Abstract
This 2014 Article IV Consultation on the Republic of San Marino highlights global crisis and tense relations with Italy, which triggered a 30 percent GDP contraction since 2008 and a sea change in San Marino’s off-shore banking model. High liquidity in the system allowed banks to withstand the shock to deposits. Cassa di Risparmio della Repubblica di San Marino, the largest bank, has required 13 percent of GDP in public support. The deep recession and bank recapitalization costs are weighing heavily on public finances.
Context, Outlook, and Risks
1. Since 2008, GDP in San Marino has fallen by a cumulative 30 percent. The decline encompassed all key sectors including banking, manufacturing, and construction. As a result, the unemployment rate has jumped from 3 percent five years ago to around 9 percent now, while employment has declined 10 percent. Three key factors combined to cause the economic crisis in San Marino:
A 2009 fiscal amnesty in Italy led to the outflow of 60 percent of nonresident deposits held in Sammarinese banks, or 40 percent of total deposits.
In 2010, Italy imposed higher reporting requirements on Italian businesses dealing with countries on the tax black list, including San Marino. The Bank of Italy also limited transactions between Italian and Sammarinese financial institutions.
The economic downturn in Europe reduced demand for tourism and Sammarinese exports.
2. The financial sector has undergone sharp adjustment. High liquidity in the system allowed banks to withstand the shock to deposits. However, several bank and nonbank financial institutions became insolvent, prompting a major consolidation in the sector. Total assets fell from €11.5 billion in 2008 to €6 billion in 2012. Similarly, assets under management of fiduciary companies have fallen by 90 percent to less than €500 million.
Change in Banking System Assets
(percent change, peak to 2012)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: IFS; Sammarinese authorities; and IMF staff calculations.1/ For Malta, the change is computed since 2007 as there is no peak in the series.Change in Banking System Assets
(percent change, peak to 2012)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: IFS; Sammarinese authorities; and IMF staff calculations.1/ For Malta, the change is computed since 2007 as there is no peak in the series.Change in Banking System Assets
(percent change, peak to 2012)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: IFS; Sammarinese authorities; and IMF staff calculations.1/ For Malta, the change is computed since 2007 as there is no peak in the series.3. Cassa di Risparmio della Repubblica di San Marino (CRSM), the largest bank, has required 13 percent of GDP in public support. CRSM’s assets accounted for 37 percent of the system and 240 percent of GDP in 2008. Recapitalization needs resulted from large losses on its investment in the Italian Delta group (intervened by Italian supervisors in 2009 and put under compulsory administration). Going forward, further capital needs cannot be ruled out (see below).
4. The deep recession and bank recapitalization costs are weighing heavily on public finances. Despite some consolidation measures—notably an extraordinary income tax surcharge, and a temporary real estate tax—the central government balance shifted from a surplus of some 2–3 percent of GDP before the crisis to deficits of 2–3 percent of GDP. This, together with bank recapitalization costs has tripled central government debt to 30 percent of GDP, while simultaneously exhausting precrisis cash buffers of 15 percent of GDP. The crisis is also having a negative impact on public pensions. Precrisis forecasts projected deficits in the pay-as-you-go system to occur sometime around 2030; such deficits could now materialize in a few years.
5. The baseline forecast is for a modest recovery. Both banking system deposits and assets have been relatively stable since their trough in late 2012, industrial production saw positive (albeit small) y/y growth in 2013, and industrial employment appears to have stabilized too. In addition, the recovery in Europe should stimulate external demand going forward. However, important sectors like construction are still contracting sharply, and fiscal consolidation envisaged in the 2014 budget and beyond (see below) could weigh on activity. All in all, staff project a modest recovery to start in the second half of the year, implying a 1 percent contraction for the full 2014 (a significant improvement over last year’s estimated -5 percent) and 1 percent growth next year.
State Revenue and Expenditure
(Million of Euros)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: Sammarinese authorities; and IMF staff calculations.State Revenue and Expenditure
(Million of Euros)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: Sammarinese authorities; and IMF staff calculations.State Revenue and Expenditure
(Million of Euros)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: Sammarinese authorities; and IMF staff calculations.6. Upside risks to the baseline are significant and stem from San Marino’s recent exit from Italy’s black list (see Appendix I). Following ratification in late 2013 of a landmark bilateral double taxation treaty, incorporating a legal framework for the exchange of tax information, Italy removed San Marino from its tax black list in February. Concretely, Italian firms dealing with Sammarinese counterparts will no longer be subjected to additional reporting requirements to prove they are not evading VAT. Greater ease of doing business could provide a jolt to the recovery in San Marino, though the impact is difficult to quantify at this stage. On the downside, San Marino remains exposed to the risk of slower than projected growth in Europe, particularly Italy, and to further bank capital shortfalls domestically that could undermine public finances and deepen GDP losses.
7. San Marino faces daunting medium-term challenges. Sustaining growth and job creation will require diversifying away from banking, and integrating more fully into neighboring Emilia-Romagna—as well as Europe and the world. The exit from the black list eliminates a key roadblock to this process, but the process will still be long and arduous. Even if upside risks to short term growth materialize, precrisis GDP levels will remain well out of reach; a significant share of the GDP decline is permanent after the demise of the old economic/banking model.
Authorities’ views
8. The authorities agreed that economic activity will remain weak in 2014, but believe that exiting the black list would boost economic confidence and, eventually, growth. At the same time, they emphasized that the exit from the black list, which they see as proof of their commitment to openness and transparency, should not be used as an excuse to avoid deep reforms needed to return to sustained growth.
Policy Discussions
A. Financial Sector
9. The deposit base has stabilized, and liquidity buffers are now comfortable. Deposits have been stable since early 2012, after falling by close to €600 million in 2011 and €2.5 billion in 2009–10. This stabilization, together with limited demand for loans, has given banks breathing room to replenish their liquid assets. As a result, the coverage of short-term liabilities has improved and is now over 45 percent for the banking system as a whole.1 More important given that resident deposits have proved very stable, liquid assets now cover about 140 percent of short-term nonresident liabilities. In the case of CRSM, immobilized assets in Italy related to the Delta restructuring are slowly being repatriated as part of the creditors’ agreement, boosting liquidity.
Liquidity Ratio 1/
(Percent)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: Sammarinese authorities;and IMF staff calculations.1/ Liquid assets as a share of liquid liabilities, excluding inter-bank loans.Liquidity Ratio 1/
(Percent)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: Sammarinese authorities;and IMF staff calculations.1/ Liquid assets as a share of liquid liabilities, excluding inter-bank loans.Liquidity Ratio 1/
(Percent)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: Sammarinese authorities;and IMF staff calculations.1/ Liquid assets as a share of liquid liabilities, excluding inter-bank loans.10. System wide buffers also include contingent credit lines at the central bank and a few private banks. The credit line allows the Central Bank to repo ECB-acceptable securities for cash with a solid foreign private counterpart on a three to twelve month maturity, which it can then use to inject liquidity if needed. Some of the largest banks have similar lines available to them on a bilateral basis. Generally, liquidity risks appear low, reflecting the high liquidity ratio of Sammarinese banks and the central bank’s contingent credit line (the counterparty to which, in turn, has access to LOLR facilities).
11. While liquidity risks have abated, capitalization concerns remain present. Under pressure from supervisors, CRSM significantly increased its provisions against losses on its Delta exposure in the first half of 2013 (recorded in the final 2012 accounts). The bank’s capital adequacy fell to 6 percent, well below the 11 percent prudential requirement. Given that the bank is of systemic importance and that current shareholders have no means to recapitalize it, state intervention was justified and necessary. This led parliament to approve in late 2013 a €85 million public capital injection, on top of the €95 million provided in late 2012 and early 2013 (see Box 1). Total public support to date amounts to 13 percent of GDP. Given the government’s limited access to financing other than the domestic banking system, the latest recapitalization will be implemented by issuing a ten year, zero-coupon bond subscribed by CRSM with an implied return of 1.43 percent. This interest rate is well below indicative benchmarks (e.g., the 10-year Italian sovereign rate) and could impair the bank’s future profitability.
CRSM: Past Recapitalizations
CRSM’s capital buffers were not enough to absorb the losses from its Delta and non-Delta investments. Given that the bank is systemic, and that its shareholders had limited means to recapitalize it, the best approach would have been to nationalize it, with full dilution of shareholders and state control of management and board. This would have (i) respected the tenet that shareholders should be the first to bear losses; (ii) protected taxpayers’ interests, by giving them a claim on future profits commensurate with the risk they are bearing; and (iii) ensured a meaningful change in the bank’s business model to give it a realistic chance to return to profitability.
Fearing a negative public reaction to nationalization, the government and parliament decided instead in late 2012 to recapitalize the bank by extending a low interest loan to the shareholders in the amount of €60 million, which the shareholders then injected as their own capital (together with €20 million of their own funds). With this, they retained their equity stake in the bank. In exchange, the government obtained some concessions, such as the possibility to name the chairman of the bank’s board and two other board members.
Subsequently, in early 2013 the bank issued subordinated debt in the amount of €40 million, €35 million of which were subscribed by the social security fund. This was the second instance of public recapitalization with no dilution of shareholders and limited or no conditionality.
12. Staff warned that the modalities of the recapitalization plan continue to fall well short of international best practice. As part of the recapitalization process, the state and bank shareholders have entered into a provisional agreement on the modalities and conditionality of the latest recapitalization tranche. Staff argued that, ideally, shareholders should have been fully diluted and the state should have become the sole owner of the bank (see box). Hence, the partial dilution of shareholders contemplated under the agreement is not ideal, but it still represents progress relative to past practice of no dilution. It is also positive that the state will now get to nominate six of the nine board members, giving it better control over the bank’s restructuring process. Still, various aspects of the agreement remain highly problematic and should be reconsidered:
Shareholder dilution will not be upfront and unconditional. According to the agreement, the public funds injected will be converted into equity capital (diluting existing shareholders) only if the central bank approves CRSM’s financial forecasts as providing a good basis for compliance with prudential requirements in coming years. (This is viewed as a safeguard by the government for its investments.) This role for the central bank potentially jeopardizes its independence, in that to achieve a best practice outcome for shareholder dilution, it may have to compromise its standards in assessing CRSM’s financial strategy (which appears to involve optimistic assumptions).
Shareholder dilution will be capped by an unrealistically high valuation of the bank. The provisional agreement appears to set an unrealistically high value for the bank, based on generous assumptions on goodwill and limited consideration of current and future profitability. In turn, this high value would result in a correspondingly lower stake accruing to the state, now estimated at just 46 percent even if the full €85 million are converted into equity.
The agreement should not give current shareholders a disproportionate say on decisions. In the current agreement, the state cannot sell its stake in the bank without the approval of the current shareholders. This is in violation of the state’s right to decide what is best for itself and the country.
13. Further capital needs in CRSM cannot be ruled out. Capital injections so far will result in a capital adequacy ratio of 10 percent, below the 11 percent minimum. More generally, losses on Delta or other assets could exceed current provisions, while CRSM’s profitability will remain constrained since about half of its assets do not earn any interest.2 With this in mind, staff urged the central bank to assign a full time on-site examiner at CRSM.
14. The viability of CRSM will depend on the design and execution of a credible restructuring plan. While the bank has taken some measures to reduce costs, it is still missing a pluriannual plan that assesses what the sustainable size of the balance sheet could be, what the bank’s comparative advantage is in the new San Marino context, and what the resource implications to operationalize this comparative advantage are. With the state now due to appoint six of the nine members of CRSM’s board, staff urged the government to pick highly qualified turnaround experts that will be able to design and execute a proper restructuring plan.
15. The rest of the banking system meets minimum capital ratios, but risks remain there as well. All other banks have capital above 11 percent, with the two largest banks after CRSM at 16.6 and 13.7 percent, respectively.3 However, the crisis has brought about high nonperforming loans. In the system excluding CRSM, the gross NPL ratio stands at 24 percent of total loans, while the NPL ratio net of provisions accounts for 120 percent of banks’ capital and 34 percent of GDP. Thus, capital buffers could prove insufficient outside of CRSM as well, although it should be noted that several banks have proven capable of raising private capital in recent times.
Non-performing Loans
(System excl. CSRM)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: Sammarinese authorities and IMF staff estimates.Non-performing Loans
(System excl. CSRM)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: Sammarinese authorities and IMF staff estimates.Non-performing Loans
(System excl. CSRM)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: Sammarinese authorities and IMF staff estimates.16. Ensuring adequate provisioning will be key. The crisis has impaired profitability, reducing incentives for provisioning. At the same time, regulations in San Marino provide banks with significant discretion in this area, as banks have to provision on the basis of expected losses over the entire life of the asset. To compound the problem, resources that the central bank can devote towards supervision have been reduced, resulting in less frequent than ideal on-site supervisions, even as off-site supervision and monitoring continues. At prima facie, the current provisioning rate does seem on the low side, being at 40.2 percent for all NPLs and 54.3 percent for bad loans (loans to insolvent borrowers, the worst category of NPLs). Staff thus called for increased resources for and a stricter regime of on-site supervisions, to ensure that banks are promptly identifying and tackling any emerging pressure point, that they are properly classifying NPLs, and that they are adequately provisioning for losses. The CBSM could also consider more stringent provisioning requirements, albeit gradually.
17. An external asset quality review in line with those to be conducted elsewhere in Europe could help increase confidence in the banking system. The exercise could sharpen clarity about the true state of the banks. It would also force the banks to recognize losses now, avoiding an evergreening of dubious assets that would delay the needed restructuring in the system. Responses to any capital shortfalls identified by the exercise should first and foremost be market-based, including injections by current shareholders as has happened recently outside CRSM. Still, the government should have contingency plans ready beforehand, including a public backstop if needed.4
18. The bank resolution framework should be amended, to give the central bank better tools for speedy and least cost resolution. At present, there is no special bank resolution regime separate from general bankruptcy law. Although the Banking Law grants the central bank special corrective powers, it is possible for the courts to reverse some central bank decisions. The Banking Law should ideally be amended to introduce a special bank resolution regime administered by the central bank; the law should legislate, at a minimum, that no court can reverse central bank decisions. Moreover, early intervention measures and other resolution tools (e.g., purchase and assumption and bridge bank) should be introduced, together with a “least-cost” test for bank resolution, so as to comply with the Financial Stability Board’s Key Attributes for Effective Financial Institution Resolution. As part of the bank resolution framework, the deposit insurance fund with up to €50,000 coverage is a key tool, but staff recommended moving gradually to a fully ex-ante funded model in line with the draft EU directive on deposit insurance.
Authorities’ views
19. The authorities noted that significant steps have been taken to address CRSM, and agreed that an external asset quality review could be beneficial. The revocation of the law protecting the foundation’s majority stake in CRSM was an important political achievement, paving the way for the dilution of current shareholders and for a proper restructuring of the bank. They emphasized that the agreement between the state and the foundation is provisional, leaving room to revisit its key clauses. They added that most decisions at the bank’s board are taken by simple majority, hence the ability to nominate six board members (for which they will seek highly qualified candidates) will give the state de facto control over the bank. Outside of CRSM, they concurred with staff on the need to ensure proper provisioning and ensure that banks not evergreen dubious loans, and will consider an external asset quality review.
B. Public Finances
20. The 2014 budget contains welcome savings of about 1 percent of GDP, though not all of high quality. In December, parliament approved a major reform of direct taxation. The reform increases efficiency by broadening the base and lowering marginal rates, and results in an estimated gross yield of about 1¼ percent of GDP. Net revenue gains in the budget will be only about 0.3 percent of GDP, however, because the real estate tax and the extraordinary surtax on income introduced during the crisis were eliminated. On the expenditure side, the budget contemplates difficult but needed cuts in wages, though with some protections for lowest earners. These cuts are complemented with incentives for early retirement and a 25 percent replacement ratio in order to facilitate a reduction in the size of the public service. Other measures, such as the decision to lower transfers to the social security fund, are not sustainable in the long term and only result in lower central government deficit at the expense of lower social security surpluses.
21. Despite progress, staff argued that significant additional budgetary savings will need to be found over the medium term. As recent experience shows, San Marino’s inherent vulnerabilities as a very small and open economy argue in favor of having ample fiscal buffers. While public debt is not very high at present, it will continue to increase under the baseline even without further bank recapitalizations (see Appendix II). A consolidation of 3 percentage points of GDP (€35–40 million) over the next few years is needed to put debt on a downward path and clear space for possible bank recapitalization needs. Consolidation would also help limit future financing needs, an important consideration given limited financing options at present. If exit from the black list leads to a stronger than expected recovery, the need for consolidation could fall to around 2 percent of GDP, but it would not disappear altogether (see Box 2).
22. The ongoing spending review will help increase public spending efficiency and identify areas of savings. The review, which was launched in 2013 and is being complemented with Fund technical assistance, is appropriately focusing on the following:
Wages. Public sector wages are about 10 percent higher than in the private sector, with the gap increasing with seniority. In addition, special allowances and indemnities, unrelated to merit, account for a large share of public wages. Some caps have been introduced in the 2014 budget.
Health benefits. Spending in this area has increased in recent years despite the state’s reduced means, reflecting strong demand for service in the absence of co-payments and other rationing devices. Also, capacity utilization, measured by hospital occupancy rates, is low. Any reform in this area has to account for the country’s size and need to import some of its care.
Public pensions. The system is no longer financially viable due to high replacement ratios (over 80 percent), low contribution rates of some 20 percent, and low effective retirement age partly because of early retirements (including seniority pensions not based on actuarially fair rules).
Adjustment Needs Under an Upside Scenario
The exit from Italy’s black list could result in higher GDP and hence less fiscal adjustment needs. If the upside scenario results in 6 percent higher GDP by 2019 (commensurate with average annual growth over 2014–19 that is 1 percentage points higher than the 0.8 percent assumed in the baseline), debt would stabilize around 30 percent instead of increasing towards 35 percent by 2019 as in the baseline. Moreover, a 2 percent of GDP cumulative adjustment would be enough to put debt on a downward trajectory, and would build up comparable space for potential recapitalization needs as the 3 percent adjustment under the baseline GDP path.
Public Debt
(Percent of GDP)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: Sammarinese authorities; and IMF staff estimates.Public Debt
(Percent of GDP)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: Sammarinese authorities; and IMF staff estimates.Public Debt
(Percent of GDP)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: Sammarinese authorities; and IMF staff estimates.
Overall Balance
(Percent of GDP)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Overall Balance
(Percent of GDP)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Overall Balance
(Percent of GDP)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
23. There is room to further increase the tax intake and improve the efficiency of the tax system. The reform of indirect taxation, to be presented for discussion mid-year, would replace the current tax on imports with a full VAT system. Introducing a VAT in such a small country will be technically challenging but, if properly executed, it can deliver significant efficiency and revenue gains relative to the current monofase tax.5 Separately, the real estate tax should be reinstated as it is a relatively un-distortive source of revenue. An alternative would be to increase the yield from imputed rents, which are included as part of taxable personal income, but this would require updating cadastral values.
24. Financing pressures are manageable, but the growing fiscal-financial nexus needs to be tackled by seeking external market access. With a liquid banking system and moderate financing needs, funding will not be a problem in the short term. However, the combination of rising debt and financing needs financed entirely via domestic banks, together with bank recapitalization happening mostly via unfunded government bonds, is creating a closed loop between banks and the government. In this context, external financing should be sought even if the terms are initially less attractive, as this would result in a more diversified funding pool, lesser concentration of government securities on bank’s balance sheets, and external discipline to fiscal performance.
Authorities’ views
25. The authorities recognized the need for additional fiscal consolidation. They expressed concern about the rising trend in debt and financing needs, and pledged to use the upcoming expenditure review and reform of indirect taxation to gradually move towards fiscal surpluses. At the same time, they pointed to significant public opposition to the recent tax reform, and the challenge of implementing fiscal adjustment when public opinion perceives little “concrete gains” from these sacrifices. They noted that they had sought external financing, but had been deterred by the higher cost. However, they are considering renewing these efforts now that San Marino has exited the black list, expecting costs to be lower.
C. Structural Issues
26. The key structural challenge facing San Marino is to develop new growth sectors that make up for the demise of the old economic model. Some stakeholders in the financial industry see a future centered on asset management, an activity that in principle carries fewer risks to the sovereign than traditional banking. However, positioning San Marino as an asset management hub will take time and considerable resources as the needed expertise is not developed yet, nor is the legal, administrative, or IT infrastructure. Extending traditional banking activities beyond surrounding regions is also being considered, though this should be based on San Marino’s own expertise and not on any regulatory arbitrage. Beyond banking, deepening economic ties with neighboring Emilia-Romagna, one of the most dynamic regions in Italy6, presents an important opportunity for growth. Indeed, manufacturing and trade links used to be the drivers of the Sammarinese economy before off-shore banking took over. In this context, San Marino’s low tax rates represent a competitive advantage.
27. Continued commitment towards openness and transparency is a sine qua non condition for a successful diversification. San Marino will not be able to rebuild its economy on new foundations without a full normalization of its international relations. In this regard, the recent exit from Italy’s black list is key, as are other achievements:
Monetary agreement with the EU, signed in 2012. San Marino has committed to transpose into its law EU requirements in the fields of banking and financial supervision (including Basel III core principles) as well as the prevention of money laundering. Separately, San Marino has been accepted into the Single Euro Payments Area.
Progress in strengthening the AML/CFT framework and its enforcement, as recognized by MONEYVAL. The authorities are working to remedy remaining shortcomings ahead of the next assessment. There is also willingness to put in practice a national risk assessment strategy, a longstanding IMF recommendation, despite considerable resource constraints.
28. Other initiatives in the transport and industrial areas have the potential to support growth. The agreement on the Rimini-San Marino airport signed in September will give the country management rights over a significant part of the airport’s infrastructure. The medium-term goal is to develop refueling and cargo services that serve Italian and international clients. Progress on a science and technology park, which is about to launch with a dozen companies at the incubator phase, is also positive.
29. Further measures are needed to help reallocate resources towards new growth sectors and lower the wage gap with Italy. In particular:
Facilitate the hiring of skilled non-resident workers. Lack of skills is typically an important bottleneck in any economy the size of San Marino’s. The current process for hiring skilled nonresidents should be reformed, as it is slow, cumbersome, and imposes de facto quantitative limits.
Vocational training. Current services are too limited in scope and should be expanded to provide workers with the skills to integrate in the regional Italian supply chain.
Business environment. Despite a low tax environment, San Marino ranks a disappointing 81st in the World Bank Doing Business survey. For instance, it takes longer than in OECD countries on average to start a business, register property or obtain construction permits.
(Percent)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: Sammarinese authorities; and IMF staff estimates.1/ Average of three industrial sectors.2/ A posititive number means Sammarinese wages are higher than Italian wages.(Percent)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: Sammarinese authorities; and IMF staff estimates.1/ Average of three industrial sectors.2/ A posititive number means Sammarinese wages are higher than Italian wages.(Percent)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: Sammarinese authorities; and IMF staff estimates.1/ Average of three industrial sectors.2/ A posititive number means Sammarinese wages are higher than Italian wages.Authorities’ views
30. The authorities affirmed San Marino’s commitment to openness and transparency, and expressed satisfaction that their efforts were translating into concrete results. They agreed with the need to diversify their economy and integrate more deeply with surrounding regions and beyond, taking advantage of San Marino’s location and competitive tax system. In this regard, they pointed to the various initiatives underway, not least efforts to develop tourism as another growth sector. They also expressed confidence that the tender for the Rimini-San Marino airport would attract well qualified international bidders, and that a joint venture would be signed before the end of the year. Regarding labor market reforms, these are still at a preliminary stage and it is too early to presume the outcome.
D. Data Issues
31. There are some data gaps which are not uncommon for a small country like San Marino. In particular, national accounts and fiscal statistics lack the detail required by international standards and are produced with significant delay. There are also inconsistencies between GDP data and other real sector indicators such as the industrial production index, which are difficult to reconcile. Balance of payments data are not currently available, but San Marino has received Fund technical assistance to compile these data. Of note, banking sector data are quite comprehensive, a key consideration given the importance of the sector within the economy. On balance, the data are of sufficient quality for surveillance purposes, but further efforts and greater resources are needed to improve both their coverage and quality.
Staff Appraisal
32. Over the last twelve months, San Marino has managed important achievements. The recent exit from Italy’s black list has paved the way for a normalization of bilateral relations; deposits in the banks have stabilized and even increased in some cases, meaning that banks now have comfortable liquidity; and parliament recently passed an important tax reform.
33. Still, the challenges remain daunting. The economy is estimated to have suffered a circa 5 percent contraction last year, as many firms continued to suffer from the effects of the black list and weak external demand. While there are tentative signs of stabilization in a few sectors, persistent weaknesses in the banking system and needed cuts in public sector wages will continue to weigh on the recovery. More generally, San Marino faces the task of rebuilding the economy on new foundations after the demise of the old economic model. The recent exit from Italy’s black list is an important achievement that will facilitate the transition process, but a substantial share of the 30 percent drop in GDP over the last five years appears permanent at this stage.
34. An immediate priority is to properly resolve CRSM. Recapitalizing the bank was important, as CRSM is a cornerstone of the financial system and the economy at large. Now that legal provisions protecting the foundation’s majority stake in the bank have been removed, the state should dilute shareholders upfront and unconditionally, and demand a controlling majority stake commensurate with its capital contributions—something that has not happened thus far. This would protect taxpayers’ interests, in line with best international practices. Moreover, members representing the state at the bank’s board should be appointed primarily on the basis of their banking expertise, so that the board can develop and execute a credible plan to turn around the bank’s fortunes and minimize future capital needs. A permanent on-site inspector at CRSM would also help protect the state’s investment, by monitoring asset quality on a daily basis.
35. The crisis has also put significant pressures on other banks in the system, necessitating increased vigilance. While these banks meet prudential requirements, nonperforming loans will continue to put pressure on their capital bases. The central bank needs appropriate resources to scale up its on-site supervisions to ensure banks are identifying and tackling any emerging troubles and provisioning adequately for losses. In addition, an external review of banks’ asset quality, in line with what is being done in other European countries, could enhance the confidence of potential external investors in the soundness of the Sammarinese banking system. Given the potential for recapitalization needs that might be uncovered by the exercise, the authorities need to prepare a credible backstop plan, even if any need should first and foremost be filled by existing shareholders or other private sector participants. The bank resolution framework also needs to be improved to allow for quicker, more transparent, and least cost resolutions.
36. The 2014 budget contains good measures that deliver significant savings. The recent tax reform makes the system more efficient by reducing exemptions, and is expected to generate more revenue for the state despite lower nominal tax rates. Furthermore, the budget contemplates significant cuts in public sector wages, with welcome progressivity. All in all, the central government deficit should fall from -2.3 percent of GDP in 2013 to -1.3 percent this year.
37. However, further fiscal consolidation will be required to change current debt dynamics and create fiscal space for potential negative shocks, all the more given limited access to foreign financing. The government must aim to gradually move towards a 2–2½ percent of GDP surplus over the next 3–4 years, equivalent to €35–40 million in additional savings. Should exit from the black list provide a stronger than expected jolt to the recovery, these needs could fall to €25 million, but would not disappear altogether.
38. The ongoing expenditure review and upcoming reform of indirect taxation provide opportunities to move towards this goal. The spending review rightly focuses on the areas of public wages, pensions, and health and social benefits. Attention will need to be paid to ensure that cuts are well targeted and equitable. The reform of indirect taxation should seek to improve tax efficiency but also increase the revenue intake, and any introduction of a VAT should follow best international practice by aiming at a uniform rate with as limited exemptions as possible. Separately, the real estate tax should be reinstated, as it provides a relatively un-distortive source of revenue.
39. San Marino has made important strides in moving away from the old economic model. Future growth lies in diversifying beyond banking, and in integrating more deeply with Emilia Romagna—one of the most dynamic regions in Italy—and with Europe and the world. Continued actions that underscore San Marino’s commitment to openness and transparency, which have facilitated the recent exit from Italy’s black list, will remain key. In parallel, the government’s efforts to open up new opportunities for the private sector, coupled with San Marino’s competitive tax environment, bode well for the long and arduous process of rebuilding the economy on new foundations.
40. It is recommended that the next Article IV consultation with the Republic of San Marino be held on the current 12-month cycle.
San Marino: Recent Economic Developments, 2006–13
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Source: CBSM; IMF, International Financial Statistics; UPECEDS;and IMF staff calculations.San Marino: Recent Economic Developments, 2006–13
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Source: CBSM; IMF, International Financial Statistics; UPECEDS;and IMF staff calculations.San Marino: Recent Economic Developments, 2006–13
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Source: CBSM; IMF, International Financial Statistics; UPECEDS;and IMF staff calculations.
San Marino: Financial Sector Indicators, 2008–13
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: CBSM; IMF, International Financial Statistics; UPECEDS; and IMF staff calculations.1/ Liquid assets as a share of liquid liabilities, excluding inter-bank loans.San Marino: Financial Sector Indicators, 2008–13
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: CBSM; IMF, International Financial Statistics; UPECEDS; and IMF staff calculations.1/ Liquid assets as a share of liquid liabilities, excluding inter-bank loans.San Marino: Financial Sector Indicators, 2008–13
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Sources: CBSM; IMF, International Financial Statistics; UPECEDS; and IMF staff calculations.1/ Liquid assets as a share of liquid liabilities, excluding inter-bank loans.San Marino: Selected Economic and Social Indicators, 2007–14
Does not include possible costs of future bank recapitalization beyond the €85 million recently decided for CRSM.
Based on total loan loss provision, which covers nonperforming and performing loans.
Data as of June for 2013
San Marino: Selected Economic and Social Indicators, 2007–14
| GDP per capita (2011): 63,650 U.S. dollars Population (December 2011): 32,166 persons |
Life expectancy at birth (2010): 83.2 years Literacy, adult (2008): 96 percent |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Estimate | Projection | ||||||||||
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | ||||
| Activity and Prices | |||||||||||
| Real GDP (percent change) | 3.5 | 1.7 | −12.8 | −4.6 | −9.5 | −7.5 | −4.5 | −1.0 | |||
| Domestic demand | .. | 1.1 | −11.4 | −7.8 | −9.1 | −4.6 | … | … | |||
| Final consumption | .. | 2.9 | 1.4 | −3.4 | −5.4 | 0.0 | … | … | |||
| Fixed investment | .. | 5.6 | −19.6 | −19.0 | −15.6 | −13.0 | … | … | |||
| Net exports (contribution to growth) | .. | 0.8 | −4.3 | 1.2 | −2.8 | −4.1 | … | … | |||
| Exports | .. | 6.0 | −18.0 | −9.2 | −15.5 | −9.8 | … | … | |||
| Imports | .. | 6.3 | −18.1 | −11.1 | −16.3 | −8.9 | … | … | |||
| Employment (percent change) | 3.2 | 3.5 | −0.3 | −0.8 | −2.2 | −1.0 | … | … | |||
| Unemployment rate (average; percent) | 3.0 | 3.1 | 4.5 | 4.9 | 5.5 | 6.9 | 8.0 | … | |||
| Inflation rate (average; percent) | 2.5 | 4.1 | 2.4 | 2.6 | 2.0 | 2.8 | 1.3 | 1.0 | |||
| Nominal GDP (millions of euros) | 1817.5 | 1878.6 | 1700.8 | 1615.3 | 1477.5 | 1401.5 | 1357.1 | 1357.0 | |||
| Central Government Operations (percent of GDP) 1/ | |||||||||||
| Revenues | 22.0 | 19.7 | 19.5 | 20.9 | 20.5 | 24.0 | 20.9 | 21.2 | |||
| Expenditure | 20.3 | 19.6 | 21.7 | 22.9 | 24.1 | 26.0 | 23.2 | 22.4 | |||
| Overall balance | 1.6 | 0.2 | −2.2 | −2.0 | −3.6 | −2.0 | −2.3 | −1.3 | |||
| Government debt | 11.4 | 13.5 | 17.5 | 17.6 | 18.4 | 22.6 | 30.7 | 31.9 | |||
| Loans | 3.6 | 3.5 | 3.7 | 3.5 | 3.2 | 7.1 | 14.6 | 15.9 | |||
| Net account payables | 7.9 | 10.0 | 13.8 | 14.1 | 15.2 | 15.5 | 16.0 | 16.0 | |||
| Government deposits (millions of euros) | 214.4 | 263.9 | 256.9 | 218.2 | 154.1 | 72.9 | 55.9 | 55.9 | |||
| Money and Credit | |||||||||||
| Deposits (percent change) | … | 16.1 | −18.7 | −18.0 | −12.5 | −1.6 | … | … | |||
| Private sector credit (percent change) | 13.6 | 12.2 | −5.5 | −6.6 | −20.0 | −13.3 | … | … | |||
| Net foreign assets (percent of GDP) | 39.3 | 29.2 | 9.2 | 25.4 | 46.4 | 37.6 | … | … | |||
| Commercial banks | 15.1 | 2.1 | −22.0 | 5.7 | 29.8 | 21.4 | … | … | |||
| Central bank | 24.2 | 27.0 | 31.2 | 19.7 | 16.6 | 16.1 | … | … | |||
| External Accounts (percent of GDP) | |||||||||||
| Balance of goods and services | 25.1 | 24.6 | 25.5 | 26.3 | 24.4 | 21.6 | … | … | |||
| Exports | 211.6 | 222.4 | 205.7 | 197.5 | 184.8 | 178.7 | … | … | |||
| Imports | 186.4 | 197.8 | 180.2 | 171.2 | 160.4 | 157.1 | … | … | |||
| Gross international reserves (millions of U.S. dollars) | 647.8 | 706.8 | 790.3 | 449.2 | 341.9 | 308.6 | … | … | |||
| Exchange Rate (average) | |||||||||||
| Euros per U.S. dollar | 0.73 | 0.68 | 0.72 | 0.76 | 0.72 | 0.78 | 0.75 | … | |||
| Real exchange rate | 100.5 | 102.0 | 103.2 | 99.4 | 99.4 | 97.6 | 99.2 | … | |||
| Financial Soundness Indicators (percent) 3/ | |||||||||||
| Regulatory capital to risk-weighted assets | 17.5 | 16.9 | 16.9 | 15.6 | 14.1 | 8.8 | 9.7 | … | |||
| Bad loans to total loans | n.a. | n.a. | 2.9 | 5.9 | 10.1 | 10.6 | 11.7 | … | |||
| Loan loss provision to total loans 2/ | 4.3 | 2.6 | 3.9 | 6.3 | 10.5 | 13.3 | 12.1 | … | |||
| Return on equity (ROE) | 12.1 | 10.0 | −14.4 | −24.4 | −24.4 | −21.1 | … | … | |||
| Liquid assets to short-term liabilities | … | … | … | … | … | 37.9 | 46.1 | … | |||
Does not include possible costs of future bank recapitalization beyond the €85 million recently decided for CRSM.
Based on total loan loss provision, which covers nonperforming and performing loans.
Data as of June for 2013
San Marino: Selected Economic and Social Indicators, 2007–14
| GDP per capita (2011): 63,650 U.S. dollars Population (December 2011): 32,166 persons |
Life expectancy at birth (2010): 83.2 years Literacy, adult (2008): 96 percent |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Estimate | Projection | ||||||||||
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | ||||
| Activity and Prices | |||||||||||
| Real GDP (percent change) | 3.5 | 1.7 | −12.8 | −4.6 | −9.5 | −7.5 | −4.5 | −1.0 | |||
| Domestic demand | .. | 1.1 | −11.4 | −7.8 | −9.1 | −4.6 | … | … | |||
| Final consumption | .. | 2.9 | 1.4 | −3.4 | −5.4 | 0.0 | … | … | |||
| Fixed investment | .. | 5.6 | −19.6 | −19.0 | −15.6 | −13.0 | … | … | |||
| Net exports (contribution to growth) | .. | 0.8 | −4.3 | 1.2 | −2.8 | −4.1 | … | … | |||
| Exports | .. | 6.0 | −18.0 | −9.2 | −15.5 | −9.8 | … | … | |||
| Imports | .. | 6.3 | −18.1 | −11.1 | −16.3 | −8.9 | … | … | |||
| Employment (percent change) | 3.2 | 3.5 | −0.3 | −0.8 | −2.2 | −1.0 | … | … | |||
| Unemployment rate (average; percent) | 3.0 | 3.1 | 4.5 | 4.9 | 5.5 | 6.9 | 8.0 | … | |||
| Inflation rate (average; percent) | 2.5 | 4.1 | 2.4 | 2.6 | 2.0 | 2.8 | 1.3 | 1.0 | |||
| Nominal GDP (millions of euros) | 1817.5 | 1878.6 | 1700.8 | 1615.3 | 1477.5 | 1401.5 | 1357.1 | 1357.0 | |||
| Central Government Operations (percent of GDP) 1/ | |||||||||||
| Revenues | 22.0 | 19.7 | 19.5 | 20.9 | 20.5 | 24.0 | 20.9 | 21.2 | |||
| Expenditure | 20.3 | 19.6 | 21.7 | 22.9 | 24.1 | 26.0 | 23.2 | 22.4 | |||
| Overall balance | 1.6 | 0.2 | −2.2 | −2.0 | −3.6 | −2.0 | −2.3 | −1.3 | |||
| Government debt | 11.4 | 13.5 | 17.5 | 17.6 | 18.4 | 22.6 | 30.7 | 31.9 | |||
| Loans | 3.6 | 3.5 | 3.7 | 3.5 | 3.2 | 7.1 | 14.6 | 15.9 | |||
| Net account payables | 7.9 | 10.0 | 13.8 | 14.1 | 15.2 | 15.5 | 16.0 | 16.0 | |||
| Government deposits (millions of euros) | 214.4 | 263.9 | 256.9 | 218.2 | 154.1 | 72.9 | 55.9 | 55.9 | |||
| Money and Credit | |||||||||||
| Deposits (percent change) | … | 16.1 | −18.7 | −18.0 | −12.5 | −1.6 | … | … | |||
| Private sector credit (percent change) | 13.6 | 12.2 | −5.5 | −6.6 | −20.0 | −13.3 | … | … | |||
| Net foreign assets (percent of GDP) | 39.3 | 29.2 | 9.2 | 25.4 | 46.4 | 37.6 | … | … | |||
| Commercial banks | 15.1 | 2.1 | −22.0 | 5.7 | 29.8 | 21.4 | … | … | |||
| Central bank | 24.2 | 27.0 | 31.2 | 19.7 | 16.6 | 16.1 | … | … | |||
| External Accounts (percent of GDP) | |||||||||||
| Balance of goods and services | 25.1 | 24.6 | 25.5 | 26.3 | 24.4 | 21.6 | … | … | |||
| Exports | 211.6 | 222.4 | 205.7 | 197.5 | 184.8 | 178.7 | … | … | |||
| Imports | 186.4 | 197.8 | 180.2 | 171.2 | 160.4 | 157.1 | … | … | |||
| Gross international reserves (millions of U.S. dollars) | 647.8 | 706.8 | 790.3 | 449.2 | 341.9 | 308.6 | … | … | |||
| Exchange Rate (average) | |||||||||||
| Euros per U.S. dollar | 0.73 | 0.68 | 0.72 | 0.76 | 0.72 | 0.78 | 0.75 | … | |||
| Real exchange rate | 100.5 | 102.0 | 103.2 | 99.4 | 99.4 | 97.6 | 99.2 | … | |||
| Financial Soundness Indicators (percent) 3/ | |||||||||||
| Regulatory capital to risk-weighted assets | 17.5 | 16.9 | 16.9 | 15.6 | 14.1 | 8.8 | 9.7 | … | |||
| Bad loans to total loans | n.a. | n.a. | 2.9 | 5.9 | 10.1 | 10.6 | 11.7 | … | |||
| Loan loss provision to total loans 2/ | 4.3 | 2.6 | 3.9 | 6.3 | 10.5 | 13.3 | 12.1 | … | |||
| Return on equity (ROE) | 12.1 | 10.0 | −14.4 | −24.4 | −24.4 | −21.1 | … | … | |||
| Liquid assets to short-term liabilities | … | … | … | … | … | 37.9 | 46.1 | … | |||
Does not include possible costs of future bank recapitalization beyond the €85 million recently decided for CRSM.
Based on total loan loss provision, which covers nonperforming and performing loans.
Data as of June for 2013
San Marino: Financial Soundness Indicators, 2007–13
As of June 2013
Based on total loan loss provision, which also covers problem loans and performing loans.
Before extraordinary items and taxes.
After extraordinary items and taxes, and before provision to fund for general banking risk.
San Marino: Financial Soundness Indicators, 2007–13
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 1/ | ||
|---|---|---|---|---|---|---|---|---|
| Capital adequacy ratios (percent) | ||||||||
| Regulatory capital to risk-weighted assets | 17.5 | 16.9 | 16.9 | 15.6 | 14.1 | 8.8 | 9.7 | |
| Capital to assets | 10.8 | 10.7 | 11.1 | 9.9 | 9.6 | 8.2 | 7.4 | |
| Asset quality ratios (percent) | ||||||||
| Bad loans to total loans | … | … | 2.9 | 5.9 | 10.1 | 10.6 | 11.7 | |
| Nonperforming loans to total loans | … | 4.2 | 8.5 | 15.0 | 23.5 | 22.6 | 21.7 | |
| Bad loans net of provision to capital | … | … | 7.2 | 17.6 | 28.6 | 41.3 | 58.0 | |
| Nonperforming loans net of provision to capital | … | … | 22.9 | 52.5 | 77.3 | 82.4 | 102.2 | |
| Loan loss provision to total loans 2/ | 4.3 | 2.6 | 3.9 | 6.3 | 10.5 | 13.3 | 12.1 | |
| Earning and profitability (percent) | ||||||||
| Return on assets (ROA) 3/ | 1.2 | 0.8 | −1.4 | −2.7 | −6.6 | −10.9 | … | |
| Return on assets (ROA) 4/ | 1.3 | 1.1 | −1.6 | −2.6 | −2.4 | −6.9 | … | |
| Return on equity (ROE) 3/ | 10.7 | 7.6 | −13.1 | −25.2 | −67.9 | −121.5 | … | |
| Return on equity (ROE) 4/ | 12.1 | 10.0 | −14.4 | −24.4 | −24.4 | −77.0 | … | |
| Interest margin to gross income | 81.2 | 100.9 | 51.4 | 49.0 | 65.8 | 51.9 | … | |
| Non-interest expenses to gross income | 36.7 | 45.2 | 52.2 | 68.5 | 83.2 | 88.7 | … | |
| Trading income to gross income | −7.8 | −29.1 | 11.0 | 1.3 | −7.0 | 8.7 | … | |
| Administrative expenses to non-interest expenditures | 84.0 | 83.5 | 51.3 | 61.9 | 69.2 | 69.7 | … | |
| Liquidity (percent) | ||||||||
| Liquid assets to total assets | 37.2 | 38.3 | 25.5 | 17.1 | 15.0 | 16.1 | 16.5 | |
| Liquid assets to short-term liabilities | … | … | … | … | … | 37.9 | 46.1 | |
| Loans to deposits | 77.1 | 75.2 | 88.5 | 101.4 | 91.6 | 108.7 | 111.4 | |
| Interest rates (basis points) | ||||||||
| Spread between lending and deposit rates | 496 | 567 | 478 | 468 | 484 | 520 | … | |
As of June 2013
Based on total loan loss provision, which also covers problem loans and performing loans.
Before extraordinary items and taxes.
After extraordinary items and taxes, and before provision to fund for general banking risk.
San Marino: Financial Soundness Indicators, 2007–13
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 1/ | ||
|---|---|---|---|---|---|---|---|---|
| Capital adequacy ratios (percent) | ||||||||
| Regulatory capital to risk-weighted assets | 17.5 | 16.9 | 16.9 | 15.6 | 14.1 | 8.8 | 9.7 | |
| Capital to assets | 10.8 | 10.7 | 11.1 | 9.9 | 9.6 | 8.2 | 7.4 | |
| Asset quality ratios (percent) | ||||||||
| Bad loans to total loans | … | … | 2.9 | 5.9 | 10.1 | 10.6 | 11.7 | |
| Nonperforming loans to total loans | … | 4.2 | 8.5 | 15.0 | 23.5 | 22.6 | 21.7 | |
| Bad loans net of provision to capital | … | … | 7.2 | 17.6 | 28.6 | 41.3 | 58.0 | |
| Nonperforming loans net of provision to capital | … | … | 22.9 | 52.5 | 77.3 | 82.4 | 102.2 | |
| Loan loss provision to total loans 2/ | 4.3 | 2.6 | 3.9 | 6.3 | 10.5 | 13.3 | 12.1 | |
| Earning and profitability (percent) | ||||||||
| Return on assets (ROA) 3/ | 1.2 | 0.8 | −1.4 | −2.7 | −6.6 | −10.9 | … | |
| Return on assets (ROA) 4/ | 1.3 | 1.1 | −1.6 | −2.6 | −2.4 | −6.9 | … | |
| Return on equity (ROE) 3/ | 10.7 | 7.6 | −13.1 | −25.2 | −67.9 | −121.5 | … | |
| Return on equity (ROE) 4/ | 12.1 | 10.0 | −14.4 | −24.4 | −24.4 | −77.0 | … | |
| Interest margin to gross income | 81.2 | 100.9 | 51.4 | 49.0 | 65.8 | 51.9 | … | |
| Non-interest expenses to gross income | 36.7 | 45.2 | 52.2 | 68.5 | 83.2 | 88.7 | … | |
| Trading income to gross income | −7.8 | −29.1 | 11.0 | 1.3 | −7.0 | 8.7 | … | |
| Administrative expenses to non-interest expenditures | 84.0 | 83.5 | 51.3 | 61.9 | 69.2 | 69.7 | … | |
| Liquidity (percent) | ||||||||
| Liquid assets to total assets | 37.2 | 38.3 | 25.5 | 17.1 | 15.0 | 16.1 | 16.5 | |
| Liquid assets to short-term liabilities | … | … | … | … | … | 37.9 | 46.1 | |
| Loans to deposits | 77.1 | 75.2 | 88.5 | 101.4 | 91.6 | 108.7 | 111.4 | |
| Interest rates (basis points) | ||||||||
| Spread between lending and deposit rates | 496 | 567 | 478 | 468 | 484 | 520 | … | |
As of June 2013
Based on total loan loss provision, which also covers problem loans and performing loans.
Before extraordinary items and taxes.
After extraordinary items and taxes, and before provision to fund for general banking risk.
San Marino: Central Government Operations, 2008–15
(Percent of GDP)
Bank recapitalizations are only recorded as financing operations.
San Marino: Central Government Operations, 2008–15
(Percent of GDP)
| Projection | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |||||
| Revenue | 19.7 | 19.5 | 20.9 | 20.5 | 24.0 | 20.9 | 21.2 | 20.9 | ||||
| Taxes | 15.9 | 15.0 | 16.2 | 15.3 | 18.8 | 15.6 | 16.6 | 16.3 | ||||
| Income Taxes | 6.2 | 6.0 | 6.9 | 6.5 | 6.4 | 6.7 | 7.3 | 6.9 | ||||
| Non-income taxes | 9.7 | 9.1 | 9.4 | 8.8 | 12.4 | 8.9 | 9.3 | 9.5 | ||||
| Taxes on international trade and transactions | 6.8 | 6.1 | 6.6 | 6.3 | 8.0 | 5.7 | 5.7 | 5.7 | ||||
| Other taxes | 3.0 | 2.9 | 2.8 | 2.5 | 4.4 | 3.1 | 3.6 | 3.8 | ||||
| Non-tax revenue | 3.8 | 4.5 | 4.7 | 5.2 | 5.2 | 5.3 | 4.6 | 4.6 | ||||
| Expenditure | 19.6 | 21.7 | 22.9 | 24.1 | 26.0 | 23.2 | 22.4 | 23.1 | ||||
| Expense | 18.0 | 20.2 | 22.1 | 23.1 | 25.1 | 22.3 | 21.3 | 22.0 | ||||
| Compensation of employees | 6.0 | 6.8 | 7.3 | 7.7 | 8.0 | 8.4 | 8.0 | 7.9 | ||||
| Use of goods and services | 1.5 | 1.8 | 1.8 | 2.0 | 2.1 | 2.1 | 2.4 | 2.4 | ||||
| Interest | 0.2 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.4 | 0.4 | ||||
| Grants to other government units | 8.9 | 10.5 | 10.5 | 10.2 | 10.0 | 10.4 | 9.4 | 10.1 | ||||
| Current | 7.4 | 8.4 | 8.7 | 8.6 | 9.3 | 9.7 | 8.9 | 9.6 | ||||
| Capital | 1.5 | 2.1 | 1.7 | 1.5 | 0.7 | 0.7 | 0.5 | 0.5 | ||||
| Other expenses (including subsidies) | 1.4 | 1.0 | 2.5 | 3.1 | 4.9 | 1.2 | 1.1 | 1.1 | ||||
| Net acquisition of non-financial assets | 1.6 | 1.5 | 0.8 | 1.0 | 0.9 | 0.9 | 1.1 | 1.2 | ||||
| Asset purchase | 1.7 | 1.5 | 0.8 | 1.0 | 0.9 | 0.9 | 1.1 | 1.2 | ||||
| Asset sale | 0.1 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||
| Gross Operating Balance | 1.8 | −0.7 | −1.2 | −2.5 | −1.1 | −1.4 | −0.1 | −1.0 | ||||
| Net lending (+)/borrowing (-) (fiscal balance) 1/ | 0.2 | −2.2 | −2.0 | −3.6 | −2.0 | −2.3 | −1.3 | −2.2 | ||||
| Net financial worth, transactions 1/ | 0.0 | −2.4 | −2.3 | −3.9 | −5.7 | −2.3 | −1.3 | −2.2 | ||||
| Net acquisition of financial assets | 1.0 | −5.9 | −4.1 | −5.6 | −1.2 | 5.0 | 0.0 | 0.0 | ||||
| Currency and deposits | 2.6 | −0.4 | −2.4 | −4.3 | −5.8 | −1.3 | 0.0 | 0.0 | ||||
| Other accounts receivable | −1.7 | −5.5 | −1.7 | −1.3 | 0.3 | 0.0 | 0.0 | 0.0 | ||||
| Investment in CRSM | 4.3 | 6.3 | 0.0 | 0.0 | ||||||||
| Net incurrence of liabilities | 1.0 | −3.6 | −1.7 | −1.7 | 4.5 | 7.3 | 1.3 | 2.2 | ||||
| Loans | −0.1 | −0.1 | −0.1 | −0.2 | 4.7 | 7.3 | 1.3 | 2.2 | ||||
| Other accounts payable | 1.0 | −3.5 | −1.6 | −1.5 | −0.3 | 0.0 | 0.0 | 0.0 | ||||
| 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||||
| Consolidated Budgetary Central Government and Social Security Fund | ||||||||||||
| Total revenue (consolidated) | 29.4 | 30.7 | 32.4 | 33.6 | 37.5 | 35.6 | 35.3 | 34.6 | ||||
| Total expenditure (consolidated) | 29.4 | 32.9 | 34.5 | 38.0 | 40.9 | 39.7 | 38.9 | 38.5 | ||||
| Overall balance (consolidated BCG and SSF) | 0.0 | −2.2 | −2.1 | −4.4 | −3.4 | −4.1 | −3.6 | −4.0 | ||||
| 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||||
| Memorandum items | ||||||||||||
| Public debt | 13.5 | 17.5 | 17.6 | 18.4 | 22.6 | 30.7 | 31.9 | 33.4 | ||||
| Loans | 3.5 | 3.7 | 3.5 | 3.2 | 7.1 | 14.6 | 15.9 | 17.7 | ||||
| Net accounts payable | 10.0 | 13.8 | 14.1 | 15.2 | 15.5 | 16.0 | 16.0 | 15.7 | ||||
| Government deposits | 14.0 | 15.1 | 13.5 | 10.4 | 5.2 | 4.1 | 4.1 | 4.0 | ||||
| Nominal GDP (in millions of euros) | 1878.6 | 1700.8 | 1615.3 | 1477.5 | 1401.5 | 1357.1 | 1357.0 | 1386.6 | ||||
Bank recapitalizations are only recorded as financing operations.
San Marino: Central Government Operations, 2008–15
(Percent of GDP)
| Projection | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |||||
| Revenue | 19.7 | 19.5 | 20.9 | 20.5 | 24.0 | 20.9 | 21.2 | 20.9 | ||||
| Taxes | 15.9 | 15.0 | 16.2 | 15.3 | 18.8 | 15.6 | 16.6 | 16.3 | ||||
| Income Taxes | 6.2 | 6.0 | 6.9 | 6.5 | 6.4 | 6.7 | 7.3 | 6.9 | ||||
| Non-income taxes | 9.7 | 9.1 | 9.4 | 8.8 | 12.4 | 8.9 | 9.3 | 9.5 | ||||
| Taxes on international trade and transactions | 6.8 | 6.1 | 6.6 | 6.3 | 8.0 | 5.7 | 5.7 | 5.7 | ||||
| Other taxes | 3.0 | 2.9 | 2.8 | 2.5 | 4.4 | 3.1 | 3.6 | 3.8 | ||||
| Non-tax revenue | 3.8 | 4.5 | 4.7 | 5.2 | 5.2 | 5.3 | 4.6 | 4.6 | ||||
| Expenditure | 19.6 | 21.7 | 22.9 | 24.1 | 26.0 | 23.2 | 22.4 | 23.1 | ||||
| Expense | 18.0 | 20.2 | 22.1 | 23.1 | 25.1 | 22.3 | 21.3 | 22.0 | ||||
| Compensation of employees | 6.0 | 6.8 | 7.3 | 7.7 | 8.0 | 8.4 | 8.0 | 7.9 | ||||
| Use of goods and services | 1.5 | 1.8 | 1.8 | 2.0 | 2.1 | 2.1 | 2.4 | 2.4 | ||||
| Interest | 0.2 | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.4 | 0.4 | ||||
| Grants to other government units | 8.9 | 10.5 | 10.5 | 10.2 | 10.0 | 10.4 | 9.4 | 10.1 | ||||
| Current | 7.4 | 8.4 | 8.7 | 8.6 | 9.3 | 9.7 | 8.9 | 9.6 | ||||
| Capital | 1.5 | 2.1 | 1.7 | 1.5 | 0.7 | 0.7 | 0.5 | 0.5 | ||||
| Other expenses (including subsidies) | 1.4 | 1.0 | 2.5 | 3.1 | 4.9 | 1.2 | 1.1 | 1.1 | ||||
| Net acquisition of non-financial assets | 1.6 | 1.5 | 0.8 | 1.0 | 0.9 | 0.9 | 1.1 | 1.2 | ||||
| Asset purchase | 1.7 | 1.5 | 0.8 | 1.0 | 0.9 | 0.9 | 1.1 | 1.2 | ||||
| Asset sale | 0.1 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||
| Gross Operating Balance | 1.8 | −0.7 | −1.2 | −2.5 | −1.1 | −1.4 | −0.1 | −1.0 | ||||
| Net lending (+)/borrowing (-) (fiscal balance) 1/ | 0.2 | −2.2 | −2.0 | −3.6 | −2.0 | −2.3 | −1.3 | −2.2 | ||||
| Net financial worth, transactions 1/ | 0.0 | −2.4 | −2.3 | −3.9 | −5.7 | −2.3 | −1.3 | −2.2 | ||||
| Net acquisition of financial assets | 1.0 | −5.9 | −4.1 | −5.6 | −1.2 | 5.0 | 0.0 | 0.0 | ||||
| Currency and deposits | 2.6 | −0.4 | −2.4 | −4.3 | −5.8 | −1.3 | 0.0 | 0.0 | ||||
| Other accounts receivable | −1.7 | −5.5 | −1.7 | −1.3 | 0.3 | 0.0 | 0.0 | 0.0 | ||||
| Investment in CRSM | 4.3 | 6.3 | 0.0 | 0.0 | ||||||||
| Net incurrence of liabilities | 1.0 | −3.6 | −1.7 | −1.7 | 4.5 | 7.3 | 1.3 | 2.2 | ||||
| Loans | −0.1 | −0.1 | −0.1 | −0.2 | 4.7 | 7.3 | 1.3 | 2.2 | ||||
| Other accounts payable | 1.0 | −3.5 | −1.6 | −1.5 | −0.3 | 0.0 | 0.0 | 0.0 | ||||
| 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||||
| Consolidated Budgetary Central Government and Social Security Fund | ||||||||||||
| Total revenue (consolidated) | 29.4 | 30.7 | 32.4 | 33.6 | 37.5 | 35.6 | 35.3 | 34.6 | ||||
| Total expenditure (consolidated) | 29.4 | 32.9 | 34.5 | 38.0 | 40.9 | 39.7 | 38.9 | 38.5 | ||||
| Overall balance (consolidated BCG and SSF) | 0.0 | −2.2 | −2.1 | −4.4 | −3.4 | −4.1 | −3.6 | −4.0 | ||||
| 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||||
| Memorandum items | ||||||||||||
| Public debt | 13.5 | 17.5 | 17.6 | 18.4 | 22.6 | 30.7 | 31.9 | 33.4 | ||||
| Loans | 3.5 | 3.7 | 3.5 | 3.2 | 7.1 | 14.6 | 15.9 | 17.7 | ||||
| Net accounts payable | 10.0 | 13.8 | 14.1 | 15.2 | 15.5 | 16.0 | 16.0 | 15.7 | ||||
| Government deposits | 14.0 | 15.1 | 13.5 | 10.4 | 5.2 | 4.1 | 4.1 | 4.0 | ||||
| Nominal GDP (in millions of euros) | 1878.6 | 1700.8 | 1615.3 | 1477.5 | 1401.5 | 1357.1 | 1357.0 | 1386.6 | ||||
Bank recapitalizations are only recorded as financing operations.
Appendix I. Risk Assessment Matrix1
| Risk | Relative likelihood | Impact if realized |
|---|---|---|
| Upside risk: exit from the black list leads to stronger than expected recovery | Medium | High Exit is now official. By facilitating business between Sammarinese firms and their Italian counterparts, the exit could provide a stronger than expected jolt to the recovery. |
| Financial stress in the euro area re-emerges (triggered by stalled or incomplete delivery of national and euro area policy commitments). | Medium | High Given extensive financial and real links with Italy, the impact on the economy would be direct. |
| Continued stress in the banking system. | Medium | High Continued stress would impair credit provision, impact confidence, and possibly have a bearing on public finances. |
| Failure to enact fiscal consolidation. | Medium | Medium Public debt would remain on an upward trend, and there would be limited fiscal space to absorb further shocks from the financial system. |
| Protracted period of slower European growth (larger than expected deleveraging or negative surprise on potential growth). | High | Medium Given links to Italy, this would likely entail slow growth in San Marino as well. |
| Risk | Relative likelihood | Impact if realized |
|---|---|---|
| Upside risk: exit from the black list leads to stronger than expected recovery | Medium | High Exit is now official. By facilitating business between Sammarinese firms and their Italian counterparts, the exit could provide a stronger than expected jolt to the recovery. |
| Financial stress in the euro area re-emerges (triggered by stalled or incomplete delivery of national and euro area policy commitments). | Medium | High Given extensive financial and real links with Italy, the impact on the economy would be direct. |
| Continued stress in the banking system. | Medium | High Continued stress would impair credit provision, impact confidence, and possibly have a bearing on public finances. |
| Failure to enact fiscal consolidation. | Medium | Medium Public debt would remain on an upward trend, and there would be limited fiscal space to absorb further shocks from the financial system. |
| Protracted period of slower European growth (larger than expected deleveraging or negative surprise on potential growth). | High | Medium Given links to Italy, this would likely entail slow growth in San Marino as well. |
Appendix II. Public Debt Sustainability Analysis
1. San Marino’s debt (central government level) is in a difficult trajectory. Before the crisis, gross debt was below 15 percent of GDP, and most of it was in the form of unclaimed tax refunds rather than actual borrowing. Since then, the sharp decline in revenues has turned budget surpluses into deficits, and the largest bank has required some 13 percent of GDP in public support.1 This has brought debt to 30 percent of GDP, and the increase would have been greater had the government not largely used its large cash buffers to finance its needs (cash buffers have gone from more than 15 percent of GDP in 2009 to 4 percent of GDP in 2013). Barring fiscal adjustment beyond what is already incorporated in the 2014 budget, the combination of primary deficits between 1–2 percent of GDP over the medium term together with sluggish growth will mean that debt will continue to increase and reach close to 36 percent by 2019. The government will also face significant gross financing needs in 2017 (11 percent of GDP), when it has to repay the first loan used to recapitalize CRSM.2
2. The possible need for further bank capital support represents the main risk to public finances and debt sustainability. An extreme, albeit unlikely, scenario where further recapitalization needs amount to up to 15 percent of GDP—either from further losses from CRSM’s Delta assets, or a combination of capital needs from CRSM and other banks—would place debt in an steep trajectory, reaching 55 percent of GDP in 2019. These adverse debt dynamics would hardly be sustainable in a country with still difficult access to external financing.
3. Debt dynamics highlight the need for fiscal adjustment. A gradual adjustment of 1 percent of GDP per year over 2015–17 would put debt on a downward trend if no contingent liabilities materialize, and by 2019 debt would end up some 10 percent of GDP below the baseline. Gross financing needs would also be commensurately smaller. In addition, consolidation would free up fiscal space for contingent liabilities: should these materialize, the debt path would be significantly more favorable than under no adjustment scenario (see chart).
San Marino: Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario
(in percent of GDP unless otherwise indicated)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Source: IMF staff.1/ Public sector is defined as central government.2/ Based on available data.3/ Long-term bond spread over German bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.San Marino: Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario
(in percent of GDP unless otherwise indicated)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Source: IMF staff.1/ Public sector is defined as central government.2/ Based on available data.3/ Long-term bond spread over German bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.San Marino: Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario
(in percent of GDP unless otherwise indicated)
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Source: IMF staff.1/ Public sector is defined as central government.2/ Based on available data.3/ Long-term bond spread over German bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
San Marino: Public DSA - Composition of Public Debt and Alternative Scenarios
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Source: IMF staff.San Marino: Public DSA - Composition of Public Debt and Alternative Scenarios
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Source: IMF staff.San Marino: Public DSA - Composition of Public Debt and Alternative Scenarios
Citation: IMF Staff Country Reports 2014, 104; 10.5089/9781484358801.002.A001
Source: IMF staff.This excludes interbank loans within San Marino.
As part of the Delta creditor’s agreements, CRSM holds a credit over four finance companies in Italy, which repay CRSM as they recover their own assets. This credit does not earn interest.
These two banks account for about 50 percent of banking system assets.
As discussed below, realistic fiscal consolidation would give the Senate room for significant further public recapitalization if needed, still keeping debt on a sustainable path.
The yield from indirect taxes including the monofase amounts to 10 percent of GDP, versus 12 percent in Italy and some 12½ percent on average across Europe.
For instance, GDP has been roughly flat in Emilia-Romagna over the last four years, compared with a circa 3½ percent contraction in the rest of Italy. Unemployment at less than 9 percent is also some 4 percentage points lower than in the rest of Italy.
The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline. The RAM reflects staff views on the source of the risks and overall level of concern as of the time of the discussion with the authorities.
11 percent was provided by the central government and 2 percent by the social security institute.
Note: the increase in gross financing needs in 2013 is an artificial by-product of the DSA template, given that the bond used to recapitalize CRSM was not funded but was rather issued to the bank in exchange for capital.
