Samoa
Staff Report for the 2015 Article IV Consultation —Debt Sustainability Analysis
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
20 Jul 2015
eISBN:
9781513568713
Language:
English
Keywords:
ISCR; CR; deficit; current account; real GDP; Samoa; authority; reconstruction effort; PFTAC TA; U.S. dollar; external shock; monetary policy transmission mechanism; Samoan authorities; monetary policy stance; growth path; exogenous Shock Facility; PFI credit; rekindling growth; Credit; Commercial banks; Natural disasters; Pacific Islands; Global; Australia and New Zealand; debt target; flows shock; GDP ratio; sustainability framework; public sector debt sustainability framework; Debt sustainability analysis; Public and publicly-guaranteed external debt; Debt sustainability
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SAMOA

Abstract

SAMOA

Contents

SAMOA

STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITY ANALYSIS

May 14, 2015

Approved By

Hoe Ee Khor and Masato Miyazaki (IMF), Satu Kristiina Kahkonen (IDA)

Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA)1

This Debt Sustainability Analysis (DSA) shows the risk rating for debt distress for Samoa has changed from high to moderate since the 2013 DSA, reflecting an increase in the discount rate to 5 percent,2 and a rebasing of GDP.3 Samoa faces a moderate risk of debt distress, based on an assessment of public external debt. This assessment does not change when remittances are added to the denominators of the relevant ratios. Samoa faces a heightened overall risk of public debt distress, reflecting contingent liabilities from government guarantees and on-lending to public enterprises in public financial institutions (PFIs) and state-owned enterprises (SOEs). These risks could materialize if the government does not follow through on its plans to reduce risks in PFIs and undertake a fiscal consolidation in the next few years.

Background

1. Samoa’s public debt has increased significantly over the past six years. Overall public debt rose from around 30 percent of GDP at end-2007/08 to about 55 percent of GDP at end-2013/14, as a result of two natural disasters which required reconstruction and rehabilitation expenditures. Recently the government has signed a U.S. $51 million loan with China, which if disbursed over three years would bring the debt ratio to 56 percent of GDP in 2017. External debt makes up 98 percent of the total, with most being concessional. Multilateral creditors account for 58 percent of total external debt (including 25 percent owed to the World Bank, 31 percent to Asian Development Bank, and 2 percent to OPEC, IFAD and EIB). Bilateral creditors account for approximately 42 percent of the total external debt (35 percent owed to China and 6 percent to Japan). The grant element of external debt is 40 percent. There is no external private debt.

2. The central government’s net domestic debt is small, amounting to 2 percent of GDP, but domestic liabilities in public financial institutions and SOEs could add 24 percent of GDP to the debt ratio. Much of the debt in public financial institutions enjoys an explicit government guarantee, and in addition, SOE liabilities (also implicitly guaranteed by the government) represent a fiscal risk (e.g. in 2013/14, the government took over the defaulted loan to the Pacific Forum Line of around SAT 16 million provided by the Unit Trust Of Samoa (UTOS) with a government guarantee). The government continues to support loss-making SOEs through soft loans or investments directed through the public financial institutions.

3. Samoa’s debt management, monitoring and reporting capacity is good relative to other Pacific Island countries. Samoa has developed a medium-term debt management strategy (MTDS 2013-2015) which establishes the government’s objectives, strategies and management of public debt, and it regularly reports and publishes information on public debt. The MTDS limits approval of external loans to those with a 35 percent grant element and a minimum positive economic return to cover interest and repayments. It also introduces mechanisms to monitor the risk of default from government guaranteed loans and monitor risks from the composition and maturity profile of public debt.

Underlying Assumptions

4. The economy is recovering from the effects of cyclone Evan which hit in 2012/13. Real GDP growth was around 2 percent in 2013/14 led by a recovery in agriculture, reconstruction and preparations for the United Nations Third International Conference on Small Island Developing States (SIDS). Real GDP growth is expected to be around 2½ percent in 2014/15, boosted by the hosting of the SIDS conference, the decline in oil prices and other one-off events. In the following two years, growth is expected to fall as the exit of Yazaki corporation’s harness assembly plant, a major employer, affects overall activity. The current account deficit widened to around 8 percent of GDP in 2013/14 as recovery took hold, but is expected to narrow with the fall in oil prices and recovery of agriculture and tourism. Box 1 summarizes the medium-term macroeconomic framework underlying this DSA update.

External Dsa

5. The baseline scenario indicates that all external debt ratios stay well below the indicative thresholds. Under the baseline, the present value (PV) of debt-to-GDP ratio remains below the thresholds over the projection period (Figure 1a). Samoa’s public external debt service ratios are also relatively low, reflecting that most of its public external debt is highly concessional.

Figure 1a.
Figure 1a.

Samoa: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2015–2035, Excluding Remittances

Citation: IMF Staff Country Reports 2015, 191; 10.5089/9781513568713.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2025. In figure b. it corresponds to a non-debt flows shock; in c. to a non-debt flows shock; in d. to a non-debt flows shock; in e. to a non-debt flows shock and in figure f. to a one-time depreciation shock. Non-debt flows consist of remittances and net FDI.

6. Stress tests show Samoa faces moderate risk of debt distress.4 Under the most extreme shock scenario (“Non-debt flows shock”), a sharp decline in remittances or FDI would lead to a breach in the PV of debt to GDP ratio in the near term. Over time, however, the debt dynamics are projected to improve, as the one-off effects of the shocks wind down. Staff assumes the scenario is plausible, given uncertainty of remittances (e.g. potential slowdown in source countries and increasing costs related to anti-money laundering compliance requirements). Under an additional natural disaster shock scenario, which assumes a disaster occurs within the next five years that reduces real GDP growth by 4 percentage points and adds 10 percent of GDP to the public external debt (based on a synthetic control exercise) Samoa’s external debt comes close to the indicative threshold in 2017, but falls steadily thereafter.

7. The results of this analysis do not change if remittances are added to the denominators of the relevant ratios (Figure 1b). Including remittances affords an additional buffer for the external debt indicators, but the relevant thresholds for the PV of debt-to-GDP and the PV of debt-to-exports are still breached in the case of a most extreme shock scenario.

Figure 1b.
Figure 1b.

Samoa: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2015–2035, Including Remittances

Citation: IMF Staff Country Reports 2015, 191; 10.5089/9781513568713.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2025. In figure b. it corresponds to a non-debt flows shock; in c. to a non-debt flows shock; in d. to a non-debt flows shock; in e. to a non-debt flows shock and in figure f. to a one-time depreciation shock. Non-debt flows consist of remittances and net FDI.

Public Dsa

8. The overall public debt dynamics are favorable, but there are risks stemming from the fiscal-financial linkages and a failure to consolidate the fiscal position. Taking into account that the government has assumed the defaulted loans of the SOEs in recent years, the baseline includes the SOE liabilities and government on-lending to the SOEs (through the PFIs), which adds 24 percentage points to the debt ratio in 2014. Explicit government guarantees (e.g. on-lending through the public financial institutions5) are estimated to amount to 7 percent of GDP at end-2014. SOE liabilities6 are about 17 percent of GDP, excluding on-lent amounts (explicit guarantees) and inter-SOE loans. Under this baseline scenario, the public debt burden remains at a high level over the projection period, but still below the benchmark (Figure 2). However, a failure to consolidate the fiscal position would lead to a protracted breach in the benchmark for the PV of debt-to-GDP ratio starting in 2019, as shown in the alternative scenario (“Fixed Primary Balance”) for the public DSA. In addition, under the most extreme shock scenario (“one time 30 percent depreciation”), there is a protracted breach of the benchmark for the PV of debt-to-GDP ratio, however the debt ratio falls back below the benchmark in 2020.

Figure 2.
Figure 2.

Samoa: Indicators of Public Debt Under Alternative Scenarios, 2015–2035 1/

Citation: IMF Staff Country Reports 2015, 191; 10.5089/9781513568713.002.A003

Sources: Country authorities; and staff estimates and projections.1/ Includes 24 percent of GDP of contingent liabilities from PFIs and SOEs.2/ The most extreme stress test is the test that yields the highest ratio on or before 2025.3/ Revenues are defined inclusive of grants.

Authorities’ Views

9. The authorities agreed with the DSA findings, noting that the current risk of debt distress is moderate, but fiscal consolidation is crucial for debt sustainability. They remain committed to achieving the debt target of 50 percent of GDP by 2020, and agree that a long-term debt target of 40 percent of GDP would be an appropriately safe level. In accordance with their current debt strategy, they are committed to not take on additional external debt in the near term. They will review their current strategy in the context of formulating their medium-term debt strategy for 2016-2019 over the next year.

Conclusion

10. Samoa’s Public and Publicly Guaranteed (PPG) external debt has moved from a high risk of debt distress to a moderate risk of debt distress. However, the overall risk of public debt distress is higher, due to contingent liabilities. Should contingent liabilities materialize and the authorities delay fiscal consolidation, this could result in unsustainable debt dynamics. Thus the government needs to adhere to its existing consolidation plans to reach its debt target by 2020, while safeguarding social spending and economic growth.

Macroeconomic Assumptions Underlying the DSA Update

  • Real GDP growth is projected at 1.5 percent on average over the medium term reflecting the negative effects from a recently reported exit plan of an automobile parts assembly plant, and to recover to 2 percent in the long run. Compared to the 2013 DSA, medium-term growth has been revised down by ½ percentage point, reflecting a planned exit from the country of Yazaki corporation’s harness assembly plant.

  • Inflation is expected to stabilize over the medium term at about 3 percent and is maintained at this level in the long run.

  • The current account is projected to be around 5 percent of GDP on average over the medium term, and to stabilize at this level in the long run. Relative to the 2013 DSA, the medium-term current account deficit has narrowed by 7 percent of GDP due to lower commodity prices and the rebasing of GDP.

  • The grant element of loans is expected to decline to around 35 percent over the medium term and then stabilize at this level in the long run. As recovery from the cyclone takes hold, the share of external financing provided on concessional terms is expected to decline to around 5 percent of GDP over the medium term and then stabilize at this level in the long run.

  • The primary fiscal balance is estimated to be in balance on average in the medium term, in line with the medium term fiscal framework which targets a public debt-to-GDP ratio at 50 percent by 2020. After 2020, the primary fiscal balance is projected to be a surplus of around 0.4 percent of GDP during 2021-35.

  • Contingent liabilities comprise explicit guarantees of around 7 percent of GDP in PFIs and implicit guarantees of around 17 percent of GDP in SOEs. The total amounts to approximately 24 percent of GDP at end-2014.

Table 1a.

Samoa: External Debt Sustainability Framework, Baseline Scenario, 2012–2035

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r − g − ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes development partner’s capital grants; exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

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

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 1b.

Samoa: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2015–2035

(In percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 2a.

Samoa: Public Sector Debt Sustainability Framework, Baseline Scenario, 2012–2035

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes public sector debt and 24 percent of GDP of contingent liabilities from PFIs and SOEs. Gross debt is used.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

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

Table 2b.

Samoa: Sensitivity Analysis for Key Indicators of Public Debt 2015–2035

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Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

1

This DSA was prepared jointly with the World Bank, in accordance with the Debt Sustainability Framework for low-income countries approved by the Executive Boards of the IMF and the IDA. Samoa is rated as a strong performer for its policies and institutions for the purposes of the IMF-World Bank low-income country DSA framework. The DSA uses a 5 percent discount rate.

2

The discount rate was set at 3 percent in the 2013 DSA assessment.

3

GDP data have been rebased to 2009 prices (previously 2002), and coverage has been increased, with the nominal GDP for 2012/13 increasing from SAT1.6 billion to SAT1.8 billion reflecting a wider sectoral coverage through new censuses and surveys.

4

Under the historical scenario, debt ratios will decline faster relative to the baseline, reflecting a more favorable current account balance as well as capital grants. On the other hand, the historical scenario in the public DSA will lead to a protracted breach due to a larger primary deficit.

5

For instance, the central bank has provided a credit line with government guarantees to the Development Bank of Samoa (DBS) of SAT 65 million and Samoa Housing Corporation (SHC) of 14 million. The rest of explicit government guarantees consists of loan to DBS (SAT 20 million) and Samoa Shipping Corporation (SAT 1.3 million) by the SNPF, share capital advance to UTOS (SAT 7.9 million) and Small Business Loan Guarantee Scheme (SAT 9.6 million).

6

The SOEs debt stock is assumed to grow in line with nominal GDP.

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Samoa: 2015 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Samoa