Democratic Republic of São Tomé and Príncipe: Staff Report for the 2018 Article IV Consultation, Fifth Review Under the Extended Credit Facility, Request for Waivers for Nonobservance of Performance Criteria and Financing Assurances Review—Debt Sustainability Analysis

2018 Article IV Consultation, Fifth Review Under the Extended Credit Facility Arrangement, Request for Waivers for Nonobservance of Performance Criteria, and Financing Assurances Review

Abstract

2018 Article IV Consultation, Fifth Review Under the Extended Credit Facility Arrangement, Request for Waivers for Nonobservance of Performance Criteria, and Financing Assurances Review

Background

1. This debt sustainability analysis (DSA) updates the DSA for São Tomé and Príncipe that was completed on December 11, 2017 (IMF Country Report No. 17/382). That DSA concluded that São Tomé and Príncipe stood at high risk of debt distress.

2. Total public and publicly guaranteed (PPG) external debt decreased from 52.5 percent of GDP in 2016 to 45.7 percent of GDP in 2017 (Text Table 1).2 PPG external debt at end-2017 was also lower than the previous projection of 49.9 percent of GDP. This decline was mainly driven by lower-than-expected disbursements due to absorption constraints (Text Table 2), an appreciation of the euro vis-à-vis the U.S. dollar, and higher-than-expected GDP deflator growth. Meanwhile, preliminary data indicate that the stock of domestic debt also decreased, bringing total PPG debt from 67.6 percent of GDP in 2016 to 64.4 percent of GDP in 2017, mainly due to the positive price differential between imported and pump oil prices, which was used to reduce the debt owed to the oil importing company, ENCO. Domestic debt includes domestic arrears and government securities issued in the domestic market (around 4.2 percent of GDP).

Text Table 1.

Säo Tomé and Príncipe: Public Debt Stock

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Sources: Country authorities and IMF staff estimates

Commercial debt guaranteed by the government.

Preliminary data

Text Table 2.

Loan Disbursements

(millions of USD)

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Projection in the December 2017 DSA.

3. Looking forward, the 2018 budget foresees $11.0 million (2.4 percent of GDP) in loan disbursements (Text Table 2). A large share of this is expected to come from the AfDB. Already contracted debt that was not disbursed in 2017 and is not expected to be disbursed in 2018 is projected to be disbursed in 2019-21.

4. In terms of coverage, the DSA includes only debt contracted or guaranteed by the central government. State-owned enterprises (SOEs) do not have external debt.

5. São Tomé and Príncipe continues to have post-HIPC arrears with bilateral creditors. These arrears are to Angola (US$4.8 million), Brazil (US$4.3 million), and Equatorial Guinea (US$1.7 million). In total, they equal 2.8 percent of GDP. In addition, a loan from Nigeria equal to 7.6 percent of GDP is excluded from the debt stock, as it is under dispute according to information provided by the São Tomé and Príncipe authorities. Text Table 3 provides more details on the arrears and disputed debt.

Text Table 3.

Arrears and Disputed Debt

(As of end-December 2017)

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6. São Tomé and Príncipe continues to engage actively in rescheduling negotiations with these creditors. An agreement with the Brazilian government was reached, pending ratification by the Brazilian Senate. The government has actively sought debt rescheduling agreements with Angola and Equatorial Guinea through correspondence and high-level meetings. However, responses are pending from these two countries on continuing the negotiations. Similarly, Nigeria is yet to respond to the authorities’ request for discussing the disputed loan.

Macroeconomic Assumptions

7. The macroeconomic assumptions have changed modestly from the previous DSA. The current DSA assumes lower long-run real GDP growth (4.9 percent instead of 5.4) due to uncertainty about the implementation of large projects. At the same time, the GDP deflator has been raised in line with recently released deflator series by the authorities. In addition, FDI and the current account deficit3 have been raised in line with the recently heightened interest in oil exploration (Text Table 4), as evidenced by the large oil signature bonus and the announcement of tenders on new exploration blocks.

Text Table 4.

Macroeconomic Assumptions

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IMF Country Report No. 17/382

External Debt Sustainability

8. Under the baseline scenario, the present value (PV) of debt to exports and the PV of debt to revenue both breach their indicative thresholds, but debt service ratios remain below their thresholds under almost all scenarios (Figure 1).4 These breaches also occurred in the previous DSA. However, the PV of PPG debt to GDP no longer breaches its threshold. This improvement from the previous DSA is driven by lower-than-expected disbursements in 2017, an appreciation of the euro vis-à-vis the U.S. dollar, and higher-than-expected GDP deflator growth. Like in the previous DSA, the debt service ratios continue to stay below their thresholds under all scenarios, except the debt-service-to-exports ratio under the historical scenario. All indicators improve over time under the baseline and the most extreme scenarios as a result of economic growth, fiscal consolidation, slower debt accumulation, expansion of the export base, and constrained imports.

Figure 1.
Figure 1.

São Tomé and Príncipe: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2018–38

Citation: IMF Staff Country Reports 2018, 251; 10.5089/9781484372227.002.A003

Sources: São Tomé and Príncipe’s authorities, and IMF staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2028. The most extreme shocks are a one-time 30-percent nominal depreciation in Figures a, b, d, and f; and a one standard deviation decrease in the historical export value growth in the case of c and e.

9. Under stress tests with the most extreme shock, all external debt stock indicators breach their respective thresholds early in the projection period, albeit with a declining trend (Figure 1, solid black lines). As in the previous DSA, export-based indicators are most sensitive to exports shocks, while the remaining indicators are most sensitive to a one-time 30-percent depreciation shock. This highlights the need to diversify the export base and maintain the credibility of the exchange rate peg.

Public Debt Sustainability

10. Unlike the previous DSA, the PV of total public debt to GDP ratio no longer breaches the benchmark under the baseline and fixed primary balance scenarios (Figure 2). The baseline scenario has improved for the reasons discussed above. The fixed primary balance scenario has also improved because a primary surplus of 0.6 percent of GDP is expected for 2018, in contrast with the primary deficit in 2017 of 1.0 percent of GDP, on account of a signing bonus for oil exploration. As is the case in the previous DSA, public debt dynamics appear unsustainable under the historical scenario, underscoring the importance of continued fiscal consolidation and fostering private-sector led growth through structural reforms. The PV of debt to revenue ratio is most sensitive to a deterioration of one standard deviation in the historical primary deficit. The other two indicators are most sensitive to a one-time 30-percent depreciation.

Figure 2.
Figure 2.

São Tomé and Príncipe: Indicators of Public Debt Under Alternative Scenarios, 2018–38

Citation: IMF Staff Country Reports 2018, 251; 10.5089/9781484372227.002.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 2028.2/ Revenues are defined inclusive of grants.

Debt Distress Qualification and Conclusions

11. São Tomé and Príncipe’s classification has been updated to stand in debt distress. This change was not made at the time of the previous DSA because the regularization of São Tomé and Príncipe’s post-HIPC sovereign arrears (to Angola, Brazil, and Equatorial Guinea, totaling around 2.8 percent of GDP) was considered imminent. As these arrears are still not regularized, staff now views the appropriate classification as being in debt distress. São Tomé and Príncipe continues to actively seek rescheduling agreements.

12. Absent these arrears, São Tomé and Príncipe would be classified at high risk of debt distress. This reflects the threshold breaches under the baseline scenario. Two other aggravating factors are that (i) a large part of the government’s domestic arrears, namely those to ENCO, are denominated in U.S. dollars and ENCO is majority foreign-owned and (ii) there are considerable contingent liabilities stemming from the state-owned electricity enterprise EMAE, which are not considered in this DSA, as it focuses only on the central government. However, the World Bank is providing technical assistance to São Tomé and Príncipe to improve its debt and SOE management, which should help reduce the incidence of external and domestic arrears. Fiscal consolidation, prudence in contracting new debt, and continued diversification of the economy and export base are needed to improve debt indicators over the medium term.

13. These findings underscore the importance of maintaining strong policies in order to reduce debt-related risks. Such policies include continuing fiscal consolidation, eschewing non-concessional loans, promoting growth, and expanding the export base.

14. Authorities’ views: In response to the staff’s presentation of this analysis in March-April 2018, the authorities broadly agreed with the assessment. They understood that the main reason for being classified as being in debt distress is the existence of long-standing external arrears. Moreover, they reiterated their commitment to borrow at a measured pace, to strive for debt sustainability, and to actively seek restructuring of the current arrears.

Table 1.

São Tomé and Príncipe: External Debt Sustainability Framework, Baseline Scenario, 2015–38

(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 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 2a.

São Tomé and Príncipe: Sensitivity Analysis of Key Indicators of Public and Publicly Guaranteed External Debt, 2018-38

(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.

São Tomé and Príncipe: Public Sector Debt Sustainability Framework, Baseline Scenario, 2015–2038

(Percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Public debt consists of central government debt. Gross debt is considered.

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.

Säo Tomé and Príncipe: Sensitivity Analysis of Key Indicators of Public Debt, 2018–38

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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.