Chad: Third Review Under the Extended Credit Facility, Request for a Waiver of Nonobservance of a Performance Criterion, and Financing Assurances Review—Debt Sustainability Analysis
Author: International Monetary Fund. African Dept.
Publication Date:
24 Jan 2019
eISBN:
9781484396087
ISBN:
9781484396087
Language:
English
Keywords:
ISCR; CR; Chadian authorities; authority; July arrears payment; Glencore debt restructuring; dynamics equation; debt carrying capacity; sustainability indicator; debt vulnerability; Stress testing; Debt sustainability; Public and publicly-guaranteed external debt
Download PDF (724.3 KB)

Third Review Under the Extended Credit Facility Arrangement, Request for Waiver of Nonobservance of Performance Criterion and Financing Assurances Review-Press Release; Staff Report and Statement by the Executive Director for Chad

Abstract

Third Review Under the Extended Credit Facility Arrangement, Request for Waiver of Nonobservance of Performance Criterion and Financing Assurances Review-Press Release; Staff Report and Statement by the Executive Director for Chad

Public Debt Coverage

1. The coverage of public debt is in line with the previous DSA. It includes the central government, as well as state guaranteed external debt owed by the public oil company “Société des Hydrocarbures du Tchad” (SHT) (Text Table 1). This scope encompasses all public external debt; other public sector entities (including regions and other state owned enterprises) do not have access to external financing. Staff will continue to seek information on domestic debt of other public sector enterprises.

2. The contingent liability stress test accounts for vulnerabilities associated with non-guaranteed state-owned enterprises (SOEs), unaudited domestic arrears, and financial markets (Text Table 1). Contingent liabilities from financial markets are set at 5 percent of GDP, which represents the average cost to the government of a financial crisis in a low-income country since 1980. The contingent liability stress test is customized to 5 percent of GDP to account for the domestic debt of SOEs (2 percent) and domestic arrears that could potentially be validated by the ongoing audit (3 percent).

Text Table 1.

Chad: Coverage of Public-Sector Debt and Design of Contingent Liability Stress Tests

article image

The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be

Background

A. Evolution and Composition of Debt

3. Chad’s external public and publicly guaranteed (PPG) debt burden increased considerably over the past decade mainly on account of external commercial borrowings related to oil. Commercial borrowings (oil sale advances) from Glencore in 2013 to cover revenue shortfalls and in 2014 to purchase a share in the Doba oil Consortium were the main contributors. This debt has since been restructured twice, most recently in early 2018 which has reduced considerably its burden. Falling oil prices over 2014-16 also contributed to the rising debt service burden by reducing revenues available to repay oil sales advances. At end-June 2018, outstanding PPG external debt stood at about$2.9 billion (26 percent of GDP). Chad’s CFAF-denominated debt held by the regional central bank (BEAC), the regional development bank (BDEAC), and bilateral creditors in the currency union (Republic of Congo, Equatorial Guinea, and Cameroon) amounts to 11.4 percent of GDP. It is not included in external debt, which is calculated on a currency basis.

4. The composition of external public debt has changed significantly over the past decade. The share of external debt from multilaterals has fallen sharply from about 87 percent in 2008 to 24 percent in 2017, while the share of commercial debt, which was virtually non-existent in 2008, has risen to almost 50 percent, mostly to Glencore. Bilateral debt doubled over the decade but, as a share of total debt, it is still significantly less than commercial debt (Text Table 2). Consistent with the ECF arrangement, external debt is defined on a currency basis.

5. Domestic public debt has increased significantly in recent years (Text Table 3). This reflects in large part an increased reliance on domestic marketable securities. Following a peak in 2015, debt to the BEAC was restructured, and Chad stopped borrowing from the BEAC. In addition to the debt owed to BEAC (33.2 percent of total debt), debt denominated in local currency but held outside Chad includes debt to official bilateral partners and BDEAC (3.4 percent of total debt), and securities in CFAF that could be held by non-resident banks.

6. External payment arrears accumulated in 2016 and in 2017 but have nearly halved so far in 2018. Due to liquidity challenges in 2016 and the first half of 2017, the government accrued external arrears vis-à-vis a number of multilateral, bilateral, and one commercial creditor (Mega bank from Taiwan province of China). At end-2017, about $102 million (1 percent of GDP) remained outstanding, mainly to bilateral creditors. The authorities have since reduced this stock to $56 million by paying the amount owed to the Islamic Development Bank and through a rescheduling agreement with Libya and India. The bulk of remaining arrears are to the Rep. of Congo (about $47 million), with small amounts remaining to Equatorial Guinea (both under negotiations), Mega Bank and the European Investment Bank. The authorities have taken concrete steps to prevent the further accumulation of arrears—including measures to improve coordination and reactivate an escrow account for the payment of external debt at the BEAC—and are making a strong effort to address the remaining arrears.

Text Table 2.

Chad: External Debt Stock 2015-20181

article image
Sources: Chadian authorities, selected creditors, and World Bank and IMF staff estimates.

Includes only debt denominated in foreign currency.

Glencore loan accounts for about 98 percent of commercial debt stock in 2017.

Text Table 3.

Chad: Domestic Debt Stock 2014-2017

article image
Source: Chadian authorities.

Existing balances were converted into long-term securities with grace period of 4 years and maturity of 14 years.

Issued through banks’ syndication.

Auctionned in regional securities’ market.

Legal commitments, standing payment orders, and accounting arrears.

B. Macroeconomic Forecast

7. The DSA’s baseline scenario reflects policies and financing assumptions underlying the ECF arrangement and the Glencore debt restructuring. The macroeconomic outlook remains broadly unchanged compared to the previous DSA (July 2017). It assumes that the ongoing revenue-led fiscal consolidation will continue over the program horizon at a gradual pace and that spending control would be maintained. Oil production is expected to continue to increase in the medium term, leading to higher oil revenues, higher exports and overall GDP growth. The baseline scenario assumes full clearance of external arrears in 2018 and gradual repayment of domestic arrears.

8. Financing assumptions have been updated based on most recent information. Externally financed investment has remain unchanged, and the discount rate is kept at 5 percent over the forecast horizon. The grant element of new borrowing is assumed to decline gradually over the forecast horizon. With regards to domestic financing, based on a recent shift towards short term debt, the share of T-bills over the forecast horizon has been revised upward. Reflecting this shift, average interest rate on domestic debt has been revised upward slightly.

9. Realism tools point out some risks around the forecast. The projected 3-year fiscal adjustment is in line with historical data on LIC adjustment programs. Continued fiscal prudence and efforts to raise non-oil revenues are expected to ensure a sustainable adjustment. The realism tool suggests that the growth path could be optimistic given the projected consolidation. However, staff considers projected growth to be realistic given that the rebound this year and next is from a low base, and that confidence is expected to strengthen after the Glencore debt restructuring, the improvement in the fiscal position (including improvement in budget execution), the repayment of domestic arrears which has started, and the authorities ongoing efforts to implement the national development plan. This is consistent with expected private sector driven growth path, led by private investment in the oil sector, as shown in Figure 4. The recent privatization of the cotton public enterprise is likely to help strengthen private sector contribution to growth.

C. Country Classification and Determination of Stress Test Scenarios

10. The newly-introduced composite index (CI) based on October 2018 World Economic Outlook (WEO) projections and update of the CPIA index to 2017 levels indicates weak debt carrying capacity for Chad. In the previous DSA framework, the medium debt-carrying capacity classification was solely informed by the CPIA rating. The new methodology relies instead on a composite indicator (CI) combining the CPIA score, external conditions as captured by world economic growth and country-specific factors. The October 2018 data indicate weak debt carrying capacity, reflecting mainly a low CPIA and a low level of foreign reserves (Text Table 4).

Text Table 4.

Chad: CI Score

article image
Source: IMF and World Bank staff calculations. The CI cutoff for medium debt carrying capacity is 2.69.

11. The debt sustainability analysis relies on six standardized stress tests and a customized oil price shock stress test (Figures 1 and 2 and Tables 3 and 4). The customized oil price shock entails oil prices lower than the baseline by 38 percent between 2019 and 2024 and has been calibrated to account for contingency mechanisms under the Glencore debt contract which limit the negative effect of the shock (Text Figure 1). In particular, low oil proceeds trigger provisions that allow Chad to forgo advanced payment on principal and interest that otherwise would occur when applicable.

Text Figure 1.
Text Figure 1.

Debt Service-to-Revenue Ratios

Citation: IMF Staff Country Reports 2019, 025; 10.5089/9781484396087.002.A002

Sources: Chadian authorities; IMF staff calculations.

Debt Sustainability

A. External Debt Sustainability

12. Chad is at high risk of external debt distress. Public external debt is projected to gradually decline over the forecast horizon under the baseline scenario. The present value of PPG external debt to GDP ratio, the present value of PPG external debt to exports ratio and the debt service to exports ratio are well below their thresholds (Figure 1). The debt service to revenue ratio now appears above its threshold of 14 percent under the baseline scenario.

13. Under stress tests, the thresholds are breached for all indicators. The exports shock stress tests appear as the most extreme for all indicators except the debt service to revenue ratio, for which the growth shock stress test is the most extreme. Under the export stress test, the threshold of the present value of PPG external debt-to GDP ratio and the present value of PPG external debt to exports ratio are breached until 2023 and 2025 respectively, while the threshold for debt service to exports is breached throughout almost all the forecast horizon. Under the growth shock stress test, the debt service to revenue ratio breaches its threshold from 2018 to 2027.

B. Public Debt Sustainability

14. The benchmark for public debt is breached under the baseline. The PV of total public debt-to-GDP ratio projected at end-2018 stands at 47 percent, which is about 12 percentage points above the 35 percent benchmark level associated with heightened public debt vulnerabilities with a weak debt carrying capacity. The threshold is breached from 2018 until 2021 under the baseline scenario.

C. Risk Rating and Vulnerabilities

15. Chad’s debt sustainability is now less vulnerable to oil price fluctuations. The impact of a commodity price shock on debt sustainability is now limited, as the debt service to revenue ratio remains close to the baseline under a lower oil price scenario (Text Figure 1). This reflects contingency mechanisms under the new Glencore debt contract, which allow lower external debt service to Glencore when oil prices are lower.

16. Chad is at high risk of external debt distress and high overall risk of public debt distress despite a major debt restructuring. The rescheduling of the Glencore debt, along with the projected recovery in the oil sector and prudent fiscal policy, result in debt burden indicators declining significantly over the near and medium terms. However, out of four indicators of external debt sustainability, one is breached under the baseline. While the projected path of this indicator has improved relative to its path in the last DSA, under the new DSA framework, a lower threshold applies to this particular indicator (Text Table 5).2 As such, Chad’s external debt is assessed to be at high risk of debt distress. Additionally, the overall risk of debt distress is high based on the breach of an external debt sustainability indicator threshold and total public debt residing above its benchmark level. Mechanically, the CFAF-denominated debt held by the BEAC, BDEAC, and bilateral creditors would weaken the external debt sustainability indicators, if the external DSA were done on residency basis, but the true risk from this debt is much lower than foreign currency denominated debt due to lack of currency risk, strong institutional ties with the creditors, and the relative ease of rescheduling.

Text Table 5.

Chad: Debt Thresholds

article image
Source: IMF and World Bank staff calculations.

17. Significant efforts are warranted to ensure debt remains on a downward trajectory. Elevated vulnerabilities reinforce the need to maintain prudent fiscal policy including on external and domestic borrowing. While progress has been made recently to reduce the stock of external and domestic arrears, much more attention is needed going forward to clear all the remaining arrears. Finally, effective inter-agency coordination to strengthen the capacity to record and monitor public debt is very important to better manage public debt.

18. While the authorities broadly agreed with staff’s assessment, they expressed strong disappointment at the still high risk of external debt distress especially after the conclusion of the Glencore debt restructuring. The aim of the restructuring was to reduce the risk rating to moderate. This would have been achieved under the previous DSA framework and would have paved the way for flexibility in accessing much needed external financing for priority investment project. They however remain committed to further reduce debt vulnerabilities going forward.

Table 1.

Chad: External Debt Sustainability Framework, Baseline Scenario, 2015-2038

(In percent of GDP, unless otherwise indicated)

article image
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.

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

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).

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

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Table 2.

Chad: Public Sector Debt Sustainability Framework, Baseline Scenario, 2015-2038

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

Coverage of debt: The central government, central bank. Definition of external debt is Currency-based.

The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.

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

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 and other debt creating/reducing flows.

Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.

Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

Figure 1.
Figure 1.

Chad: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2018-2028

Citation: IMF Staff Country Reports 2019, 025; 10.5089/9781484396087.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2028. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.Note: Although the tailored commodity price stress test is applicable in Chad’s case, it has been replaced by a revised scenario that has the same commodity price shock, but accounts for the contingency mechanisms in the Glencore debt. As shown in Text Figure 1, this change does not affect the results shown in this figure.
Figure 2.
Figure 2.

Chad: Indicators of Public Debt Under Alternative Scenarios, 2018-2028

Citation: IMF Staff Country Reports 2019, 025; 10.5089/9781484396087.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2028. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Table 3.

Chad: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2018-2028

article image
Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

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

Includes official and private transfers and FDI.