St. Lucia: External and Public Debt Sustainability Analysis
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This 2010 Article IV Consultation highlights that macroeconomic outcomes have weakened significantly for St. Lucia. Real GDP is estimated to have contracted by 5.2 percent in 2009, reflecting a sharp decline in visitor arrivals and construction activity related to foreign direct investment. For 2010, the outlook is for a nascent recovery, supported by higher advance hotel bookings and additional flights to the island. Against this backdrop, Executive Directors have welcomed the authorities’ commitment to implement a credible fiscal framework to achieve fiscal sustainability.

Abstract

This 2010 Article IV Consultation highlights that macroeconomic outcomes have weakened significantly for St. Lucia. Real GDP is estimated to have contracted by 5.2 percent in 2009, reflecting a sharp decline in visitor arrivals and construction activity related to foreign direct investment. For 2010, the outlook is for a nascent recovery, supported by higher advance hotel bookings and additional flights to the island. Against this backdrop, Executive Directors have welcomed the authorities’ commitment to implement a credible fiscal framework to achieve fiscal sustainability.

A. Introduction

1. St. Lucia, like many other tourism-dependent countries in the Caribbean, has been significantly impacted by the 2008–09 global economic and financial crises. After expanding on average by about 3 percent during 2004–08, economic activity contracted by about 5 percent in 2009, reflecting a sharp fall in tourist arrivals and FDI-financed construction activity. Fiscal imbalances widened, mainly on account of the cyclical downturn, the discretionary spending measures taken by the central government to cushion the impact of the crisis on unemployment, and delays in the implementation of revenue-enhancing tax measures envisaged at the time of the RAC-ESF request. As a result, the primary fiscal balance (as a percentage of GDP) reverted by almost 5 percentage points, from a surplus of 2.2 percent in 2008 to a deficit of 2.5 percent of GDP in 2009. Reflecting the fiscal deterioration, as well as off-budget expenditures related to the construction and financing of public projects by the private sector (design, finance, and construct), which amounted to almost 1.7 percent of GDP, gross public sector debt increased from about 66¼ percent of GDP in 2008 to about 74¾ percent in 2009. Meanwhile, St. Lucia’s public external debt increased to 40.2 percent of GDP (from 36.7 percent in 2008), but the country’s risk of debt distress remains moderate.

B. Baseline Assumptions for the DSA

2. St. Lucia’s DSA is built on a baseline scenario that assumes: (i) real GDP growth rising to about 3.9 percent over the medium term; and (ii) a compression of the primary fiscal balance towards a steady deficit of one percent of GDP over the same period. The envisaged paths for real GDP growth and the primary fiscal balance are subject to downside risks, including those arising from volatile FDI and grant inflow. While FDI inflows are projected to revert back to historical levels of about 14 percent of GDP in the medium-term, they are lower than during 2006–07 given spikes related to the preparation for the West Indies Cricket World Cup. If grant inflows were to be lower than envisaged under the baseline projection, capital expenditure would need to be scaled back further to achieve a primary fiscal balance of about -0.2 percent of GDP—the level required to stabilize the debt-to-GDP ratio.

3. The deficit is assumed to be financed mainly through borrowing in the Regional Government Securities Market (RGSM), which is held by both domestic and foreign investors, along with limited multilateral borrowing reflecting Caribbean Development Bank (CDB) terms. While exports of goods as a percent of GDP would gradually decrease to an average 12¾ percent (from currently 15 percent), tourism receipts would slowly catch up to pre-crisis levels, averaging 33¼ percent of GDP in the longer term, in the context of a moderate recovery in tourism-related FDI inflows. The associated external current account deficit converges to about 23 percent of GDP, in line with pre-crisis levels.

Macroeconomic Assumptions under the Baseline Scenario (2010–29)

  • Following a prolonged slowdown in the aftermath of the global recession, real GDP growth is projected to average about 3.9 percent over the longer term. Inflation is expected to remain in the low single digits, anchored by the currency board arrangement.

  • The primary fiscal deficit of the central government (including grants) is projected to converge to about one percent of GDP by 2013, reflecting three core elements of the baseline fiscal stance:(a) the fiscal stimulus provided by the government to contain the surge on unemployment in the aftermath of the global financial crisis; (b) the projected increase in the wage bill to about 12 percent of GDP in FY 2010/11, and (c) the delays in the implementation of critical revenue-enhancing tax measures, such as the single-rate value-added tax.

  • Capital grants are conservatively projected at 0.9 percent of GDP starting in 2012, consistent with the historical average, while capital expenditure reverts to 8¾ percent of GDP over the longer term.

  • Following a sharp decline in 2008-09, FDI inflows are assumed to only partially recover the pre-crisis levels, averaging about 14 percent over the medium term. The current account deficit is projected to converge to 23 percent of GDP, reflecting persistently lower FDI-related imports.

C. Evaluation of External Debt Sustainability under Baseline Scenario

4. Reflecting its relatively sound policies and institutional framework, St. Lucia has been classified as a strong performer according to the CPIA rating system, with an average rating of 3.93 for 2005–08. As a strong performer, St. Lucia’s prudential thresholds on the present value (PV) of debt-to-GDP, debt-to-exports and debt-to-revenue are, respectively, 50, 200 and 300 percent.

5. Notwithstanding its performance in the recent past, the global financial crisis has led St. Lucia to an overall fiscal deficit of about 7¾ percent of GDP in 2009 (including liabilities related to the construction and financing of public projects by the private sector), with a projected average medium-term deficit of about 6 percent of GDP under the baseline scenario. As a result, in the absence of additional fiscal measures the PV of external debt is set to increase to about 51 percent of GDP by 2029, breaching the relevant threshold of debt distress. All other debt and debt service ratios increase substantially over the medium and longer terms, but do not cross the respective thresholds. For this reason, St. Lucia’s risk of external debt distress remains moderate (see Figures A1A2 and Tables A1A4).

Table A1.

St. Lucia: External Debt Sustainability Framework, Baseline Scenario, 2006-2029 1/

(In percent of GDP, unless otherwise indicated)

article image
Sources: St. Lucian authorities; and Fund staff estimates and projections.

Includes public sector guaranteed and non-guaranteed external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = 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 changes.

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 A2.

St. Lucia: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2009-2029

(In percent)

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Sources: St. Lucian authorities; and Fund staff estimates and projections.

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.

Table A3.

St. Lucia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2006-2029

(In percent of GDP, unless otherwise indicated)

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Sources: St. Lucian authorities; and Fund staff estimates and projections.

Includes public sector guaranteed and non-guaranteed debt. Also includes liabilities related to the construction and financing of public projects by the private 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.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.
Table A4.

St. Lucia: Sensitivity Analysis for Key Indicators of Public Debt 2009-2029

article image
Sources: St. Lucian 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 the length of the projection period.

Revenues are defined inclusive of grants.

Figure A1.
Figure A1.

St. Lucia: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2009-2029 1/

Citation: IMF Staff Country Reports 2010, 092; 10.5089/9781455203611.002.A003

Sources: St. Lucian authorities; and Fund staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2019. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock
Figure A2.
Figure A2.

St. Lucia: Indicators of Public Debt Under Alternative Scenarios, 2009-2029 1/

Citation: IMF Staff Country Reports 2010, 092; 10.5089/9781455203611.002.A003

Sources: St. Lucian 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.

6. Sensitivity analysis shows that the level of external debt is most responsive to an extreme shock of nominal exchange rate depreciation. Under this scenario—with a one-time 30 percent nominal depreciation relative to the baseline in 2010—the PV of external debt-to-GDP ratio would breach the debt-to-GDP threshold of 50 percent (Table A2, Scenario B6). Similarly, the most extreme export shock scenario—of export growth at one standard deviation below the historical average in 2010–11—would push the debt service-to-exports ratio to slightly above the 25 percent threshold in three years (Table A2, Scenario B2).

7. St. Lucia’s external debt sustainability analysis includes only public sector debt, as information on private sector external borrowing is not available.

D. Evaluation of Public Sector Debt Sustainability under Baseline Scenario

8. The combination of a recession and counter-cyclical fiscal policies in 2009 resulted in a debt-to-GDP ratio that is 8 percentage points higher than in 2008. Consequently, under the baseline scenario the rate of debt accumulation is about 3 percent of GDP per year. Moreover, the debt service as a share of current revenue and grants is expected to increase to about 63 percent in 2029 from 33½ percent in 2009. Under the most extreme shock scenarios, keeping the primary balance at the 2009 level will push the NPV of the total debt to 103 percent of GDP by 2020, while having a one-time depreciation will take the debt to 116 percent of GDP by that year.

9. Given St. Lucia’s high public debt-to-GDP ratio, its recent debt dynamics, and the ever-present risks of natural disasters, the vulnerabilities of its public debt remain elevated. In addition, the recovery from the global downturn is expected to be slower than in advance economies, as demand for tourism is projected to remain subdued for a prolonged period of time. In recent years, St. Lucia has relied heavily on private financing sources (in lieu of concessional financing), which has increased the cost of financing and rollover risks. Due to the small pool of creditors in the regional markets, the risks of exhausting financing sources have increased (see background note on the Regional Government Securities Market). If it becomes necessary to tap private international financial markets outside of the RGSM, St. Lucia may obtain a credit rating under unfavorable circumstances and will be compared to other emerging markets in the region, which will likely imply a sustained widening of sovereign spreads. This could raise interest payments, which will, in turn, require a credible fiscal framework that yields higher primary surpluses necessary to restore debt sustainability. Finally, possible contingent liabilities from the non-banking financial sector could also raise the required primary surplus.

E. External and Public Debt Dynamics under the Active Scenario

10. The deterioration in debt dynamics underscores the need for an exit strategy from the fiscal stimulus that does not jeopardize St. Lucia’s growth prospects. Projections show that the implementation of the planned tax measures and some tightening of discretionary expenditure, as recommended in active scenario described in the staff report, would deliver the primary surpluses necessary to put St. Lucia’s public debt-to-GDP ratio on a firmly downward trajectory over the medium term. By targeting a primary fiscal surplus of about 1.6 percent over the medium and long term, the stock of debt would decline to about 58 percent of GDP by 2020—i.e., slightly below the Eastern Caribbean Central Bank’s benchmark of 60 percent—and to 42 percent by 2029. Moreover, the external debt would be cut by almost a half over the projection period, declining to 22.3 percent of GDP by 2029. All relevant indicators of debt distress would show patterns of steady improvement; particularly with respect to debt service ratios (see Figures A3A4 and Tables A5A8.). The deterioration in debt dynamics also calls for a strengthening of debt management capacity, including the development of a medium-term strategy and improvement in capacity to conduct debt sustainability analysis. A reversal of the trend toward shortening the maturity profile of the debt in recent years could also help avoid a rise in the debt service ratio over the medium term—one of the main contributors to the rising risk of debt distress.

Figure A3.
Figure A3.

St. Lucia: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2009-2029 1/

(Active Scenario)

Citation: IMF Staff Country Reports 2010, 092; 10.5089/9781455203611.002.A003

Sources: St. Lucian authorities; and Fund staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2019. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock
Figure A4.
Figure A4.

St. Lucia: Indicators of Public Debt Under Alternative Scenarios, 2009-2029 1/

(Active Scenario)

Citation: IMF Staff Country Reports 2010, 092; 10.5089/9781455203611.002.A003

Sources: St. Lucian 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.
Table A5.

St. Lucia: External Debt Sustainability Framework, Active Scenario, 2006-2029 1/

(In percent of GDP, unless otherwise indicated)

article image
Sources: St. Lucian authorities; and Fund staff estimates and projections.

Includes public sector guaranteed and non-guaranteed external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = 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 changes.

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 A6.

St. Lucia: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2009-2029 (Active Scenario)

(In percent)

article image
Sources: St. Lucian authorities; and Fund staff estimates and projections.

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.

Table A7.

St. Lucia: Public Sector Debt Sustainability Framework, Active Scenario, 2006-2029

(In percent of GDP, unless otherwise indicated)

article image
Sources: St. Lucian authorities; and Fund staff estimates and projections.

Includes public sector guaranteed and non-guaranteed debt. Also includes liabilities related to the construction and financing of public projects by the private 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.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.
Table A8.

St. Lucia: Sensitivity Analysis for Key Indicators of Public Debt 2009-2029

(Active Scenario)

article image
Sources: St. Lucian 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 the length of the projection period.

Revenues are defined inclusive of grants.

F. Conclusions

11. Staff analysis shows that, under the baseline scenario (with an average primary deficit of around one percent of GDP over the medium and longer terms), imbalances for the overall public sector would be on an increasing and unsustainable path, achieving a public debt-to-GDP ratio of about 88 percent by 2020—the timetable for attaining the 60 percent of GDP debt benchmark of the Eastern Caribbean Central Bank. St. Lucia would then continue to increase its stock of public debt steadily, reaching 96 percent of GDP by 2029.

12. Also noteworthy, under the baseline scenario the public external debt is set to increase by 1/3 percent per year, and the present value of the external debt-to-GDP ratio is set to breach the 50 percent threshold by 2027. However, other relevant thresholds are expected to be respected, and for this reason St. Lucia’s risk of external debt distress remains moderate. Nevertheless, some caution should be used in interpreting these results as private external debt data are not available, and under the most extreme shock scenario up to three thresholds (the PV of debt-to-GDP, debt service-to-exports, and debt service-to-revenue ratios) would be breached over the projection period.

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St. Lucia: Staff Report for the 2010 Article IV Consultation
Author:
International Monetary Fund
  • Figure A1.

    St. Lucia: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2009-2029 1/

  • Figure A2.

    St. Lucia: Indicators of Public Debt Under Alternative Scenarios, 2009-2029 1/

  • Figure A3.

    St. Lucia: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2009-2029 1/

    (Active Scenario)

  • Figure A4.

    St. Lucia: Indicators of Public Debt Under Alternative Scenarios, 2009-2029 1/

    (Active Scenario)