ST. Vincent and the Grenadines Staff Report for the 2018 Article IV Consultation—Supplementary Information

2018 Article IV Consultation-Press Release; Staff Report and Statement by the Executive Director for St. Vincent and the Grenadines

Abstract

2018 Article IV Consultation-Press Release; Staff Report and Statement by the Executive Director for St. Vincent and the Grenadines

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The overall assessment is broadly unchanged from the 2017 Article IV Staff Report. After peaking at 83 percent of GDP in 2016, total public debt fell to 74 percent of GDP in 2017. Public and publicly guaranteed external debt fell from 57 percent in 2016 to 47 percent of GDP in 2017. This reflects improvements in the fiscal position in the last two years and two rounds of debt forgiveness with a bilateral creditor in 2017.

Nonetheless, the risk of external and public debt distress remains high. 1Public external debt is projected to decline over the medium-term, but its present value (PV) is projected to stay above the indicative threshold (40 percent of GDP) until 2020 under the baseline scenario (Figure 1). The PV of total public debt is projected to stay above the indicative threshold (55 percent of GDP) until 2030 (Figure 2).

Figure 1.
Figure 1.

St. Vincent & the Grenadines: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2018–2028

Citation: IMF Staff Country Reports 2019, 066; 10.5089/9781498300193.002.A003

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.
Figure 2.
Figure 2.

St. Vincent & the Grenadines: Indicators of Public Debt Under Alternative Scenarios, 2018–2028

Citation: IMF Staff Country Reports 2019, 066; 10.5089/9781498300193.002.A003

* Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections.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.

The DSA results highlight key risks to debt dynamics stemming from weaker-than-expected growth and more severe natural disaster hazards due to climate change. The authorities could consider additional fiscal measures to guard against adverse events and to firmly put public debt on a downward path toward the Eastern Caribbean Currency Union’s (ECCU) regional target of 60 percent of GDP.

Background on Public Sector Debt

1. There are no data gaps in public sector debt coverage (Text Table 1). Public sector debt includes central government debt and state-owned enterprises (SOEs) debt2 As of end-2017, the outstanding stock of public debt was EC$1.6 billion (74.2 percent of GDP), of which central government debt was EC$1.3 billion (62.4 percent of GDP), and SOEs debt was EC$0.2 billion (11.8 percent of GDP).3

Text Table 1.

Coverage of Public Sector Debt

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2. The stock of public debt has declined as a percent of GDP, reflecting progress with fiscal consolidation and debt forgiveness. Public debt fell from 82.8 percent of GDP in 2016 to 74.2 percent of GDP in 2017 reflecting a primary surplus position and two rounds of debt forgiveness with Venezuela (US$85 million in June 2017 and US$81 million in September 2017 equal to7¾ percent of GDP).

3. The composition of public debt is dominated by external debt (Text Figure 1). As of end 2017, the stock of external debt accounted for around 64 percent of total public debt, while domestic debt accounted for 36 percent of total public debt, in the form of treasury bills and government bonds (53 percent of total domestic debt); loans in local currency (38 percent); and accounts payable (about 9 percent).4 Most of the government securities are held by the buy-and- hold national pension system. Additionally, the government has in place a sinking fund (about 1.5 percent of GDP) for the repayment of government securities and to reduce potential rollover risks.

Text Figure 1.
Text Figure 1.

Public Sector Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 066; 10.5089/9781498300193.002.A003

Sources: St. Vincentand the Grenadines’ authorities and IMF staff calculations.

4. External public debt fell from 56.7 percent of GDP in 2016 to 47.4 percent of GDP in 2017. The decline in external debt was due to improvements in the fiscal position over the last two years and two rounds of debt forgiveness with Venezuela. Most public external debt is with multilateral and bilateral donors (47.6 percent and 38.6 percent of total, respectively) on concessional terms. The remaining 13 percent is on commercial terms (Text Figure 2 and Text Table 2).

Text Figure 2.
Text Figure 2.

Public Publicly Guaranteed External Debt

(Percent of total)

Citation: IMF Staff Country Reports 2019, 066; 10.5089/9781498300193.002.A003

Text Table 2.

Public Sector External Debt, 2017

(Percent of total and percent of GDP)

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Source: Ministry of Finance, St. Vincent and the Grenadines.

Includes commercial banks, insurance companies, pension funds, among others.

Changes in The Macro Economic Forecast Relative to Previous Dsa

5. The macroeconomic assumptions underlying the baseline scenario are consistent with the macroeconomic framework discussed in the Staff Report. Main revisions since the 2017 Article IV consultation are as following (Text Table 3).

  • The near-term growth outlook is largely unchanged, with real GDP growth (based on market prices) expected to rebound from 0.9 percent in 2017 to 2.0 percent in 2018, supported by higher stay-over tourism arrivals and tourism-related activities. However, medium- to long-term growth projections have been revised down, from the 2.8–3 percent growth assumed in the 2017 Article IV Staff Report to around 2.3 percent, reflecting more moderate and realistic growth rates of public capital spending and net FDI inflows

  • Growth of the GDP deflator is estimated at 3.2 percent in 2018 reflecting increases in oil and food prices (up from 2.1 percent in the 2017 Article IV Staff Report) but is projected to moderate to 2 percent in 2020–30 broadly in line with the U.S. inflation.5

  • The current account deficit is projected to narrow over the medium-term from 16 percent of GDP in 2018 to about 12 percent of GDP in 2022, similar to the path assumed in the 2017 Staff Report. This reflects improvements in the trade balance driven by rising exports of goods and services associated with the increase in tourism activity and non-traditional exports and lower dependence on imported fuels once the new geothermal project comes on stream.

  • FDI is projected to remain steady over the medium-term at around 12.5 percent of GDP reflecting the construction and expansion of hotels. FDI will remain the main source of financing of the current account deficit.

  • The average primary balance for the public sector is assumed at a surplus of 1.1 percent of GDP for the projection horizon. This is slightly higher than the DSA scenario in the 2017 report, reflecting the government’s positive track record in containing recurrent spending (including the wage bill and transfers and subsidies in recent years).

  • Long-term external and domestic financing mix. About one third of the deficit is assumed to be financed by external sources and the remaining two thirds by domestic sources. External loan disbursements include those from existing loan contracts (US$170 million) and new loans (US$100 million). Most of the new financing is expected to come from multilateral and bilateral donors, including budget support and projects (e.g., geothermal power plant, new port and ferry, coastal protection, and agribusiness). These reflect the increase in IDA resources, which will contribute to raise the grant element of new disbursements to an average of 38.5 percent over the projection period compared to 22.4 percent in 2018.

Text Table 3.

St. Vincent and the Grenadines: Selected Macroeconomic Indicators Assumptions

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Source: St. Vincent and the Grenadines Ministry of Finance and IMF Staff calculations and projections.

Realism of The Macro Framework

6. Debt dynamics (Figure 3). Over the next five years, the expected increase in direct flights would boost tourism receipts (contributing to smaller current account deficits) and private investment (contributing to steady net FDI inflows), which would help to contain an increase in the external debt-to-GDP ratio. The projected improvement in the primary balance and higher growth would contribute to reduce the public debt-to-GDP ratio. Public debt is projected to fall faster than assumed in the 2017 report, mainly because the primary surplus is higher than previously assumed.

Figure 3.
Figure 3.

St. Vincent & the Grenadines: Drivers of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2019, 066; 10.5089/9781498300193.002.A003

Sources: Country authorities; and staff estimates and projections.1/ Qfference between anticipated and actual contributions on debt ratios.2/ Dstribution across LICs for w hich LIC DSAs w ere produced.3/ Given the relatively low private external debt for average low -income countries, a ppt change in PFG external debt should be largely explained by the drwers of the external debt dynamics equation.

7. Staff considers the baseline scenario as realistic (Figure 4). The projected fiscal adjustment could exert some drag on growth in 2019. However, the expected increase in tourist arrivals would boost tourism-related activities such as hotels, restaurants, and retail trade, supporting private-sector led growth. The fiscal adjustment over the medium-term is also assumed to be moderate. The primary balance is projected to improve from 0.6 percent of GDP in 2018 to 0.8 percent of GDP in 2019, and gradually to 1.1 percent of GDP by 2022 by restraining recurrent spending. The contribution of public capital to real GDP growth is projected to be slightly negative mainly because the growth rate of public capital spending in 2018 is negative. Excluding 2018, the contribution to real GDP growth is neutral.

Figure 4.
Figure 4.

St. Vincent & The Grenadines: Realism Tools

Citation: IMF Staff Country Reports 2019, 066; 10.5089/9781498300193.002.A003

Sources: Country authorities; and staff estimates and projections.

Country Classification

8. St. Vincent’s debt-carrying capacity is medium (Text Table 4). St. Vincent’s Composite Indicator (Cl) index (which determines the indicative thresholds to assess a country’s debt sustainability) is calculated as 2.98, corresponding to a “medium” rating.6 St. Vincent’s debt carrying capacity is unchanged compared to the rating under the previous Country Policy and Institutional Assessment (CPIA) methodology.7 The corresponding scores for the Cl index determine the relevant thresholds for St. Vincent and the Grenadines for both external and total public debt (Text Table 5).

Text Table 4:

Debt-Carrying Capacity Under the Composite Indicator Index

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Text Table 5:

Composite Indicator Index: Thresholds

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9. The combined contingent liability stress test is aligned to St. Vincent’s specific risks (Text Table 6). The stress test includes the potential impact from existing Public-private partnerships (PPPs) and risks pertaining to financial markets. SOEs’ debt is excluded from the stress test, as SOEs’ debt is already included in total public debt8

Text Table 6:

Combined Contingent Liability Shock

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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 negligible, a country team may reduce this to 0%. There are no local governments in St Vincent and the Grenadines. 100 percent of current SOEs’ external debt is guaranteed by the central government.

Debt Sustainability Analysis

A. Baseline Scenario

Baseline Natural Disaster Assumptions

10. The impact of natural disasters is estimated based on St. Vincent and the Grenadines’ historical experience (Text table 7). The average of total natural disaster damage is estimated at 1.5 percent of GDP for the period 1980–2017, at 2 percent for the last 15 years, and 3.9 percent for the last 5 years. Staff assumes that under the baseline scenario, natural disasters would occur at the magnitude and frequency of the past 15 years, and about 70–75 percent of total damage would be borne by the public sector (i.e., annual fiscal costs of 1.4 percent of GDP a year). The baseline also assumes that 0.7 percent of GDP of the fiscal costs could be covered by the contingency fund and the remaining 0.7 percent of GDP by expenditure reserves included in the annual budget envelope.

Text Table 7:

St. Vincent and the Grenadines: Major Weather-related Disasters since 1980

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Sources: Acevedo, S., 2016, “Gone with the Wind : Estimating Hurricane and Climate Change Costs in the Caribbean,” IMF WP 16/199; EM-DAT database; and the St. Vincent authorities.

External Debt Sustainability Analysis

11. St. Vincent and the Grenadines’ risk of external debt distress is high. Under the baseline scenario, the PV of debt-to-GDP ratio would fall below the indicative threshold of 40 percent of GDP in 2021 (Figure 1 and Table 1). However, it breaches the threshold for an extended period under stress test scenarios, including due to shocks to growth, exports, and a hypothetical one-time 30 percent depreciation (Tables 3 and 4). The shock that generates the largest impact on the PV of debt-to-GDP ratio is the shock to exports. In this case, it breaches the threshold for an extended period until 2028, longer than in the baseline scenario.

Table 1.

St. Vincent & the Grenadines: External Debt Sustainability Framework, Baseline Scenario, 2015–2038

(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) + εα (1 + r)]/(1 +g + ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, p = growth rate of GDP deflator in U.S. dollar terms, ε=nominal appreciation of the local currency, and a= share of local currency-denominated external debt in total external debt.

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.

St. Vincent & the Grenadines: Public Sector Debt Sustainability Framework, Baseline Scenario, 2015–2038

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Coverage of debt: The central government, government-guaranteed debt. Definition of external debt is Residency-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.

Table 3.

St. Vincent & the Grenadines: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2018–2028

(In percent)

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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.