Abstract
Over the last half decade, San Marino’s economy has managed to weather the implosion of its offshore banking model, the global crisis, and Italy’s decision to put San Marino on a tax blacklist. Together, these shocks resulted in a loss of a third of output since 2008, caused banking system NPLs to rise to over 40 percent—with the largest bank requiring 13 percent of GDP in public support—and pushed up net public debt by some 20 percent of GDP (from virtually nil five years ago). Looking forward, the economy is stabilizing, reflecting the inclusion of San Marino in Italy’s tax whitelist, but downside risks persist.
Context, Outlook, and Risks
1. San Marino’s offshore banking model of economic growth imploded over the last half decade. The global financial crisis and the inclusion of San Marino on Italy’s tax blacklist led to a large outflow of nonresident deposits and a sharp decrease in the size of and asset quality in its financial sector. The country’s largest bank has needed three bailouts, following the debt restructuring of its Italian Delta subsidiary. Combined with low external demand due to the crisis in Europe, this led to an extraordinary loss of a third of San Marino’s output since 2008. As the offshore banking model of growth will not return, much of this output loss likely represents a permanent level shift in GDP. The banking system remains in transition to a new business model, focused more on domestic lending.
San Marino: GDP
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Sources: National AccountsSan Marino: GDP
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Sources: National AccountsSan Marino: GDP
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Sources: National Accounts
San Marino: Banking System Assets
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Source: Central Bank of San MarinoSan Marino: Banking System Assets
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Source: Central Bank of San MarinoSan Marino: Banking System Assets
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Source: Central Bank of San Marino2. Although a sound fiscal stance before the crisis provided ample buffers, the large output decline and bank recapitalization needs have put the fiscal position under pressure. The central government balance swung from a surplus of some 2–3 percent of GDP prior to the crisis to a deficit of about 2½ percent of GDP, notwithstanding the authorities’ consolidation efforts. This, together with the fall in GDP and bank recapitalization costs, exhausted cash buffers and raised public debt to 23 percent of GDP. Furthermore, the social security fund’s position has weakened significantly.
3. The economy is exhibiting tentative signs of stabilization. The inclusion in Italy’s tax whitelist in late 2014 and stabilization of bank deposits are paving the way for a modest recovery over the next few years. Although GDP fell 4½ percent in 2013, high-frequency data such as business turnover and confidence, and decreasing bank losses, point to a more moderate contraction in 2014. Overall, the economy is estimated to have shrunk by 1 percent in 2014 and to return to modest growth of 1 percent in 2015. Meanwhile, unemployment has risen to over 8 percent.
4. Similar to a year ago, risks remain tilted to the downside, as the weak financial sector continues to cast a shadow over San Marino’s medium-term outlook (Annex I). Prolonged slow growth in Italy and the euro area remains a downside risk to growth and the financial sector going forward, through external demand and the quality of banks’ Italian assets. Much economic activity is linked closely with Italy, while 42 percent of bank assets and 25 percent of deposits are nonresident, mostly Italian. On the upside, the recent inclusion in Italy’s whitelist could stimulate bilateral economic activity more than expected. Still, high nonperforming loans (NPLs) in the banking system and the incomplete restructuring of the largest bank in the country pose vulnerabilities. Should stress in the financial system escalate, further recapitalization needs are likely to arise with direct implications for fiscal balances and growth, increasing the potential for a negative bank-sovereign feedback loop.
5. In the medium term, San Marino faces the significant challenge of adapting to the new economic environment. 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.
Authorities’ views
6. The authorities shared staff’s assessment that the economy is stabilizing. In particular, they emphasized that San Marino’s inclusion in Italy’s tax whitelist and the recent conclusion of a bilateral economic cooperation agreement will provide support to the incipient recovery. The authorities recognized the need for the economy to find a new growth model. Still, they also saw opportunities for the financial sector to grow through increased international activities once the banks will be allowed to operate in Italy as deposit-taking institutions, rather than serving Italian clients mainly from San Marino as they currently do.
Policy Discussions
A. Financial Sector
The Banking System
7. Liquidity ratios appear adequate, but NPLs have surged to over 40 percent, putting pressure on capital buffers. The ratio of liquid assets to short-term liabilities rose to 50 percent, from 30 percent in 2012. The recent Italian policy on voluntary disclosure of assets to the tax authorities—under which Italian citizens may have an incentive to repatriate offshore assets—has raised uncertainty about outflows of nonresident deposits. Still, the liquidity buffers should enable banks to withstand such withdrawals. Overall, the banking system’s capital adequacy ratio stands at 12.7 percent, well above the 11 percent minimum capital ratio, although recently recapitalized Cassa di Risparmio della Repubblica di San Marino (CRSM) still falls short with an estimated capital ratio of 7.5 percent. However, NPLs spiked by €932 million to 42 percent of total loans in the year to June 2014, from 22 percent a year earlier. Most of the increase, €876 million, was related to CRSM’s recapitalization (see below), when loans from its restructured Delta subsidiary were restructured and brought on to its own balance sheet. Still, NPLs in the rest of the system also rose significantly, in part due to strengthened enforcement of existing regulation. NPLs are concentrated in the household, construction, and service sectors and expected to remain elevated for a prolonged period of time even as the economy returns to modest growth. Since provisions did not keep up with the increase in NPLs, the coverage ratio dropped to 28 percent (33 percent for the system excluding CRSM). In the first half of 2014, losses in the banking system decreased by 20 percent year-over-year to €14 million (equivalent to 1 percent of GDP).
8. The weak asset quality raises concerns about the financial system, and may hinder economic growth. While a bank-by-bank asset quality review is needed to determine appropriate provision levels, the current level of 28 percent appears low both by historical standards (provisions stood at 44 percent on average in 2009–10) and compared with peer countries (Box 1). Underprovisioning of NPLs raises several issues. First, it taints the reliability of capital measures, as full recognition of expected losses on NPLs would negatively impact capital. This has happened already at CRSM in the recapitalization process, while at several other banks, the need to take additional provisions has affected profits. Second, banks’ incentives to sell NPLs remain weak, as such sales would result in large book losses. Third, it may reduce credit supply and limit economic adjustment if banks keep underperforming firms that are not able to repay their loans from restructuring. Lastly, forbearance with respect to provisioning may ultimately increase losses, as no action towards a solution is taken.
San Marino’s Banking System in International Perspective
With 470 percent of GDP in assets (€6.2 billion), the Sammarinese banking system is very large. However, it is much smaller than at the onset of the global financial crisis, when it accounted for 650 percent of GDP. In relative terms, it is close to Cyprus’s (575 percent of GDP) but an order of magnitude smaller than Luxembourg’s (about 2,000 percent of GDP). Overall, 40 percent of assets are claims on nonresidents. Two banks are more domestically oriented, with about 70 percent of domestic loans in their portfolio. On the funding side, 75 percent of deposits are from residents. Most banks are domestically owned.
At 28 percent, the coverage ratio of NPLs is relatively low by international standards. San Marino’s ratio is significantly below most other European countries’. While the system’s capital ratio exceeds the required level, NPLs net of provisions are very large relative to capital. Thus, higher-than-expected losses on NPLs could quickly erode capital buffers. International comparisons should be interpreted with caution, though, since restructured Delta loans on CRSM’s balance sheet account for 35 percent of system NPLs. Excluding restructured loans—which can be expected to yield relatively high recovery and hence feature relatively low provisioning rates—the coverage ratio is 42 percent. For the bad loan portfolio—the worst category of NPLs—coverage is significantly higher at 57 percent. In historical perspective, coverage is about 15 percentage points lower than in 2009–10. Overall, the NPL coverage ratio hence appears to be low.
Coverage Ratios
(Percent)
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Coverage Ratios
(Percent)
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Coverage Ratios
(Percent)
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
NPLs Net of Provisions to Capital
(Percent)
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
NPLs Net of Provisions to Capital
(Percent)
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
NPLs Net of Provisions to Capital
(Percent)
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Coverage Ratio of San Marino Banking System
(Percent)
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Sources: Central Bank of San Marino and IMF FSIs.1/ Partly reflecting CRSM provisions taken in 2012 to cover NPLs recognized in 2013.Coverage Ratio of San Marino Banking System
(Percent)
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Sources: Central Bank of San Marino and IMF FSIs.1/ Partly reflecting CRSM provisions taken in 2012 to cover NPLs recognized in 2013.Coverage Ratio of San Marino Banking System
(Percent)
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Sources: Central Bank of San Marino and IMF FSIs.1/ Partly reflecting CRSM provisions taken in 2012 to cover NPLs recognized in 2013.9. The authorities should come up with a plan to deal with low coverage ratios and potential capital shortfalls in the banking system. Failure to do so may exacerbate losses going forward and depress credit supply. Such a plan should include the following steps:
Asset quality review (AQR). An AQR is critical to reduce uncertainty by establishing a clear baseline, based on accurate loan classification, collateral valuations, and bank-by-bank assessments of expected losses and provisioning levels. These AQRs should build on the Central Bank of San Marino’s (CBSM) ongoing on-site supervisory bank inspections. In case of capacity constraints, the authorities should consider hiring external parties to perform the AQRs.
Provisioning. The CBSM should encourage banks to raise their provisions ahead of the AQR results. Once the AQR has been completed, the CBSM should demand banks bring provisions up to the needed level, while strict on-site supervision should ensure compliance with provisioning rules going forward. The CBSM should also gradually introduce more stringent provisioning requirements to ensure adequate provisioning levels in the future.
Capitalization. Higher provisions could result in capital shortfalls. Banks with capital shortfalls should retain their earnings to increase capital. Banks where retained earnings would not quickly close the gap should be given a limited amount of time to present market-based recapitalization plans to the central bank, and another time limit to execute them.
Resolution. Banks that remain critically undercapitalized should be resolved. Banks deemed systemically important should be recapitalized according to best international practices, including full unconditionally and upfront dilution of existing shareholders.
10. Foreign investment could support recapitalization efforts, but high standards should apply to investors. In particular, the authorities should carefully examine the business plans of potential foreign investors and apply best-practice fit and proper standards.
11. It is essential to address the large stock of NPLs, by escalating collection efforts and exploring sales of bad assets. Banks should pursue collection of bad loans aggressively. For some banks, setting up special purpose vehicles to host NPLs or the outright sale of part of their NPL portfolios could aid this process. In case banks lack specific collection expertise, the authorities could encourage banks to set up modalities to share such expertise (e.g., through joint training). Furthermore, the limit on tax deducibility of provisions should be raised from its current level of 5 percent of loans per annum, as it disincentivizes provisioning.
12. The plan to adopt Basel III is welcome, and there is scope to improve the supervision and resolution framework. The authorities are preparing a timeline to guide the adoption of Basel III standards by 2017. This process will allow for continued improvements in the supervisory framework, which should pay special attention to liquidity buffers, ensuring they continue to be large enough to withstand sizeable outflows of nonresident deposits. The bank resolution framework should be adapted to improve the deposit insurance system and to put speedy and least-cost resolution of failed banks at its core, amending the banking law to introduce a special bank resolution regime.
13. The role of the central bank is central to many of these recommendations. In order to deliver on the above plan on provisioning, work on the implementation of Basel III, and more generally deal with its growing set of responsibilities, the CBSM needs additional resources and independence in their deployment. Furthermore, the role of the CBSM in both the operation and supervision of pension funds needs to be reviewed to avoid conflicts of interest. Constraints on hiring foreign experts to deal with bank restructuring should be reconsidered.
Cassa di Risparmio
14. CRSM was recapitalized, but modalities did not follow best-practice. The bank has required a total of 13 percent of GDP in public support during 2012–14, with the last recapitalization agreement implemented in April 2014.1 This was due mainly to large losses on its investment in the Italian Delta group, which was intervened by Italian supervisors and put under compulsory administration. The 2013–14 recapitalization was a necessary step and introduced partial dilution of shareholders. However, the shareholders were not fully and unconditionally diluted, but instead kept a majority equity stake. And while the state now gets to nominate a majority of the banks’ board members, the foundation (CRSM’s majority shareholder) still nominates a minority of board members and has to approve any sale of the state’s shares in the bank.
15. The bank’s turnaround remains incomplete, amid continuing operational losses. Even after recapitalization, at end 2014 CRSM’s capital ratio is only 7.5 percent, €51 million short of the minimum regulatory capital. This shortfall is significantly worse than envisaged in the original recapitalization plan. Moreover, the bank continues to make losses (€31 million in 2014, compared to €36 million in 2013 and €156 million in 2012) and its provisions cover just a quarter of NPLs.
San Marino: CRSM
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Source: Central Bank of San MarinoSan Marino: CRSM
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Source: Central Bank of San MarinoSan Marino: CRSM
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Source: Central Bank of San Marino16. To limit the risk of further public support, it is important to speed up CRSM’s restructuring and improve its governance. The authorities should demand a business plan from CRSM that shows how, under a realistic but conservative scenario, the bank will become profitable and reach the minimum capital requirement within three years. Significant cost cuts and reducing the size of the balance sheet further should be part of the strategy. Adverse contingency plans should be drafted, to be prepared in case the business plan proves unsuccessful. The state should promptly appoint seasoned turnaround experts to CRSM’s board and executive positions. To facilitate this, revisions to the recapitalization agreement between the foundation and the state should be considered to give the state complete ownership and control of CRSM. Without these actions, the risk that CRSM will require further public support in the future is considerable.
Authorities’ views
17. The authorities noted that the financial system as a whole is transitioning to a new business model and that on-site bank inspections are ongoing. They thought that better relations with Italy will soon allow Sammarinese banks to operate in Italy as deposit-taking institutions, thus creating opportunities for growth. Still, they recognized this strategy remains untested. The authorities contended that judging the adequate level of provisions should depend on the composition of the NPL portfolio. In particular, a large share of NPLs concerns leasing assets, where banks own the underlying asset. They also noted that restructured Delta loans in CRSM account for a large share of total NPLs, and that, as these loans have already been restructured, their recovery rate is expected to be higher. Nonetheless, the authorities agreed on the need for AQRs for the largest banks, which the CBSM is conducting as part of its ongoing on-site inspection program.
18. On CRSM, the authorities saw getting the bank back to health as the most important challenge. They emphasized the successful recapitalization that took place last year, while acknowledging modalities deviated from best practice. Looking forward, they will carefully review the business plan CRSM recently submitted to ensure its viability.
B. Public Finances
19. The central government deficit is expected to decline slightly to 1.1 percent of GDP in 2014. After peaking at 4.1 percent of GDP in 2011, fiscal consolidation brought the deficit down to a more manageable level of 1.5 percent of GDP in 2013. The 2014 income tax reform adjusted tax brackets and reduced exemptions. Together with the introduction of an electronic certification system to enhance collection, 2014 tax revenue is projected to have increased by almost 1½ percent of GDP to 17 percent of GDP. At the same time, reining in the public sector wage bill helped contain expenditure growth. However, some of the improvement in the central government balance reflects cuts in transfers to the social security fund. Between 2012 and 2014, these transfers declined by €14 million, while the fund’s operational deficit increased by €16.5 million to €27 million (2 percent of GDP).
20. The 2015 budget preserves the consolidation efforts based on modest further efficiency gains. The authorities plan to reduce expenditure on the public administration by a further 0.2 percent of GDP, principally by reducing allowances and overtime, merging public offices, encouraging early retirement, and more generally reviewing the number of employees. Tax revenue is projected to remain stable, while expenditure on transfers to social security and interest payments are projected to increase. However, capital expenditure is expected to fall, leaving the overall balance unchanged at -1.1 percent of GDP.
21. Debt is on an upward path, projected to reach 27 percent of GDP by 2020 under a scenario without policy change. A comprehensive reassessment of outstanding tax refunds led to a sharp decrease in net accounts payable in 2011–12, revising public debt down by almost 7 percent of GDP. However, successive recapitalizations of CRSM together with budget deficits increased public debt to 23 percent of GDP at end 2014, up from 11 percent in 2007. Over the same period, government deposits decreased from 12 to 3 percent of GDP. Going forward, debt is projected to gradually increase further on moderate fiscal deficits amidst modest economic growth. Debt is mostly financed by domestic bank loans and the CRSM recapitalization bond. San Marino has not issued bonds on the international capital market.
22. Rebuilding the buffers that served San Marino well during the crisis remains paramount. Fiscal adjustment of 2½ percent in discretionary measures at the central government level, realized over five years, would put debt on a downward path. The adjustment should start in 2016, once the recovery is firmly underway, but credible plans should be announced as early as possible. Plans should be skewed towards expenditure cuts, in recognition of San Marino’s new post-crisis economic realities in which output declined by a third and hence spending as a share of GDP increased markedly compared to 2008. However, such expenditure cuts should not result in increased deficits in the social security fund. Under such a fiscal stance, the government would have sufficient fiscal buffers to withstand a contingent shock (e.g., from further bank recapitalization needs) in the magnitude of 20 percent of GDP, with debt still peaking below 50 percent of GDP (Annex II). Over the medium term, parametric reform of social security is needed to ensure its sustainability. Without it, social security balances will run down fast amid pressure to increase transfers from the central government.
23. Expenditure policy should center on curtailing the public sector wage bill, public pensions, and health benefits. A recent expenditure review suggested measures should target the public sector wage bill—both through wages (which remain some 10 percent above those in the private sector) and employment—the public pension system, and health care benefits. Such policies would reduce deficits both at the central government level as well as in the social security fund. The measures could yield some 2 percent of GDP, creating space for well-targeted increases of around ½ percent of GDP in capital spending, which has been reduced to unsustainably low levels over the last few years. Private sector participation in capital spending could be explored, as long as modalities provide real risk sharing and limit contingent liabilities.
24. The planned introduction of the VAT is welcome and efforts should be made to find additional revenue sources. In particular, a real estate tax yielding about 1 percent of GDP would provide an equitable and efficient source of income. Alternatively, raising the VAT rate above its planned level could be considered. The decision on the actual rate should be informed by an analysis of projected VAT revenue and its sensitivity to the VAT rate. Exemptions from the standard VAT rate should be limited to a narrow set of basic goods. An increase of the corporate tax rate is not advisable, as it would negatively affect competitiveness.
25. Establishing market access for the sovereign would help diversify funding sources. Even if more expensive than domestic borrowing, market access provides a crucial buffer in the event of shocks that simultaneously raise borrowing needs and leave domestic banks unable to lend to the government. Accessing the markets for the first time could involve non-negligible costs but the current international financial environment could prove attractive for issuance.
Authorities’ views
26. The authorities agreed with the importance of rebuilding fiscal buffers to cushion the impact of future shocks. In this regard, they plan to continue to curb current expenditure and reduce the deficit. This will create room for planned additional capital expenditure relating to infrastructure and a high-tech business incubator. They also saw the need for policy action to make pension liabilities sustainable. On revenues, the authorities did not believe reinstating a real estate tax is feasible and note that a higher VAT would have inflationary effects. With respect to accessing international markets, the authorities agreed on the possible benefits and noted that they are investigating various avenues for financing.
C. Structural Policies and International Cooperation
27. Recent improvements in the business environment and government policies support development of the nonbanking sector. The new simple and fast online process to establish a business and ongoing effort to simplify the registration of property should boost investment and economic activity. Once up and running, the new credit registry would facilitate access to credit. Other recent welcome government initiatives include setting up a high-tech business incubator and starting talks with Italy to allow Sammarinese companies to operate business aviation and cargo services at a nearby Italian airport. Nevertheless, it remains important to perform careful cost-benefit analysis of the incentives and tax breaks involved in such projects.
28. Changes to labor market policies and vocational training should further support employment and growth. Recently introduced incentives for employment include the establishment of entry-level wages below the lowest level in collective wage agreements, and temporary lower social security contributions when hiring unemployed workers. Further reform of the labor market, culminating in changes to the labor law, is under discussion. The process to hire nonresidents remains slow and complicated, and in practice results in hiring caps. Recent exemptions from this process for high-tech business in the incubator may provide a model for the broader economy, allowing San Marino to take greater advantage of the labor market in Emilia-Romagna, the dynamic neighboring Italian region. Unemployed workers are provided with vocational training, in order to diminish existing skills gaps. To increase the productivity of the labor force further, worker education and vocational training could be employed more broadly.
29. An inflation differential and a wage gap with Italy suggest price competitiveness may be an issue. A proxy2 for San Marino’s real effective exchange rate (REER) has fallen back to early 2008 levels, but the inflation differential with Italy continues on a gradual upward trend. Together with a 12 percent wage gap with Italy, this suggests San Marino’s REER may be overvalued. The recommended structural and fiscal policies should serve to close this gap over time.
Real Effective Exchange Rate (2008 = 100)
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Source: IFS.Real Effective Exchange Rate (2008 = 100)
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Source: IFS.Real Effective Exchange Rate (2008 = 100)
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Source: IFS.
(Percent)
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Sources: Sammarinese authorities; and IMF staff estimates.1/ Average of four industrial sectors.2/ A posititive number means Sammarinese wages are higher than Italian wages.(Percent)
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Sources: Sammarinese authorities; and IMF staff estimates.1/ Average of four industrial sectors.2/ A posititive number means Sammarinese wages are higher than Italian wages.(Percent)
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Sources: Sammarinese authorities; and IMF staff estimates.1/ Average of four industrial sectors.2/ A posititive number means Sammarinese wages are higher than Italian wages.30. International cooperation improved significantly and continued commitment in this area remains crucial for a very small open economy like San Marino. Most importantly, towards end 2014, Italy included San Marino in its tax whitelist and the bilateral economic cooperation agreement was concluded. Looking forward, the prompt conclusion of the memorandum of understanding (MoU) with the Bank of Italy that will allow the uninterrupted payment card services and may fully open the Italian banking market for Sammarinese banks is a priority. In this regard, the ongoing setup of the credit register is very important. Moreover, San Marino—together with Andorra and Monaco—has started negotiations on an association agreement with the EU, focused on fully integrating the country with the EU’s four freedoms.
31. The imminent launch of a national AML/CFT risk assessment is commendable. The authorities are also preparing to be among the early adopters of the OECD initiative for exchange of tax information (to be launched in 2017 following the FATCA model). Together with MONEYVAL’s recognition of San Marino’s anti-money laundering efforts, these actions will contribute to further shedding the perception of San Marino as an offshore haven.
Authorities’ views
32. The authorities agreed that San Marino has to diversify its economy and find a new growth model and saw their focus on international cooperation as key. They pointed to the various initiatives underway including the high-tech business incubator, a science park, and various efforts to boost tourism revenue and infrastructure more generally. The authorities are committed to simplifying bureaucracy and improving the business environment in order to both attract foreign direct investment and improve productivity for existing companies. They explained the wage cost differential with Italy is smaller than implied by the data, as wages in neighboring Italian regions are significantly above the Italian national average numbers. They are moving forward with the technical setup of the credit register, and have amended the banking law to allow for reciprocal international credit information exchange. This should allow negotiations on the MoU with the Bank of Italy to proceed, with the aim of concluding soon. Ultimately, the EU association agreement is seen as taking the country to its goal of full integration of all sectors of the Sammarinese economy into the EU single market.
D. Data Issues
33. Data provision is broadly adequate for surveillance purposes, but gaps exist. While these data gaps are not uncommon for a small country like San Marino, there is a need to improve timeliness of, in particular, national accounts and fiscal statistics and ensure consistency with international standards. Balance of payments data are not currently available, but San Marino is working with specialized IMF staff to start the compilation of these data. Importantly, banking sector data are comprehensive and timely.
Staff Appraisal
34. Over the last year, San Marino has made very significant progress normalizing international relations and it is set to emerge from a deep recession. On the back of the inclusion in Italy’s tax whitelist and the conclusion of bilateral financial and economic cooperation agreements, there are signs that the economy is stabilizing. Staff expects GDP to expand by 1 percent this year, followed by modest growth over the medium term. Nevertheless, the output loss during the crisis has been very large, and it will take a long time for GDP to return to its pre-crisis level.
35. Still, serious policy challenges remain. Liquidity conditions in the banking system improved and steps were taken in an attempt to put CRSM on sound footing. Yet, issues remain with respect to CRSM and high NPLs in the banking system more broadly.
36. CRSM needs a strong and credible business plan to minimize the risk of further public support. The plan should show how the bank will become profitable and reach the minimum capital requirement within three years. Its baseline should be based on realistic, but conservative assumptions and a contingency plan “Plan B” should spell out what will be done in case the business plan is unsuccessful. As a matter of urgency, seasoned experts to engineer a turnaround should be appointed to CRSM’s board and executive positions. Moreover, revisions to the recapitalization agreement between the foundation and the state to give the state complete ownership and control of CRSM should be considered.
37. Banks need to deal with their very large NPL portfolios in order to be able to support the recovery. They should enhance their NPL collection efforts and increase NPL provisioning. The following steps are needed to assert asset quality and increase provisions:
First, a bank-by-bank asset quality review, building on the CBSM’s ongoing bank inspections, is needed to ascertain the quality of banks’ loan portfolios. The support of external parties should be considered.
Second and in parallel with the first step, the CBSM should continue to encourage banks to increase provisions immediately since they are low by international and historical standards. Stricter on-site supervision should ensure adequate provisioning going forward.
A third step would be needed if the exercise indicates capital shortfalls. Market-based recapitalization plans would have to be presented to the CBSM. If such plans fail, banks that remained critically undercapitalized would have to be resolved. In the case of systemic banks, public support may be inevitable.
38. The Central Bank will have to play a central role in this process. In order to deliver on the plan above and deal with its growing set of responsibilities, the CBSM needs additional resources and independence in their deployment.
39. Further fiscal effort is needed to rebuild the buffers San Marino had before the crisis. Without these buffers, the crisis would have been even deeper and the state could not have cushioned social expenditure. The central government’s fiscal position has worsened as tax receipts declined, but efforts over the last two years to reduce the deficit represent important steps in the right direction. Furthermore, the balance of the social security institute has deteriorated significantly. To strengthen the fiscal balance further, the authorities should design a multi-year strategy, with implementation starting in 2016 once the economy is solidly growing again.
40. The fiscal strategy should aim to lower overall expenditure, while modestly increasing tax revenue. Overall, 2½ percent of GDP in measures over five years are needed to start rebuilding buffers. Areas for action identified by a recent spending review include the public sector wage bill, pensions, and health costs. A real estate tax would be the optimal choice to increase tax revenue, as it provides an equitable and efficient source of income. Alternatively, a slight increase in the envisaged VAT rate could be considered. This fiscal strategy would also create space for the authorities’ planned timely increase in capital spending. Still, over the medium term, parametric reform of social security is needed to ensure its sustainability. The authorities should also consider modest borrowing in international capital markets, as establishing market access would provide an important additional buffer to deal with shocks.
41. San Marino has recently achieved very important milestones in international cooperation. The inclusion in Italy’s tax whitelist is a key step, as is MONEYVAL’s report on anti-money laundering efforts. Continued international cooperation building on these achievements is essential for a new growth model to emerge. Priority should be given to concluding the MoU with the Bank of Italy in the near term. Negotiating an association agreement with the EU is a key medium-term priority.
42. Recent improvements in the business environment are a welcome development. Efforts to speed up the process of starting a business and simplify the registration of property should support economic activity. Completion of the ongoing work to create a credit registry will improve access to credit. Government initiatives such as the high-tech incubator are positive as long as their fiscal costs are monitored closely.
43. It is recommended that the next Article IV consultation with the Republic of San Marino be held on the standard 12-month cycle.
San Marino: Recent Economic Developments, 2006-15
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Sources: CBSM;IMF, International Financial Statistics; UPECEDS; and IMF staff calculations.San Marino: Recent Economic Developments, 2006-15
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Sources: CBSM;IMF, International Financial Statistics; UPECEDS; and IMF staff calculations.San Marino: Recent Economic Developments, 2006-15
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Sources: CBSM;IMF, International Financial Statistics; UPECEDS; and IMF staff calculations.
San Marino: Financial Sector Indicators, 2008-14
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.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, 2008-14
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.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, 2008-14
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.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, 2012-16
For the central government. Does not include possible costs of future bank recapitalization.
For 2014, latest available.
Based on total loan loss provision, which covers nonperforming and performing loans.
San Marino: Selected Economic and Social Indicators, 2012-16
| GDP per capita (2013): 56,112 U.S. dollars | Life expectancy at birth (2010): 83.2 years | |||||||
|---|---|---|---|---|---|---|---|---|
| Population (December 2013): 31,460 persons | Literacy, adult (2008): 96 percent | |||||||
| Projection | ||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | ||||
| Activity and Prices | ||||||||
| Real GDP (percent change) | -7.5 | -4.5 | -1.0 | 1.0 | 1.1 | |||
| Domestic demand | -4.6 | -2.9 | … | … | … | |||
| Final consumption | 0.0 | -1.4 | … | … | … | |||
| Fixed investment | -13.0 | -8.4 | … | … | … | |||
| Net exports (contribution to growth) | -4.1 | -2.3 | … | … | … | |||
| Exports | -9.8 | -6.6 | … | … | … | |||
| Imports | -8.9 | -6.1 | … | … | … | |||
| Employment (percent change) | -2.6 | -1.3 | -0.8 | … | … | |||
| Unemployment rate (average; percent) | 6.9 | 8.1 | 8.7 | … | … | |||
| Inflation rate (average; percent) | 2.8 | 1.3 | 1.1 | 0.4 | 0.9 | |||
| Nominal GDP (millions of euros) | 1401.5 | 1357.1 | 1343.5 | 1363.3 | 1392.1 | |||
| Public Finances (percent of GDP) 1/ | ||||||||
| Revenues | 20.4 | 20.3 | 22.1 | 21.5 | 21.5 | |||
| Expenditure | 23.0 | 21.8 | 23.2 | 22.7 | 22.8 | |||
| Overall balance | -2.6 | -1.5 | -1.1 | -1.1 | -1.2 | |||
| Government debt | 15.4 | 21.6 | 22.9 | 23.7 | 24.4 | |||
| Loans | 7.1 | 14.3 | 14.9 | 15.8 | 16.7 | |||
| Net account payables | 8.3 | 7.3 | 8.0 | 7.9 | 7.8 | |||
| Government deposits (millions of euros) | 72.9 | 55.9 | 40.4 | 45.0 | 45.0 | |||
| Money and Credit | ||||||||
| Deposits (percent change) | -6.3 | -6.5 | … | … | … | |||
| Private sector credit (percent change) | 11.4 | -8.7 | … | … | … | |||
| Net foreign assets (percent of GDP) | 38.4 | 47.1 | … | … | … | |||
| Commercial banks | 21.9 | 31.8 | … | … | … | |||
| Central bank | 16.5 | 15.2 | … | … | … | |||
| External Accounts (percent of GDP) | ||||||||
| Balance of goods and services | 21.6 | 21.7 | … | … | … | |||
| Exports | 178.7 | 171.4 | … | … | … | |||
| Imports | 157.1 | 149.7 | … | … | … | |||
| Gross international reserves (millions of U.S. dollars) | 308.6 | 539.3 | … | … | … | |||
| Exchange Rate (average) | ||||||||
| Euros per U.S. dollar | 0.78 | 0.75 | 0.75 | … | … | |||
| Real exchange rate vis-à-vis Italy | 98.0 | 100.0 | … | … | … | |||
| Financial Soundness Indicators (percent) 2/ | ||||||||
| Regulatory capital to risk-weighted assets | 8.8 | 13.6 | 13.0 | … | … | |||
| Bad loans to total loans | 9.6 | 13.9 | 15.3 | … | … | |||
| Loan loss provision to total loans 3/ | 13.3 | 11.5 | 11.8 | … | … | |||
| Return on equity (ROE) | -77.0 | -7.5 | … | … | … | |||
| Liquid assets to total assets | 16.1 | 15.3 | 16.5 | … | … | |||
| Liquid assets to short-term liabilities | 31.7 | 42.8 | 46.6 | … | … | |||
For the central government. Does not include possible costs of future bank recapitalization.
For 2014, latest available.
Based on total loan loss provision, which covers nonperforming and performing loans.
San Marino: Selected Economic and Social Indicators, 2012-16
| GDP per capita (2013): 56,112 U.S. dollars | Life expectancy at birth (2010): 83.2 years | |||||||
|---|---|---|---|---|---|---|---|---|
| Population (December 2013): 31,460 persons | Literacy, adult (2008): 96 percent | |||||||
| Projection | ||||||||
| 2012 | 2013 | 2014 | 2015 | 2016 | ||||
| Activity and Prices | ||||||||
| Real GDP (percent change) | -7.5 | -4.5 | -1.0 | 1.0 | 1.1 | |||
| Domestic demand | -4.6 | -2.9 | … | … | … | |||
| Final consumption | 0.0 | -1.4 | … | … | … | |||
| Fixed investment | -13.0 | -8.4 | … | … | … | |||
| Net exports (contribution to growth) | -4.1 | -2.3 | … | … | … | |||
| Exports | -9.8 | -6.6 | … | … | … | |||
| Imports | -8.9 | -6.1 | … | … | … | |||
| Employment (percent change) | -2.6 | -1.3 | -0.8 | … | … | |||
| Unemployment rate (average; percent) | 6.9 | 8.1 | 8.7 | … | … | |||
| Inflation rate (average; percent) | 2.8 | 1.3 | 1.1 | 0.4 | 0.9 | |||
| Nominal GDP (millions of euros) | 1401.5 | 1357.1 | 1343.5 | 1363.3 | 1392.1 | |||
| Public Finances (percent of GDP) 1/ | ||||||||
| Revenues | 20.4 | 20.3 | 22.1 | 21.5 | 21.5 | |||
| Expenditure | 23.0 | 21.8 | 23.2 | 22.7 | 22.8 | |||
| Overall balance | -2.6 | -1.5 | -1.1 | -1.1 | -1.2 | |||
| Government debt | 15.4 | 21.6 | 22.9 | 23.7 | 24.4 | |||
| Loans | 7.1 | 14.3 | 14.9 | 15.8 | 16.7 | |||
| Net account payables | 8.3 | 7.3 | 8.0 | 7.9 | 7.8 | |||
| Government deposits (millions of euros) | 72.9 | 55.9 | 40.4 | 45.0 | 45.0 | |||
| Money and Credit | ||||||||
| Deposits (percent change) | -6.3 | -6.5 | … | … | … | |||
| Private sector credit (percent change) | 11.4 | -8.7 | … | … | … | |||
| Net foreign assets (percent of GDP) | 38.4 | 47.1 | … | … | … | |||
| Commercial banks | 21.9 | 31.8 | … | … | … | |||
| Central bank | 16.5 | 15.2 | … | … | … | |||
| External Accounts (percent of GDP) | ||||||||
| Balance of goods and services | 21.6 | 21.7 | … | … | … | |||
| Exports | 178.7 | 171.4 | … | … | … | |||
| Imports | 157.1 | 149.7 | … | … | … | |||
| Gross international reserves (millions of U.S. dollars) | 308.6 | 539.3 | … | … | … | |||
| Exchange Rate (average) | ||||||||
| Euros per U.S. dollar | 0.78 | 0.75 | 0.75 | … | … | |||
| Real exchange rate vis-à-vis Italy | 98.0 | 100.0 | … | … | … | |||
| Financial Soundness Indicators (percent) 2/ | ||||||||
| Regulatory capital to risk-weighted assets | 8.8 | 13.6 | 13.0 | … | … | |||
| Bad loans to total loans | 9.6 | 13.9 | 15.3 | … | … | |||
| Loan loss provision to total loans 3/ | 13.3 | 11.5 | 11.8 | … | … | |||
| Return on equity (ROE) | -77.0 | -7.5 | … | … | … | |||
| Liquid assets to total assets | 16.1 | 15.3 | 16.5 | … | … | |||
| Liquid assets to short-term liabilities | 31.7 | 42.8 | 46.6 | … | … | |||
For the central government. Does not include possible costs of future bank recapitalization.
For 2014, latest available.
Based on total loan loss provision, which covers nonperforming and performing loans.
San Marino: Financial Soundness Indicators, 2009–14
Before extraordinary items and taxes.
After extraordinary items and taxes, and before provision to fund for general banking risk.
San Marino: Financial Soundness Indicators, 2009–14
| 2009 | 2010 | 2011 | 2012 | 2013 | Jun-14 | ||
|---|---|---|---|---|---|---|---|
| Capital adequacy ratios (percent) | |||||||
| Regulatory capital to risk-weighted assets | 16.9 | 15.6 | 14.1 | 8.8 | 13.6 | 13.0 | |
| Capital to assets | 11.1 | 9.9 | 9.6 | 8.2 | 9.4 | 8.5 | |
| Asset quality ratios (percent) | |||||||
| Bad loans to total loans | 2.9 | 5.9 | 7.2 | 9.6 | 13.9 | 15.3 | |
| Nonperforming loans to total loans | 8.5 | 15.0 | 34.1 | 20.4 | 42.3 | 42.3 | |
| Bad loans net of provision to capital | 7.2 | 17.6 | 28.7 | 41.3 | 47.3 | 59.1 | |
| Nonperforming loans net of provision to capital | 22.9 | 52.5 | 205.8 | 82.4 | 249.1 | 274.3 | |
| Coverage ratio | 45.7 | 42.3 | 27.7 | 58.8 | 27.1 | 27.8 | |
| Earning and profitability (percent) | |||||||
| Return on assets (ROA) 1/ | -1.4 | -2.7 | -6.6 | -10.9 | -1.5 | … | |
| Return on assets (ROA) 2/ | -1.6 | -2.6 | -2.4 | -6.9 | -0.7 | … | |
| Return on equity (ROE) 1/ | -13.1 | -25.2 | -67.9 | -121.5 | -15.8 | … | |
| Return on equity (ROE) 2/ | -14.4 | -24.4 | -24.4 | -77.0 | -7.5 | … | |
| Interest margin to gross income | 51.4 | 49.0 | 65.8 | 51.9 | 42.2 | … | |
| Non-interest expenses to gross income | 52.2 | 68.5 | 83.2 | 88.7 | 114.3 | … | |
| Trading income to gross income | 11.0 | 1.3 | -7.0 | 8.7 | 8.4 | … | |
| Administrative expenses to non-interest expenditures | 51.3 | 61.9 | 69.2 | 69.7 | 66.1 | … | |
| Liquidity (percent) | |||||||
| Liquid assets to total assets | 25.5 | 17.1 | 15.0 | 16.1 | 15.3 | 16.5 | |
| Liquid assets to short-term liabilities | … | … | … | 31.7 | 42.8 | 46.6 | |
| Loans to deposits | 88.5 | 101.4 | 91.6 | 108.7 | 109.0 | 86.4 | |
Before extraordinary items and taxes.
After extraordinary items and taxes, and before provision to fund for general banking risk.
San Marino: Financial Soundness Indicators, 2009–14
| 2009 | 2010 | 2011 | 2012 | 2013 | Jun-14 | ||
|---|---|---|---|---|---|---|---|
| Capital adequacy ratios (percent) | |||||||
| Regulatory capital to risk-weighted assets | 16.9 | 15.6 | 14.1 | 8.8 | 13.6 | 13.0 | |
| Capital to assets | 11.1 | 9.9 | 9.6 | 8.2 | 9.4 | 8.5 | |
| Asset quality ratios (percent) | |||||||
| Bad loans to total loans | 2.9 | 5.9 | 7.2 | 9.6 | 13.9 | 15.3 | |
| Nonperforming loans to total loans | 8.5 | 15.0 | 34.1 | 20.4 | 42.3 | 42.3 | |
| Bad loans net of provision to capital | 7.2 | 17.6 | 28.7 | 41.3 | 47.3 | 59.1 | |
| Nonperforming loans net of provision to capital | 22.9 | 52.5 | 205.8 | 82.4 | 249.1 | 274.3 | |
| Coverage ratio | 45.7 | 42.3 | 27.7 | 58.8 | 27.1 | 27.8 | |
| Earning and profitability (percent) | |||||||
| Return on assets (ROA) 1/ | -1.4 | -2.7 | -6.6 | -10.9 | -1.5 | … | |
| Return on assets (ROA) 2/ | -1.6 | -2.6 | -2.4 | -6.9 | -0.7 | … | |
| Return on equity (ROE) 1/ | -13.1 | -25.2 | -67.9 | -121.5 | -15.8 | … | |
| Return on equity (ROE) 2/ | -14.4 | -24.4 | -24.4 | -77.0 | -7.5 | … | |
| Interest margin to gross income | 51.4 | 49.0 | 65.8 | 51.9 | 42.2 | … | |
| Non-interest expenses to gross income | 52.2 | 68.5 | 83.2 | 88.7 | 114.3 | … | |
| Trading income to gross income | 11.0 | 1.3 | -7.0 | 8.7 | 8.4 | … | |
| Administrative expenses to non-interest expenditures | 51.3 | 61.9 | 69.2 | 69.7 | 66.1 | … | |
| Liquidity (percent) | |||||||
| Liquid assets to total assets | 25.5 | 17.1 | 15.0 | 16.1 | 15.3 | 16.5 | |
| Liquid assets to short-term liabilities | … | … | … | 31.7 | 42.8 | 46.6 | |
| Loans to deposits | 88.5 | 101.4 | 91.6 | 108.7 | 109.0 | 86.4 | |
Before extraordinary items and taxes.
After extraordinary items and taxes, and before provision to fund for general banking risk.
San Marino: Statement of Operations for Budgetary Central Government, 2009–16
(Percent of GDP)
Does not reflect the introduction of the VAT, planned for 2016.
San Marino: Statement of Operations for Budgetary Central Government, 2009–16
(Percent of GDP)
| Projection | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||
| Revenue | 19.1 | 19.0 | 18.3 | 20.4 | 20.3 | 22.1 | 21.5 | 21.5 | |||
| Taxes | 14.5 | 14.2 | 13.0 | 14.6 | 15.1 | 16.6 | 16.6 | 16.6 | |||
| Income Taxes | 7.1 | 7.5 | 7.1 | 7.0 | 7.7 | 8.0 | 7.9 | 7.9 | |||
| Non-income taxes 1/ | 7.3 | 6.7 | 5.9 | 7.6 | 7.4 | 8.6 | 8.6 | 8.6 | |||
| Taxes on international trade and transactions | 4.4 | 4.0 | 3.5 | 4.5 | 5.3 | 6.3 | 6.4 | 6.4 | |||
| Other taxes | 2.9 | 2.7 | 2.5 | 3.0 | 2.2 | 2.2 | 2.2 | 2.2 | |||
| Non-tax revenue | 4.6 | 4.8 | 5.3 | 5.8 | 5.2 | 5.6 | 5.0 | 5.0 | |||
| Expenditure | 21.7 | 21.4 | 22.4 | 23.0 | 21.8 | 23.2 | 22.7 | 22.8 | |||
| Current Expenditure | 18.1 | 18.9 | 19.8 | 20.7 | 20.4 | 20.7 | 21.0 | 21.1 | |||
| Compensation of employees | 6.8 | 7.3 | 7.7 | 8.0 | 8.3 | 8.0 | 7.9 | 7.9 | |||
| Use of goods and services | 1.8 | 1.8 | 2.0 | 2.1 | 2.0 | 2.5 | 2.3 | 2.3 | |||
| Interest | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.3 | 0.3 | 0.4 | |||
| Transfers | 9.2 | 9.4 | 9.7 | 10.2 | 9.8 | 9.5 | 10.0 | 10.1 | |||
| To other general government units | 8.4 | 8.7 | 8.7 | 9.4 | 9.1 | 8.8 | 9.3 | 9.4 | |||
| Other expenses (including subsidies) | 0.3 | 0.3 | 0.3 | 0.3 | 0.3 | 0.4 | 0.4 | 0.4 | |||
| Capital Expense | 3.5 | 2.6 | 2.6 | 2.2 | 1.4 | 2.5 | 1.6 | 1.6 | |||
| Net lending (+)/borrowing (-) (fiscal balance) | -2.6 | -2.4 | -4.1 | -2.6 | -1.5 | -1.1 | -1.1 | -1.2 | |||
| Memorandum items | |||||||||||
| Social Seurity balance | … | … | -0.2 | -0.8 | -0.8 | -2.0 | … | … | |||
| Public debt | 17.5 | 17.5 | 14.7 | 15.4 | 21.6 | 22.9 | 23.7 | 24.4 | |||
| Loans | 3.7 | 3.4 | 3.2 | 7.1 | 14.3 | 14.9 | 15.8 | 16.7 | |||
| Net accounts payable | 13.8 | 14.1 | 11.5 | 8.3 | 7.3 | 8.0 | 7.9 | 7.8 | |||
| Government deposits | 15.1 | 13.5 | 10.4 | 5.2 | 4.1 | 3.0 | 3.3 | 3.2 | |||
| Nominal GDP (in millions of euros) | 1700.8 | 1615.3 | 1477.5 | 1401.5 | 1357.1 | 1343.5 | 1363.3 | 1392.1 | |||
Does not reflect the introduction of the VAT, planned for 2016.
San Marino: Statement of Operations for Budgetary Central Government, 2009–16
(Percent of GDP)
| Projection | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||
| Revenue | 19.1 | 19.0 | 18.3 | 20.4 | 20.3 | 22.1 | 21.5 | 21.5 | |||
| Taxes | 14.5 | 14.2 | 13.0 | 14.6 | 15.1 | 16.6 | 16.6 | 16.6 | |||
| Income Taxes | 7.1 | 7.5 | 7.1 | 7.0 | 7.7 | 8.0 | 7.9 | 7.9 | |||
| Non-income taxes 1/ | 7.3 | 6.7 | 5.9 | 7.6 | 7.4 | 8.6 | 8.6 | 8.6 | |||
| Taxes on international trade and transactions | 4.4 | 4.0 | 3.5 | 4.5 | 5.3 | 6.3 | 6.4 | 6.4 | |||
| Other taxes | 2.9 | 2.7 | 2.5 | 3.0 | 2.2 | 2.2 | 2.2 | 2.2 | |||
| Non-tax revenue | 4.6 | 4.8 | 5.3 | 5.8 | 5.2 | 5.6 | 5.0 | 5.0 | |||
| Expenditure | 21.7 | 21.4 | 22.4 | 23.0 | 21.8 | 23.2 | 22.7 | 22.8 | |||
| Current Expenditure | 18.1 | 18.9 | 19.8 | 20.7 | 20.4 | 20.7 | 21.0 | 21.1 | |||
| Compensation of employees | 6.8 | 7.3 | 7.7 | 8.0 | 8.3 | 8.0 | 7.9 | 7.9 | |||
| Use of goods and services | 1.8 | 1.8 | 2.0 | 2.1 | 2.0 | 2.5 | 2.3 | 2.3 | |||
| Interest | 0.1 | 0.1 | 0.1 | 0.1 | 0.1 | 0.3 | 0.3 | 0.4 | |||
| Transfers | 9.2 | 9.4 | 9.7 | 10.2 | 9.8 | 9.5 | 10.0 | 10.1 | |||
| To other general government units | 8.4 | 8.7 | 8.7 | 9.4 | 9.1 | 8.8 | 9.3 | 9.4 | |||
| Other expenses (including subsidies) | 0.3 | 0.3 | 0.3 | 0.3 | 0.3 | 0.4 | 0.4 | 0.4 | |||
| Capital Expense | 3.5 | 2.6 | 2.6 | 2.2 | 1.4 | 2.5 | 1.6 | 1.6 | |||
| Net lending (+)/borrowing (-) (fiscal balance) | -2.6 | -2.4 | -4.1 | -2.6 | -1.5 | -1.1 | -1.1 | -1.2 | |||
| Memorandum items | |||||||||||
| Social Seurity balance | … | … | -0.2 | -0.8 | -0.8 | -2.0 | … | … | |||
| Public debt | 17.5 | 17.5 | 14.7 | 15.4 | 21.6 | 22.9 | 23.7 | 24.4 | |||
| Loans | 3.7 | 3.4 | 3.2 | 7.1 | 14.3 | 14.9 | 15.8 | 16.7 | |||
| Net accounts payable | 13.8 | 14.1 | 11.5 | 8.3 | 7.3 | 8.0 | 7.9 | 7.8 | |||
| Government deposits | 15.1 | 13.5 | 10.4 | 5.2 | 4.1 | 3.0 | 3.3 | 3.2 | |||
| Nominal GDP (in millions of euros) | 1700.8 | 1615.3 | 1477.5 | 1401.5 | 1357.1 | 1343.5 | 1363.3 | 1392.1 | |||
Does not reflect the introduction of the VAT, planned for 2016.
Appendix I. Risk Assessment Matrix1
| Risk | Relative likelihood | Impact if realized | Policy Response |
|---|---|---|---|
| Protracted period of slower growth in advanced economies, and Italy and the Euro area in particular. Lower-than-anticipated potential growth and persistently low inflation due to a failure to fully address the legacies of the financial crisis, leading to secular stagnation and lower commodity prices. | High | High Given extensive financial and real links with Italy and advanced Europe, the impact on the Sammarinese economy would be large and direct. |
|
| Higher medium-term growth from inclusion in Italy’s tax whitelist. | Medium | Medium The industrial and service sectors could bounce back, boosting growth, tax revenue, and banks’ margins. |
|
| A surge in global financial volatility, as investors reassess underlying risk. | High | Low The banking system is not active on the international capital markets and does not rely on wholesale funding. |
|
| Further modest public bank recaps. | High | Medium Public finances could cope with modest further bank recapitalization needs. |
|
| Failure to clean up bank balance sheets, leading to a loss of confidence in the system. | Medium | High A loss of confidence in the system would likely lead to large public recapitalization needs and would have significant growth and fiscal implications. |
|
| 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. |
|
| Tensions with neighboring Italy resurface. | Low | High Persistent tensions would dissuade some Italian corporates and banks from doing business with San Marino, thus affecting growth. |
|
| Risk | Relative likelihood | Impact if realized | Policy Response |
|---|---|---|---|
| Protracted period of slower growth in advanced economies, and Italy and the Euro area in particular. Lower-than-anticipated potential growth and persistently low inflation due to a failure to fully address the legacies of the financial crisis, leading to secular stagnation and lower commodity prices. | High | High Given extensive financial and real links with Italy and advanced Europe, the impact on the Sammarinese economy would be large and direct. |
|
| Higher medium-term growth from inclusion in Italy’s tax whitelist. | Medium | Medium The industrial and service sectors could bounce back, boosting growth, tax revenue, and banks’ margins. |
|
| A surge in global financial volatility, as investors reassess underlying risk. | High | Low The banking system is not active on the international capital markets and does not rely on wholesale funding. |
|
| Further modest public bank recaps. | High | Medium Public finances could cope with modest further bank recapitalization needs. |
|
| Failure to clean up bank balance sheets, leading to a loss of confidence in the system. | Medium | High A loss of confidence in the system would likely lead to large public recapitalization needs and would have significant growth and fiscal implications. |
|
| 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. |
|
| Tensions with neighboring Italy resurface. | Low | High Persistent tensions would dissuade some Italian corporates and banks from doing business with San Marino, thus affecting growth. |
|
Appendix II. Public Sector Debt Sustainability
1. San Marino’s central government debt is on an upward trajectory. Before the crisis, gross debt was mostly in the form of unclaimed tax refunds and stood below 15 percent of GDP. Net debt was negative, as the government held cash buffers slightly in excess of gross debt. However, the sharp decline in revenues triggered by the crisis swung budget surpluses into deficits. In addition, financial support to the largest bank amounting to 13 percent of GDP1 increased debt to about 23 percent of GDP. Over the same timeframe, the government almost depleted its large cash buffers (cash buffers diminished to 3 percent of GDP in 2014). Based on current policies, the central government deficit is projected to remain around 1–1½ percent of GDP implying further increases in the debt to GDP ratio to 27 percent by 2020 (Figure A2.1).
San Marino: Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario
(in percent of GDP unless otherwise indicated)
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Source: IMF staff.1/ Public sector is defined as central government2/ 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(l+g) - g + ae(l+r)]/(l+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 2015, 094; 10.5089/9781484316665.002.A001
Source: IMF staff.1/ Public sector is defined as central government2/ 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(l+g) - g + ae(l+r)]/(l+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 2015, 094; 10.5089/9781484316665.002.A001
Source: IMF staff.1/ Public sector is defined as central government2/ 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(l+g) - g + ae(l+r)]/(l+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.2. The possible need for further bank capital support represents the main risk to public finances and debt sustainability. A shock scenario where further recapitalization needs amount to 20 percent of GDP—reflecting a combination of further capital for CRSM as well as other banks—would increase debt and, without a change in the fiscal stance, set it on an upward trajectory, reaching almost 50 percent of GDP by 2020. Such dynamics may prove unsustainable in a country without a track record of sovereign bond issuance and hence untested ability to access external financing.
3. These observations highlight the need for fiscal adjustment. Staff’s suggested adjustment of 2½ percent of GDP would put debt on a downward trend—providing fiscal space for contingent liabilities (Figure A2.2). Accounting for such adjustment, debt would peak just below 45 percent of GDP in 2016 even after a 20 percent of GDP contingent shock.
San Marino: Public Sector DSA - Composition of Public Debt and Alternative Scenarios
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Source: IMF staff.San Marino: Public Sector DSA - Composition of Public Debt and Alternative Scenarios
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Source: IMF staff.San Marino: Public Sector DSA - Composition of Public Debt and Alternative Scenarios
Citation: IMF Staff Country Reports 2015, 094; 10.5089/9781484316665.002.A001
Source: IMF staff.The agreement was negotiated in 2013 and discussed in last year’s staff report (IMF Country Report 14/104).
Italy’s REER corrected for differences in developments in the consumer price index for Italy and San Marino.
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.
