St. Lucia: External and Public Debt Sustainability Analysis
Author: International Monetary Fund
Publication Date:
09 Sep 2011
eISBN:
9781463902926
ISBN:
9781463902926
Language:
English
Keywords:
ISCR; CR; debt; SDR; real GDP; reconstruction effort; article IV discussion; sustainability analysis; creating flow; debt trajectory; gross debt; debt service-to-revenue; Fiscal stance; Public and publicly-guaranteed external debt; Depreciation; Global; financing need
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St. Lucia faces significant policy challenges in the aftermath of Hurricane Tomas. It is experiencing an urgent balance of payments need that would result in a severe economic disruption. The government is focused on achieving medium-term debt sustainability. The policies outlined tackle urgent rebuilding needs and appropriately aim to maintain macroeconomic stability. Executive Directors support the request for funds based on the extent of the damage caused, the associated urgent balance of payments need, and the government’s commitment to limit the increase in capital spending.

Abstract

St. Lucia faces significant policy challenges in the aftermath of Hurricane Tomas. It is experiencing an urgent balance of payments need that would result in a severe economic disruption. The government is focused on achieving medium-term debt sustainability. The policies outlined tackle urgent rebuilding needs and appropriately aim to maintain macroeconomic stability. Executive Directors support the request for funds based on the extent of the damage caused, the associated urgent balance of payments need, and the government’s commitment to limit the increase in capital spending.

I. Introduction

1. St. Lucia has been significantly impacted by the 2008–09 global economic and financial crises, as the tourism demand from the main source economies declined on weak employment and consumption. Economic activities contracted by about 3.6 percent in 2009 after expanding on an average by about 3 percent in 2004–08. The primary balance turned to a deficit of 0.5 percent of GDP in 2009 from a surplus of 2.3 percent in 2008, reflecting the counter-cyclical measures taken to cushion the impact of the crisis.1 Reflecting the weak growth and the fiscal deterioration, gross public debt increased from 66½ percent of GDP in 2008 to 73.9 percent in 2009. External debt constitutes a little over half of the public debt, however, the share of domestic debt is expanding, increasing by 5 percentage points to 34.4 percent of GDP in 2009. While the economy was on a path for a gradual recovery in 2010 led by tourism sector, St. Lucia was hit hard by Hurricane Tomas, resulting in a projected reduction in the real GDP growth by 1.2 percentage point from the pre-hurricane growth for 2010 to 0.5 percent post-hurricane.

II. Underlying DSA Assumptions

2. The DSA analysis is based on the following macroeconomic framework, assuming that the authorities will implement the near-term policies agreed with staff.

  • Growth and Inflation: Despite the impact of Hurricane Tomas and its damage to the agricultural production and infrastructure, the real GDP is projected to grow moderately by 0.5 percent in 2010. A rebound of 4.1 percent growth is projected in 2011, led by the reconstruction activities, and projected to average around 3.0 percent in the medium term. Inflation is expected to remain low at around 2 percent, anchored by the currency board arrangement.

Macroeconomic assumptions under the Baseline Scenario (2011–2030)

  • Following a prolonged slowdown in the aftermath of the global recession and the weak outlook of the employment and consumption in the major trading partners, real GDP growth is projected to average around 3.0 percent in the medium term. Inflation is expected to remain in low single digits, anchored by the currency board arrangement.

  • The primary balance of the central government (including grants) is projected to improve to about 2.9 percent of GDP, reflecting the yield from the introduction of VAT in the first half of 2012. Also, civil service reform is assumed to contribute to reducing the wage bills by close to 2 percent of GDP to 11 percent of GDP in the medium term.

  • The overall deficit is assumed to be financed roughly equally by domestic and external sources. Interest rates of 6.8 percent and 5.3 percent are assumed for domestic and external borrowings, respectively, in line with the historical average.

  • Capital grants are conservatively projected at 0.9 percent of GDP per year, after the inflow above the historical levels in 2010/11 and 2011/12 for the support of the reconstruction from the damage of Hurricane Tomas. Capital expenditure is projected to converge to around 9.0 percent of GDP and stay constant over the medium term.

  • FDI inflow is assumed to recover to around 14.4 percent of GDP, in line with historical average, following the sharp decline in 2008–2009 due to the global downturn. The current account deficit is projected to stay around 16 percent of GDP over the medium term.

  • Fiscal Balance: The primary balance is projected to worsen temporarily to a deficit of around 2 percent of GDP in 2010 and 2011, as the impact of hurricane on revenue and the increase in capital expenditure for the reconstruction is only partially offset by higher grants. The primary surplus is assumed to improve over the medium term to an average of 2.9 percent of GDP, as planned policy measures would yield results, including the introduction of a market-based property tax in 2011, a VAT in the first half of 2012, and civil service reform to reduce wage bills to around 11 percent of GDP in the medium term. In the short term, the increase in the deficit will be limited to the identified sources of concessional financing. However, in the case the disbursements of the identified financing were to be delayed, the authorities might temporarily resort to borrowing in the Regional Government Securities Market (RGSM) or issue bonds outside of the region. In the medium term, the overall deficit is assumed to be financed mainly on market terms, and the interest rates of 6.8 percent for domestic debt and 5.3 percent for external debt are assumed, in line with the historical average. As the new borrowings are assumed to be contracted largely on market terms reflecting the historical debt composition, the overall DSA results will not be altered should the authorities resort to bridge financing via the RGSM or a bond issue outside of the region.

  • External Sector: The current account deficit is projected to widen in 2011 primarily due to the increase in import for the reconstruction, before converging to around 16 percent of GDP over the medium term. Tourism receipt is assumed to recover, in line with the strong growth in tourist arrivals before the hurricane. FDI inflows are projected to recover to historical levels of 14.4 percent of GDP, but remain below the recent peak of 2006–2007.

III. Evaluation of Public Sector Debt Sustainability

3. The debt-to-GDP ratio rose by 7½ percentage points to 73.9 percent in 2009 as a result of a recession and counter-cyclical fiscal policies. The ratio is projected to increase further by another 5.6 percentage points over the next two years to 79.5 percent in 2011, reflecting the increase in capital expenditure for the reconstruction. In subsequent years, however, yields from the introduction of VAT and strengthened expenditure controls would contribute to the improvement in fiscal balances and put the public debt to a declining path over the medium term. The public debt is projected to fall to 59.9 percent of GDP by 2020, achieving the Eastern Caribbean Central Bank (ECCB)’s benchmark of 60 percent by 2020.

4. Sensitivity analysis shows that the public debt is most responsive to a shock to real GDP growth. Under this scenario, which assumes the reduction of real GDP growth by one standard deviation below the historical average in 2011 and 2012, the PV of public debt increases to 121.2 percent of GDP in 2030 (Table 2a, Scenario B1). The combined shock of annual growth and the primary balance below historical averages would push the PV of public debt-to-GDP to 97.6 percent (Table 2a, Scenario B3). These results highlight St. Lucia’s vulnerability to natural disasters and the risks of its high level of debt.

Table 1a.

St. Lucia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2007-2030

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

The analysis covers the public sector guaranteed and non-guaranteed debt and gross debt is used.

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 2a.

St. Lucia: Sensitivity Analysis for Key Indicators of Public Debt 2010-2030

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Sources: Country authorities; and 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.

IV. Evaluation of External Debt Sustainability

5. St. Lucia’s external debt sustainability analysis includes only public sector debts due to the limitations in the data on private sector external borrowing. Under the baseline scenario, the PV of external debt is projected to increase to 40.0 percent of GDP in 2011 reflecting the widening fiscal deficit due to the impact of the hurricane. The ratio is projected to decline to 17.8 percent of GDP by 2030, well below the prudential threshold of 50 percent2 (1 and Table 3a).

Table 3a.:

External Debt Sustainability Framework, Baseline Scenario, 2007-2030 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and 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., identified financing for Hurricane Tomas-related spending); 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).

6. Sensitivity analysis shows that the level of external debt is most responsive to an extreme shock of nominal exchange rate depreciation. The stress test assuming a one-time 30 percent nominal depreciation relative to the baseline in 2011 indicates that the PV of external debt-to-GDP ratio would rise to 56.8 percent and breach the threshold of 50 percent (Table 3b, Scenario B6). The debt service-to-export ratio rises to 17.1 percent under the most extreme export shock scenario assuming the export growth at one standard deviation below the historical average in 2010-11, below the prudential threshold of 25 percent.

Table 3b.

St. Lucia: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2010-2030

(In percent)

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Sources: Country authorities; and 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.

V. Conclusion

7. Staff analysis shows that, under the baseline scenario, imbalances for the overall public sector would be on a declining and sustainable path, achieving the ECCB’s debt-to-GDP ratio target of 60 percent by 2020. St. Lucia would then continue to reduce its stock of public debt steadily to 35.5 percent by 2030. The main risks to the debt trajectory are the delay in implementation of measures to improve fiscal balances and shocks to economic growth including natural disaster.

8. External debt risk remains moderate. While the baseline scenario indicates no breach of any threshold over the projection period, the most extreme shock scenarios suggest breach of the PV of debt-to-GDP threshold and moderate increase of the PV of debt service-to-export. It should be noted that the external debt sustainability analysis is constrained by the data limitation on private sector external borrowing.

9. The sustainable debt trajectory presented in the analysis is based on a strong fiscal adjustment and real GDP growth over the medium term. The government is assumed to successfully implement policy measures to achieve fiscal primary surplus of 2.9 percent of GDP, and the real GDP to grow by 3.0 percent in the medium term. As indicated by the stress tests, the public debt could take an unsustainable path should there be shortcomings in the fiscal consolidation and/or economic growth underperform.

Figure 1.
Figure 1.

St. Lucia: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2010-2030 1/

Citation: IMF Staff Country Reports 2011, 278; 10.5089/9781463902926.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2020. 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 2.
Figure 2.

St. Lucia: Indicators of Public Debt Under Alternative Scenarios, 2010-2030 1/

Citation: IMF Staff Country Reports 2011, 278; 10.5089/9781463902926.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2020.2/ Revenues are defined inclusive of grants.
1

The fiscal year starts April 1.

2

The DSA uses policy-dependent external debt burden indicators. Policy performance is measured by the Country Policy and Institutional Assessment Index (CPIA) compiled annually by the World Bank, categorizing countries into three groups based on the quality of their macroeconomic policies (strong, medium, and poor). St. Lucia is classified as a strong performer, with the thresholds on PV of debt-to-GDP, debt-to-exports and debt-to-revenue of 50, 200 and 300 percent respectively.

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Cover IMF Staff Country Reports
St. Lucia: Request for Disbursement under the Rapid Credit Facility and Emergency Natural Disaster Assistance-Staff Report, Staff Supplement, Press Release and Statement by the Executive Director for St. Lucia
Author: International Monetary Fund
Volume/Issue:
Volume 2011: Issue 278
Publisher:
International Monetary Fund
ISBN:
9781463902926
ISSN:
1934-7685
Pages:
36
DOI:
https://doi.org/10.5089/9781463902926.002