ST. Vincent and the Grenadines: External and Public Debt Sustainability Analysis
Author: International Monetary Fund
Publication Date:
08 Jun 2009
eISBN:
9781451840063
Language:
English
Keywords:
ISCR; CR; exogenous shocks facility; Rapid-Access component; Rapid-Access; balance of payments financing burden; SVG authorities; sustainability analysis; creating flow; sustainability framework; service-to-revenue ratio; debt service-to-revenue; Fiscal stance; Public and publicly-guaranteed external debt; debt distress
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St. Vincent and the Grenadines’s financial system has been largely unaffected by the global financial crisis. The report examines St. Vincent and the Grenadines 2009 Article IV Consultation and request for Disbursement under the Rapid-Access Component of the Exogenous Shocks Facility. The global economic downturn has led to a significant decline in tourism, which worsened the balance of payments position and, together with lower foreign direct investment and construction activity, led to a sharp output slowdown in 2008.

Abstract

St. Vincent and the Grenadines’s financial system has been largely unaffected by the global financial crisis. The report examines St. Vincent and the Grenadines 2009 Article IV Consultation and request for Disbursement under the Rapid-Access Component of the Exogenous Shocks Facility. The global economic downturn has led to a significant decline in tourism, which worsened the balance of payments position and, together with lower foreign direct investment and construction activity, led to a sharp output slowdown in 2008.

I. Background

1. Following a period of robust growth, macroeconomic outcomes were mixed in 2008. Amid a global slowdown, real GDP growth decelerated from an annual average of almost 6 percent during 2004-07 to 0.9 percent in 2008, owing to sharply weakened activities in the tourism, construction and agriculture sectors. Reflecting solid VAT performance, more grants, and lower capital expenditures, the central government fiscal balance strengthened by about 2 percent of GDP, achieving a primary surplus of 1.2 percent of GDP, the first since 2002. Due to strong growth and an agreement with Italy to write-off the Ottley Hall debt obligation, the public sector debt in nominal terms declined to about 67½ percent of GDP at end-2008 from 77½ percent in 2006.

II. Underlying DSA Assumptions

2. The baseline scenario assumes continued declines in real growth for 2009-10, reflecting the global economic slowdown and financial crisis. In the medium term, growth is expected to return to its potential of around 4 percent, driven mostly by large-scale public sector construction and a recovery in tourism. Notwithstanding the recent progress in fiscal consolidation, sizeable overall fiscal deficits are expected to continue, financed commercially and with some grants from the European Union and nontraditional donors, such as Venezuela, Cuba, and Taiwan Province of China. Under this scenario, the central government primary deficit is projected to stay close to around 0.9 percent of GDP during 2009-14. Compared to the projections in the DSA accompanying the 2007 Article IV consultation, the current growth projections for 2009-10 have been marked down, given the global slowdown and financial strains while projections for medium- to long-term are similar. Overall public sector fiscal projections for 2009-14 are also more conservative, reflecting the uncertainties surrounding the financing of the international airport as well as the length and depth of the current economic downturn.1

Baseline Macroeconomic Assumptions (2009-29)

  • a. Real GDP growth is projected to average about 1.7 percent during 2009-11, well below the historical average (around 4.2 percent during 1999-2008), and to return to its potential over the medium term. Inflation, after sharply accelerating in 2007-08 with high world food and fuel prices, is projected to return to low levels, consistent with historical averages and the currency board arrangement.

  • b. The primary balance of the central government is projected to deteriorate sizably in 2009 and then remain broadly stable. On the revenue side, the maximum corporate income tax rate is reduced to 30 percent by 2010, reducing corporate tax revenues as a share of GDP by ½ percentage points, while the property tax reform is expected to bring a revenue gain of about ⅓ percent of GDP. On the expenditure side, after 2008 the wage bill as a share of GDP remains constant, while capital expenditure remains at around 7½ percent of GDP. Under this scenario, the public sector primary deficit would remain sizable (peaking at about 4.8 percent of GDP by 2010).

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

  • d. Given the ongoing repricing of risk and tight global liquidity conditions, it is assumed that average nominal interest rates on foreign debt increase to around 6 percent in the medium term.

  • e. Amid the economic slowdown, the current account deficit is projected to decline moderately from the elevated level during 2007-08, although it will remain high during the period when the airport is constructed. It is expected to return to a more sustainable level, due to a pickup in tourism receipts over the medium term. The expansion of tourist arrivals is underpinned by an expansion of the hotel capacity over the medium term and the construction of the new international airport.

  • f. FDI, following a sharp decline in 2008-09, is assumed to return to its historical average of around 15¾ percent of GDP over the medium term.

III. Evaluation of Public Sector Debt Sustainability

3. At end-2008 the NPV of public debt was high at 66.8 percent of GDP (67½ 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. A large degree of fiscal adjustment was achieved in 2008, thanks to higher tax revenue collection and lower capital expenditure.

4. The external debt stood at 35 percent of GDP, and domestic debt at 32½ percent of GDP at end-2008. The largest share of the external debt stock is owed to multilateral creditors (around 55½ percent), followed by commercial creditors (around 25½ percent). In the future, most new external requirements are expected to be financed through the ECCU Regional Government Securities Market (RGSM), although some financing from IFIs such as the Caribbean Development Bank (CDB) is expected. On the domestic front, commercial banks are the most important lenders to the public sector.

Baseline Scenario

5. Under the baseline scenario St. Vincent and the Grenadines’ NPV of public debt-to-GDP ratio would rise to about 83 percent by 2014 (86¾ percent in nominal terms), and increase further in the long term to around 102 percent of GDP by 2029 (106¾ percent in nominal terms). Similarly, the NPV of debt-to-revenue ratio increases from 183¾ percent in 2009 to around 255 percent by 2014.

Alternative Scenarios

Active scenario

6. Under this scenario, a fiscal adjustment would raise the primary surplus of the central government to 2⅔ percent of GDP over the medium term. The adjustment would be supported by revenue measures, including: (i) substituting tax holidays and exemptions with investment credits, accelerated depreciation, and improving loss carry-forward provisions (conservatively expected to yield 1.9 percent of GDP); (ii) efficiency gains in customs collections, estimated to yield 0.5 percent of GDP; 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, to create room for planned additional social spending, a civil service reform yields cost savings of 0.4 percent of GDP. Reforms to the public service pension system are adopted gradually. Capital expenditure is reduced by the elimination or postponement of low-priority projects (yielding ⅓ percent of GDP), although it would remain above its long-run average of 6.6 percent of GDP. With the impetus from public sector capital projects and greater activity in the private sector, the underlying growth rate is expected to accelerate to about 4⅔ percent over the medium term.

7. Under this active scenario, St. Vincent and the Grenadines’ NPV of public debt-to-GDP would decline to about 65 percent by 2014, and down further to 17 percent by 2029 (Table 2, Active Scenario).2 All other indicators of debt sustainability would register continual improvements; particularly debt service as a share of current revenue, which would fall to around 11 percent by 2029.

Table 1.

St. Vincent and the Grenadines: Public Sector Debt Sustainability Framework, Baseline Scenario, 2006–2029

(In percent of GDP, unless otherwise indicated)

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

Gross debt of the public sector.

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 2009–2029

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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 length of the projection period.

Assumes zero growth and a fiscal cost for the government of 9 percent of GDP between 2010 and 2012.

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

8. The sensitivity analysis (which is applied to the baseline scenario) shows that lower economic growth and a lower primary balance 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 154 percent of GDP by 2029 (Table 2, Scenario A3). If the primary deficit is unchanged from the high level projected in 2009, the NPV of debt-to-GDP ratio reaches 157 percent of GDP by 2029 (Table 2, Scenario A2). The impact of a natural disaster on St. Vincent and the Grenadines’ debt dynamics is also very significant (Table 2, Scenario A4). Under this scenario, the government incurs a fiscal cost of 9 percent of GDP and real GDP growth is zero during 2010-12, reverting to the baseline levels thereafter.3 This shock accelerates the deterioration of the NPV of debt-to-GDP ratio which reaches 99 percent of GDP by 2014.

Borrowing for the Airport

9. Sensitivity analysis (which is applied to the baseline scenario) shows the importance of containing borrowing for the construction of the new international airport. In a worst-case scenario, 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 2014 the NPV of debt-to-GDP ratio rises to 95 percent (Table 2, Scenario A5).

IV. Evaluation of External Debt Sustainability

10. 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.

11. Under the baseline scenario the NPV of external debt gradually increases up to nearly 42½ percent of GDP by 2017 (47 percent in nominal terms), before declining to 38½ percent by 2029 (43 percent in nominal terms), but remains within the prudential threshold of 50 percent. 4 The NPV of debt-to-exports ratio remains below 125 percent throughout the period, comfortably below the indicative threshold of 200 percent.

12. Sensitivity analysis (which is applied to the baseline scenario) shows that the level of external debt is very sensitive to a combination of negative shocks to output growth, export growth, and FDI flows. In light of the current global environment, which is sharply lowering tourism receipts, FDI and economic growth, this is a relevant shock scenario. Under this scenario, the NPV of external debt-to-GDP ratio would increase to 59 percent by 2011, breaching the debt-to-GDP threshold of 50 percent (Table 4, Scenario B5). If FDI were to fall to one standard deviation below its historical average, the NPV of external debt-to-GDP ratio would increase to 51 percent by 2011 (Table 4, Scenario B4). Similarly, with export value growth at one standard deviation below its historical average, the NPV of external debt-to-GDP ratio increases to 54 percent by 2011 (Table 4, Scenario B2). As the majority of external debt is denominated in U.S. dollars, a one-time 30 percent nominal depreciation in 2010 will raise the NPV of external debt-to-GDP ratio to 55 percent in 2010, breaching the debt-to-GDP threshold (Table 4, Scenario B6).

Table 3.

External Debt Sustainability Framework, Baseline Scenario, 2006–2029 1/

(In percent of GDP, unless otherwise indicated)

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Source: Staff simulations.

Includes only public sector external debt.

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

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 4.

St. Vincent and the Grenadines: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2009–29

(In percent)

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Sources: 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 assumingan 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.

V. Conclusion

13. Sound public finances are key to achieving debt sustainability, particularly given the uncertainties associated with the current economic slowdown and financing for the airport project. Public sector imbalances would remain relatively high without continued fiscal adjustment, leaving the ECCB’s public debt benchmark of 60 percent of GDP by 2020 out of reach for St. Vincent and the Grenadines. Staff analysis shows that with a fiscal adjustment that achieves a central government primary surplus (including grants) of around 2⅔ percent of GDP by 2014, St. Vincent and the Grenadines would reach a nominal public debt-to-GDP ratio below 60 percent—the ECCB benchmark—by 2017.

14. 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 and suggest several breaches of the NPV of debt-to-GDP threshold. As private external debt data are unavailable, some caution should be used when interpreting these results, which cover public external debt only.

Figure 1.
Figure 1.

St. Vincent and the Grenadines: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2009-2029 1/

Citation: IMF Staff Country Reports 2009, 181; 10.5089/9781451840063.002.A003

Sources: Staff projections and simulations.1/ The most extreme stress test is the test that yields the highest ratio in 2019. In figure b. it corresponds to a Terms shock; in c. to a Combination shock; in d. to a Terms shock; in e. to a Combination shock and in picture f. to a One-time depreciation shock
Figure 2.
Figure 2.

St. Vincent and the Grenadines: Indicators of Public Debt Under Alternative Scenarios, 2009–29 1/

Citation: IMF Staff Country Reports 2009, 181; 10.5089/9781451840063.002.A003

Sources: St. Vincent and the Grenadines authorities; and Fund staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2019.2/ Revenues are defined inclusive of grants
1

The authorities plan to complete the construction of a new international airport by 2011 with an estimated cost of EC$608 million.

2

The nominal public debt-to-GDP ratio would fall below the 60 percent benchmark of the ECCB by 2017.

3

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

4

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: 2009 Article IV Consultation and Request for Disbursement Under the Rapid-Access Component of the Exogenous Shocks Facility: Staff Report; Staff Supplement; Public Information Notice and Press Release 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 181
Publisher:
International Monetary Fund
ISBN:
9781451840063
ISSN:
1934-7685
Pages:
77
DOI:
https://doi.org/10.5089/9781451840063.002
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    St. Vincent and the Grenadines: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2009-2029 1/

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    St. Vincent and the Grenadines: Indicators of Public Debt Under Alternative Scenarios, 2009–29 1/

St. Vincent and the Grenadines: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2009-2029 1/

St. Vincent and the Grenadines: Indicators of Public Debt Under Alternative Scenarios, 2009–29 1/