ratio to around 66 percent by end-2007 (68 percent in nominal terms).

Baseline Scenario

28. Under the baseline scenario St. Vincent and the Grenadines’ NPV of public debt to GDP ratio would rise to about 69 percent by 2012 (72 percent in nominal terms), and increase further in the long term to around 82 percent of GDP by 2027 (82½ percent in nominal terms). Similarly, the NPV of debt-to revenue ratio increases from 181 percent in 2007 to around 211 percent by 2012.

Alternative Scenarios

Active scenario

29. Under this scenario a fiscal adjustment would raise the primary surplus of the central government to 4 percent of GDP over the medium term. The adjustment would be supported by revenue measures, including: (i) the introduction of market valuation-based property taxes in 2009 with an expected additional yield of ½ of 1 percent of GDP; (ii) efficiency gains in customs collections, and (iii) the gradual reduction by 2012 of the corporate income tax from 37.5 to 30 percent along with the gradual reduction of tax concessions (revenue neutral). It is assumed that donors would support the reform strategy, and additional grants would be provided by the European Union and Taiwan Province of China. On the expenditure side, in order to create room for planned additional social spending, growth in the real wage bill would be minimal (by holding real wages and the number of civil servants constant). This scenario also assumes that the government sells enough land to meet any additional financial needs related to the international airport after 2008. Reforms to the public service pension system are adopted yielding estimated savings of 0.2 percent of GDP, while capital expenditure would be reduced by the elimination or postponement of low-priority projects, although it would still remain above its long-run average of 6.6 percent of GDP.

30. Under this adjustment scenario St. Vincent and the Grenadines’ NPV of public debt to GDP would decline to about 55 percent by 2012 (53 percent in nominal terms)—below the 60 percent benchmark of the ECCB (Table 2, Active Scenario). The NPV of debt to GDP ratio would decline throughout the period reaching around 41 percent of GDP by 2027. All other indicators of debt sustainability would register continual improvements; particularly debt service as a share of current revenue, which would fall to around 14 percent by 2027.

Table 1.

St. Vincent and the Grenadines: Public Sector Debt Sustainability Framework, Baseline Scenario, 2004–27

(In percent of GDP, unless otherwise indicated)

article image
Sources: St. Vincent and the Grenadines authorities; and Fund staff estimates and projections.

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

The consolidated public sector debt includes the central government, the NIS, and ten nonfinancial public sector enterprises.

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.

Table 2.

St. Vincent and the Grenadines: Sensitivity Analysis for Key Indicators of Public Debt 2007-2027

article image
Sources: St. Vincent and the Grenadines authorities; and Fund staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).

Assumes a fiscal cost for the government of 9 percent of GDP between 2008 and 2010.

Assumes in-kind grants do not materialize and the government needs to borrow 50 percent of the airport cost.

Revenues are defined inclusive of grants.

Lower growth and natural disasters

31. The sensitivity analysis shows that lower economic growth and natural disasters are the two key vulnerabilities for St. Vincent and the Grenadines’ debt dynamics. Assuming that growth remains at one standard deviation below the level in the baseline scenario, the NPV of debt-to-GDP ratio reaches 115 percent of GDP by 2027 (Table 2, Scenario A3). Similarly, the impact of a natural disaster on St. Vincent and the Grenadines’ debt dynamics is very significant (Table 2, Scenario A4). Under this scenario the government incurs a fiscal cost of 9 percent of GDP in 2008-10, reverting to the baseline levels thereafter.10 This shock accelerates the deterioration of the NPV of debt-to-GDP ratio which reaches 85 percent of GDP by 2012.

Borrowing for the Airport

32. Sensitivity analysis also shows the importance of containing borrowing for the construction of the new international airport. If the in-kind grants do not materialize, land sales are lower than expected, and the government needs to borrow around 50 percent of the airport cost, then by 2012 the NPV of debt-to-GDP ratio rises to 88 percent (Table 2, Scenario A5).

X. Evaluation of External Debt Sustainability

33. St. Vincent and the Grenadines’ external debt sustainability analysis covers only public sector debt, since data on private sector external borrowing is not available. As a result, debt dynamics in the external DSA follow a similar pattern to those of the public sector DSA.

34. Under the baseline scenario the NPV of external debt gradually increases, reaching 41½ percent of GDP by 2027 (42 percent in nominal terms), but remains within the prudential threshold of 50 percent. 11 The NPV of debt-to-exports ratio remains below 100 percent throughout the period, comfortably below the indicative threshold of 200 percent.

35. Sensitivity analysis shows that the level of external debt is most sensitive to a negative shock to output growth and a decline on FDI. If FDI were to fall to one standard deviation below its historical average in 2008-09, the NPV of external debt-to-GDP ratio would increase to 71 percent by 2012 (Table 4, Scenario B4) or 75 percent in nominal terms. Similarly, with output growth at one standard deviation below its historical average for 2008-09, the NPV of external debt-to-GDP ratio increases to 58 percent by 2012 (Table 4, Scenario B1) or 62 in nominal terms.

Table 3.

St. Vincent and the Grenadines: External Debt Sustainability Framework, Baseline Scenario, 2004–27 1/

(In percent of GDP, unless otherwise indicated)

article image
Source: St. Vincent and the Grenadines authorities; and Fund staff simulations.

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

Includes only public sector external debt.

Derived as [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. dollar terms.

Includes the Ottley Hall debt write-off for 2007; changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price changes.

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

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

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 NPV of new debt).

Table 4.

St. Vincent and the Grenadines: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2007-27

(In percent)

article image
Source: St. Vincent and the Grenadines authorities; and Fund staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), noninterest current account in percent of GDP, and nondebt 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.

XI. Conclusion

36. Public sector imbalances would remain high without continuous fiscal adjustment, and by 2017 the NPV of public debt-to-GDP would return to a similar level as before the Ottley Hall write-off. Staff analysis shows that with a fiscal adjustment that achieves a central government primary surplus (including grants) of around 4 percent of GDP by 2012, St. Vincent and the Grenadines would reach a nominal public debt-to-GDP ratio below 60 percent—the ECCB benchmark—by 2011.

37. St. Vincent and the Grenadines faces a moderate risk of external debt distress. The debt trajectory under the baseline scenario does not breach the NPV of debt-to-GDP indicative threshold; however, various stress tests underline the country’s vulnerabilities to natural disasters, lower FDI, and lower output growth. These alternative scenarios show a substantial rise in the debt-service ratio over the projection period, and a breach of some of the debt stock thresholds.

Figure 1.
Figure 1.

St. Vincent and the Grenadines: Indicators of Public Debt Under Alternative Scenarios, 2007–27 1/

Citation: IMF Staff Country Reports 2009, 118; 10.5089/9781451840049.002.A003

Source: Fund staff projections and simulations.1/ Most extreme stress test is test that yields highest ratio in 2017.2/ Revenue including grants.
Figure 2.
Figure 2.

St. Vincent and the Grenadines: Indicators of Public External Debt Under Alternative Scenarios, 2007–27

Citation: IMF Staff Country Reports 2009, 118; 10.5089/9781451840049.002.A003

Source: Fund staff projections and simulations.
10

The actual impact of this shock could be lower given the recent participation of St. Vincent and the Grenadines in the Caribbean Catastrophe Risk Insurance Facility—a regional insurance pool organized by the World Bank.

11

The DSA uses policy-dependent external debt-burden thresholds. Policy performance is measured by the Country Policy and Institutional Assessment (CPIA) index, compiled annually by the World Bank. The CPIA divides countries into three performance categories (strong, medium, and poor) based on the overall quality of macroeconomic policies, with strong performers having higher prudential thresholds than poor performers. St. Vincent and the Grenadines is classified by the CPIA as a strong performer, implying prudential thresholds on NPV of debt-to-GDP and debt-to-exports ratios of 50 and 200 percent, respectively.

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Cover IMF Staff Country Reports
St. Vincent and the Grenadines: 2007 Article IV Consultation: Staff Report; Staff Supplement and Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for St. Vincent and the Grenadines
Author: International Monetary Fund
Volume/Issue:
Volume 2009: Issue 118
Publisher:
International Monetary Fund
ISBN:
9781451840049
ISSN:
1934-7685
Pages:
66
DOI:
https://doi.org/10.5089/9781451840049.002
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    St. Vincent and the Grenadines: Indicators of Public Debt Under Alternative Scenarios, 2007–27 1/

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    St. Vincent and the Grenadines: Indicators of Public External Debt Under Alternative Scenarios, 2007–27

St. Vincent and the Grenadines: Indicators of Public Debt Under Alternative Scenarios, 2007–27 1/

St. Vincent and the Grenadines: Indicators of Public External Debt Under Alternative Scenarios, 2007–27