St. Lucia: External and Public Debt Sustainability Analysis
Author: International Monetary Fund
Publication Date:
09 Apr 2010
eISBN:
9781455203611
ISBN:
9781455203611
Language:
English
Keywords:
ISCR; CR; consultations informational annex; consultation; deficit; outturn; sustainability analysis; creating flow; Real GDP growth; current account; benchmark of the Eastern Caribbean Central Bank; Depreciation; Public and publicly-guaranteed external debt
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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 A1–A2 and Tables A1–A4).

Table A1.

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

(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 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

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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.