Côte d’Ivoire: First Reviews Under Extended Arrangement Under the Extended Fund Facility and an Arrangement Under the Extended Credit Facility, and Requests for Modification of Performance Criteria and Augmentation of Access—Debt Sustainability Analysis Update
Author: International Monetary Fund. African Dept.
Publication Date:
22 Jun 2017
eISBN:
9781484305102
Language:
English
Keywords:
ISCR; CR; Eurobond issuance; Eurobond; Eurobond placement; issuance; buy-back operation; long-term debt; debt service indicator; public debt-to; debt service measure; debt burden indicator; Public and publicly-guaranteed external debt; Fiscal stance; Global
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First Reviews Under Extended Arrangement Under the Extended Fund Facility and an Arrangement Under the Extended Credit Facility

Abstract

First Reviews Under Extended Arrangement Under the Extended Fund Facility and an Arrangement Under the Extended Credit Facility

Background

1. External public and publicly guaranteed debt stock increased marginally in 2016 (as a percentage of GDP), and is projected to increase further in 2017.2 Excluding concessional lending from the IMF and the Caisse Française de Development claims, total public and publicly guaranteed external debt has increased marginally from 22.5 percent of GDP in 2015 to 22.6 percent of GDP in 2016. For 2017, Cote d’Ivoire’s external debt stock is projected to increase to 26.8 percent of GDP, reflecting the authorities’ plan to issue a Eurobond. In terms of composition, the external debt has seen the share of multilateral creditors increased from 24.2 percent in 2015 to 24.7 percent in 2016. The share of official bilateral creditors has also increased from 16.1 percent to 19.5 percent. Conversely, the share of commercial creditors has declined from 59.8 percent of the total in 2015 to 55.8 percent in 2016. Despite this decline, the figure confirms the high reliance of Côte d’Ivoire on commercial debt for external financing (text table 1).

Text Table 1.

Côte d’Ivoire: Composition of External Debt per Creditor Group1/

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Central government only

2. Domestic public debt increased considerably in 2016. From about 18 percent of GDP in 2015, domestic debt has risen by about 2 percentage points to 20 percent of GDP in 2016. The rise in domestic debt in has been driven by a substantial increase in government debt securities issued in the regional bond market (about 3.7% of nominal GDP). Thus, in 2016 government debt securities constituted more than 80 percent of government domestic liabilities.

3. In early 2015, the government started collecting quarterly data on the debt stock of public enterprises. The development of a centralized database on public enterprises’ and government guaranteed debt is an important tool to prevent an unsustainable accumulation of debt by public sector entities. Most recent available data show that as of end 2016, the debt stock of public enterprises amounted to 3.5 percent of GDP, of which only 0.14 percent of GDP is directly guaranteed by the government. The data should be considered preliminary, however, since the government is refining the database.

Underlying Assumptions and Borrowing Plans

4. This DSA is consistent with the macroeconomic framework underlying the Staff Report prepared for the first review of the three-year EFF/ECF-supported program. Côte d’Ivoire has been adversely affected by a terms of trade shock as well as domestic shocks. At the WAEMU level, with the monetary policy tightening by the regional central bank, BCEAO, the cost of funds has increased. The macro framework assumes a gradual convergence towards a more sustainable growth path in the long run, an increasing contribution of domestic demand to GDP, a gradual moderation of investment, offset by an increase in private consumption, and steady progress towards the fiscal target of the government, consistent with Côte d’Ivoire’s WAEMU membership commitments.

5. Key macroeconomic assumptions are as follows:

  • Global environment. The external demand from Côte d’Ivoire’s trading partners is projected to gradually increase in the long term. This assumption is subject to the downside risk of continued sluggish recovery in global demand.

  • GDP over the medium term. In the current DSA update, real GDP growth is expected to be slower on average during the first five years of the projection (6.8 percent) than in the last DSA (7.5 percent). Real GDP growth is supported initially by robust investment growth and increasingly by private consumption.3 Real GDP is projected to grow by 5.9 percent over 2023–28 on average and 5.5% over 2029–37 as investment normalizes and net trade contribution becomes more negative.

  • The current account deficit would gradually decline over time. The current account deficit is projected to widen to 2.8 percent of GDP (from 2.4 percent in the previous DSA) on average in the first five years of the projection, reflecting the unfavorable terms-of-trade shock. The current account deficit is projected to shrink and stabilize at about 1.8 percent of GDP over the longer term, reflecting an improvement in the trade, and, to a lesser extent, of the services’ balances. These assumptions are subject to downside risks including weaker-than expected global economic growth and changes in commodity prices, which may trigger terms-of-trade shocks.

  • The primary fiscal balance would gradually improve over the baseline horizon. In the current DSA update, the primary basic fiscal balance is assumed to be much lower on average during the first five years of the projection than in the last DSA, reflecting the adverse impacts of the external and internal shocks on government finances. The expected trajectory of the fiscal position remains anchored on a convergence of the fiscal deficit to the 3 percent of GDP target in 2019 and continued consolidation thereafter. A steady improvement in the primary fiscal balance is expected in the medium- to long-term.

Text Table 2.

Côte d’Ivoire: Selected Economic Indicators, 2013–37

(Period averages)

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Sources: Ivoirien authorities; and IMF staff estimates and projections.

Debt strategy

6. The authorities’ Medium Term Debt Strategy (MTDS) aims at keeping debt at a sustainable level. The MDTS objectives for the domestic bond market are to: lengthen the average duration of domestic debt, contribute to the development of the domestic bond market, and reduce the cost of local issuance. Regarding external debt, the MTDS objectives are to: achieve a regular presence in international markets, limit foreign exchange risk and channel external financing primarily towards infrastructure investment. A set of ongoing initiatives will support the achievement of this strategy and help make debt management operations more efficient, including: the finalization of the operational restructuring of the debt policy directorate (merger of the external and domestic debt units), reinforcement of cash management operations, and setting-up of a network of Primary Dealers to promote the issuance and secondary market trading of the CFA-denominated debt issued in the regional market.

Debt Sustainability Analysis

A. External Debt Sustainability Analysis

7. The external DSA assumes that the government would issue a Eurobond to cover its 2017 financing gap and that all existing Eurobonds would be rolled over during the whole horizon of the DSA. Specifically, bullet Eurobonds would be rolled over in the year they mature, while Eurobonds whose principal is amortized over two or three years would be rolled over in the first year of principal amortization. The assumption of external debt rollover implies that going forward, Côte d’Ivoire would rely increasingly more on commercial debt and less on concessional loans to finance its public investment projects.

8. The results of the external DSA confirm that Cote d’Ivoire’s debt dynamics are sustainable under the baseline scenario. The present values of the debt-to-GDP ratio, debt-to exports ratio, debt-to-revenue ratio, and liquidity measures of debt service to exports and revenues (excluding grants) all remain under the debt distress thresholds in the baseline scenario (Figure 1). However, in 2027 the debt service-to-revenues indicator is anticipated to increase toward the threshold, as 2027 represents the second year of principal amortization of the Eurobond issued in 2015.

Figure 1.
Figure 1.

Côte d’Ivoire: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2017–371/

Citation: IMF Staff Country Reports 2017, 165; 10.5089/9781484305102.002.A002

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 2027. In figure b. it corresponds to a Combination shock; in c. to a Exports shock; in d. to a Combination shock; in e. to a Exports shock and in figure f. to a Combination shock

9. The debt indicators breach the thresholds in the most extreme shock scenario. Under the latter—i.e., a shock hitting the country in the first two years of the projection consisting in a combination of lower real GDP growth, exports, foreign inflation, current transfers and FDI inflows—substantial and prolonged breaches for the PV of debt-to-GDP and the PV of debt-to-export ratios occur. Specifically, the PV of debt-to-GDP ratio would reach 43.9 percent in 2019, before returning to more sustainable levels in 2029. The PV of debt-to-exports ratio would reach 160 percent in 2019, before declining below the threshold in 2028. Debt service measures, which are sensitive to the repayment of the principal of maturing Eurobonds, also breach the thresholds under the most extreme shock scenario. These results underscore the considerable downside risks for debt sustainability originating from higher (domestic and external) macroeconomic volatility which may hit the economy.

10. In an alternative scenario where the government assumes responsibility for liabilities of the Société Ivoirienne de Raffinage (SIR) in 2017, the risk of debt distress would nonetheless remain moderate. Specifically, a long-term bank loan for about US$ 600 million would be obtained to restructure the SIR debt. The loan is assumed to have a maturity of at least 8 years, gradual amortization of principal, and present value (PV) estimated at 1.1 percent of GDP. Although this new bank loan would worsen the debt service profile, it would not jeopardize the rating of debt distress, which remain moderate.

B. Public Debt Sustainability Analysis

11. Under the baseline scenario, in 2017 the PV of the public debt-to-GDP ratio is projected to reach 43.2 percent. The PV of total public debt in 2017 reflects an increase in new medium- and long-term (MLT) debt. In turn, this increase originates from new official bilateral debt contracted (mainly Non-Paris Club debt) and new commercial lending. In subsequent years, the PV of debt-to-GDP ratio declines gradually moving below 38 percent and reaching 21.7 percent in the long run. The trend reflects a gradual decline through time of both components of total public sector debt (foreign and domestic currency-denominated components). Similarly, the PV of debt-to-revenue ratio starts at 218 percent in 2017 before gradually declining below 150 percent in 2027, and eventually below 100 percent in the long run. By contrast, the debt service to revenue ratio deteriorates as it is projected to reach 20.2 percent in 2027, before stabilizing around 16 percent in the long run.

12. Stress tests highlight a number of potential vulnerabilities. In the scenario of constant primary balance, the debt indicators stabilize over the long run, except for the ratio between debt service and revenues which would reach 31.3 percent in the long run. The most extreme shock scenario (real GDP growth at historical average minus one standard deviation in the first two years of the projection) suggests rising public debt vulnerability for all debt burden indicators. At the end of the projection horizon, the PV of debt-to-GDP ratio would reach 71 percent.

13. Overall, the analysis portrays a broadly favorable picture in terms of public debt sustainability. The PV of the public debt-to GDP ratio and the PV of public debt-to-exports ratio are projected to gradually decline though time. The public debt service to revenue ratio is more volatile—reflecting the amortization of medium- and long-term debt—and does not decline over the medium term. Summing up, while the PV of domestic debt gradually declines over time, as in the case of the external DSA, the debt service to revenue ratio is the debt burden indicator that should be closely monitored to identify potential fiscal vulnerabilities arising in the medium-term.

Conclusions

14. Côte d’Ivoire remains at moderate risk of debt distress in 2017, as in the 2016 DSA. However, importantly, compared to the 2016 DSA Côte d’Ivoire is no longer a borderline case. Under the baseline scenario, all debt burden indicators remain under their respective debt distress thresholds. In addition, all the indicators remain below the lower bound of the ±5 percent band calculated around the debt distress threshold. In the most extreme stress test scenario, however, all the debt and debt service indicators breach the thresholds of debt distress.

15. Sound macroeconomic policies and an effective debt management strategy are essential to maintaining a sustainable external position. Policies to maintain a sustainable fiscal position are also an essential prerequisite to stabilizing debt over time, and enhanced mobilization of domestic revenues would help to achieve this goal. In addition, a medium-term debt management strategy aimed at increasing reliance on domestic source of financing, smoothing out the pattern of debt amortization by avoiding too large refinancing spikes, and helping optimize the cost of funding of the sovereign would help maintain a sustainable debt position. Measures aimed at increasing the liquidity of the primary and secondary market of the regionally issued domestic debt, like the creation of a network of primary dealers, will contribute to a more cost-effective effective pricing of Ivoirien sovereign securities. An effective management and monitoring of PPPs will also help contain fiscal risk and contingent liabilities.

16. The authorities of Côte d’Ivoire broadly agreed with that Côte d’Ivoire’s risk of external debt distress is moderate. They agreed that it was important to continue to strengthen debt management, to refine the database for public enterprises, to mobilize revenues in the medium term and, more generally, to implement prudent fiscal management. That said, the authorities stressed that they considered that the baseline macroeconomic assumptions used in this DSA update continue to be too conservative particularly regarding the economic growth projections which are lower than those in the baseline scenario of the 2016–20 National Development Plan.

Figure 2.
Figure 2.

Côte d’Ivoire: Indicators of Public Debt Under Alternative Scenarios 2017 – 371/

Citation: IMF Staff Country Reports 2017, 165; 10.5089/9781484305102.002.A002

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 2027.2/ Revenues are defined inclusive of grants.
Table 1.

Côte d’Ivoire: External Debt Sustainability Framework, Baseline Scenario, 2014–371/

(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 – p(l+g)]/(l+g+p+gp) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and p = growth rate of GDP deflator in U.S. dollar terms.

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

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

Current-year interest payments divided by previous period debt stock

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

Defined as grants, concessional loans, and debt relief.

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

Table 2.

Côte d’Ivoire: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, Baseline Scenario, 2017–371/

(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 3.

Côte d’Ivoire: Public Sector Debt Sustainability Framework, Baseline Scenario, 2014–371/

(Percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or 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 4.

Côte d’Ivoire: Sensitivity Analysis for Key Indicators of Public Debt 2017–371/

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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

In the LIC-DSA framework Côte d’Ivoire is classified as having weak policy performance with a Country Policy and Institutional Assessment (CPIA) average of 3.24 for the period 2013–15 (http://databank.worldbank.org/data/download/CPIA_excel.zip). With the progress in the CPIA score (the 3-year average for the period 2012–14 stood at 3.17), Côte d’Ivoire is on the cusp of a medium policy performance category, which would raise from 30 to 40 percent the threshold of the PV of external debt-to-GDP ratio, from 100 to 150 the threshold for the PV of external debt-to-exports ratio, and from 200 to 250 the threshold for the PV of external debt-to-revenue ratio. In addition, the threshold for the external debt service-to-exports ratio would raise from 15 to 20 percent, and the threshold for the external debt service-to-revenues ratio would raise from 18 to 20 percent.

2

In this DSA, PPG external debt covers only the central government. It excludes French claims under C2D debt-for-development swaps, which were cancelled in the context of beyond HIPC debt relief. Under the C2D mechanism, debt service due on these claims is returned in the form of grants to the government to finance development projects. In the staff report the flows associated with the C2D process are included in the external and fiscal accounts to capture the gross cash flows (debt service and grants). See IMF Country Report nº14/358 and Supp.1, 11/21/2014 for a detailed discussion.

3

During the 2017–22 horizon, inflation pressures are expect