Republic of San Marino: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for the Republic of San Marino
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International Monetary Fund. European Dept.
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Publication Date:
25 Mar 2019
eISBN:
9781498304887
Language:
English
Keywords:
ISCR; CR; government; Sammarinese authorities; state support; staff; banking system; banking sector; market share; government deposit; current account; Sammarinese authority; customs authorities
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2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of San Marino

Abstract

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of San Marino

Context

1. Economic activity has yet to recover from the sharp downturn in the past decade. The collapse of San Marino’s offshore banking model, largely due to anti-tax evasion measures by Italy, as well as weak external demand and tight credit conditions in the post-crisis period led to a loss of a third of its output—among the deepest recessions in Europe. Activity bottomed out in 2015–16, but the pace of the subsequent recovery has been subdued.

uA01fig01

Real GDP (2005=100)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Sources: World Economic Outlook.
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Non-performing Loans and Cumulative Change in the Banking Sector Assets

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

1/ San Marino’s NPL figure indicates the pre-AQR ratio.Sources: ECB, CBSM, and IMF staff.

2. Vulnerabilities have increased, owing to fragilities in the banking system and excessive use of forbearance. The over-sized banking sector has been shrinking and left with low liquidity due to deposit outflows, mainly by non-residents. High NPLs and elevated operating costs have eroded banks’ capital and viability, leading to multiple bank resolutions over recent years, but the losses have yet to be properly recognized and absorbed. Multiple state supports have been provided to the state-owned bank, Cassa di Risparmio della Repubblica di San Marino (CRSM), yet its capital base remains deeply negative. A full and upfront cost recognition of ast bank interventions will increase public debt substantially to an unsustainable level. This, together with low CBSM liquidity buffers and lack of external market access, threatens financial stability. Recognizing the gravity of the challenges ahead, the authorities are discussing how to restore banking system viability and safeguard public finances with local stakeholders. Progress, however, has been slow as domestic politics and limited administrative capacity are challenging.

Recent Developments and Policy Priorities

3. Economic recovery lost momentum in 2017. Real GDP growth moderated to 0.6 percent in 2017 from an expansion of 2.5 percent in 2016 as the contraction of exports and final consumption partly offset buoyant investment. High frequency indicators paint a mixed picture for 2018 as the relaxation in labor market restrictions (“Development law”, 2017) boosted cross-border workers.1 Nevertheless, the unemployment rate edged up to above 8 percent (December) after moderating in the first half of the year, while the number of enterprises further contracted. Headline inflation picked up and then retrenched to about 1.6 percent reflecting volatile food and transport costs, but core inflation remained broadly stable at 0.7 percent (December).

uA01fig03

Real GDP Growth

(Percent)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: Sammarinese authorities and IMF staff.
uA01fig04

Number of Enterprises

(Percent, contribution to growth in 3-month average)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: Sammarinese authorities.
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Unemployment Rate and Employment Growth

(3-month average yoy, percent)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: Sammarinese authorities.

4. Deposit outflows have abated in 2018, but banking system liquidity remains at highly vulnerable levels. Liquid assets-to-short-term deposits have almost halved since mid-2015 and two banks have been chronically reliant on emergency liquidity assistance (ELA) from the CBSM. Recently, one bank repaid ELA following one-off asset disposals, while the other was put under special administration and is subject to monthly deposit withdrawal limits as its liquidity has been depleted. Additionally, banks have benefitted from substantial waivers from minimum reserve requirements with two banks receiving a full exemption. Continuous financing provided to banks and government contributed to a decline of about 40 percent in CBSM reserves relative to their end-2016 level.

uA01fig06

Banking System Deposits

(millions of euros)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Note: Customer deposits include certificates of deposits (CDs). Customer deposits of Asset Banca are excluded since June 2017, when it was placed under compulsory administrative liquidation, until its assets were transferred to CRSM at end-October 2017.Sources: CBSM and IMF staff.
uA01fig07

Banking Sector Liquidity

(In percent)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Note: Coverage ratios are liquid assets plus net interbank loans as a share of customer deposits and financial instruments. Liquid assets include cash, financial assets (other than interbank loans) that are available within 7 days and securities that can be readily converted to cash.Sources: CBSM and IMF staff.

5. The banking system’s recapitalization needs are sizable and asset quality is low (Annex I). The estimated capital shortfalls stand at 39 percent of GDP (54 percent of GDP when tax credits are included). Higher capital levels will be required under the application of the EU standards, which are expected to be transposed in 2019 with a yet-to-be-determined transition period. While the asset quality review (AQR) was completed several months ago, the CBSM has commenced discussions on findings with banks, but the diagnostic results are becoming outdated. Even after the recent sale of Delta sub-portfolio, NPLs, which are largely related to failed SMEs in the services sector, remain high at around 55 percent of total loans (post-AQR), thus weighing heavily on financial intermediation and profitability.

uA01fig08

Non-performing loan distribution

(precent of total NPLs, net of provisions, September2018)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Sources: CBSM and IMF staff.

6. Persistent losses further eroded banks’ capital position. The banking system is estimated to have registered a loss in 2018—for the ninth year in a row—reflecting high operating costs, high NPL costs, and non-interest-bearing tax credits (15 percent of GDP) given to banks to cover the asset-liability gap when they absorbed failed banks.2 The recent decision to repeal banks’ option to convert tax credits into government bonds implies that these tax credits will continue to weigh on profitability and act as a deterrent to raising capital from private sources.

7. Efforts to develop a financial sector strategy continue, but progress is slow. This reflects the divergent views among stakeholders of how to allocate the substantial losses, the lack of appetite to implement the needed reforms, and the inability to reach consensus on the future structure and role of the San Marino banking system. The CBSM is making progress on several fronts that will promote financial stability, but lack of sufficient powers, autonomy, and consultation on financial sector-related policies hinder its effectiveness. A court decision in late 2018 to annul the CBSM’s intervention and resolution of Asset Banca in 2017 may complicate issues further.

8. Fiscal buffers remain low amid sustained fiscal deficits. The overall fiscal deficit is projected to have narrowed to 2.7 percent of GDP in 2018 from 3.6 percent of GDP in 2017 as one-off revenue measures, including a wealth tax, helped offset the state support to CRSM (about 3 percent of GDP). The fiscal deficit is projected to have contributed to a further increase in the official public debt figure to about 27.5 percent of GDP in 2018 and to continued low levels of government deposits at the CBSM. The inclusion of government’s commitments to the banking system (CRSM’s legacy losses and the banking system tax credits), suggests that the implicit public debt stood at about 77 percent of GDP in 2018 (Annex V).

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Fiscal Buffers and the Overall Fiscal Balance

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Sources: MoF and IMF staff.

9. The external position is weaker than implied by fundamentals and desired policy settings (Box 1). San Marino recently produced its first balance of payment and International Investment position (IIP) statistics. While caution is needed as monitoring cross-border shopping remains difficult, the 2017 current account balance points to a deficit of 0.5 percent of GDP. Large liquidation of foreign portfolio investments by banks and a decline in loans of domestic banks to nonresidents resulted in a decline in the net IIP to 261 percent of GDP in 2017 from 270 percent in 2016. The real effective exchange rate (REER) remined broadly stable in 2018 at about two percent above its 10-year average following a prolonged appreciation.

External Sector Assessment

San Marino’s market share declined considerably in recent years. San Marino lost about two-thirds of its world export market share compared to the pre-crisis period due to weak recovery in Italy, and significant reduction in exports of goods, including manufacturing. The loss in export market share occurred simultaneously with a prolonged appreciation of the REER on account of a persistent and widening positive inflation differential vis-à-vis Italy. This, along with the remaining structural impediments (see structural policies), suggests that improving competitiveness remains a key challenge for San Marino.

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CPI-Based REER and Export Market Share

(Index Jan. 2007=100; increase is appreciation)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Sources: Haver, IFS, San Marino authorities and IMF staff.
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Share of San Marino’s Exports of Goods in World’s Exports

(percent)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Sources: San Marino authoritiesand IMF staff.

Based on the IMF’s EBA-lite methodology, staff assess that San Marino’s external position is weaker than implied by fundamentals and desirable policy settings. While significant data weaknesses call for caution, both the Current Account (CA) gap and REER Index models suggest an overvaluation, albeit with different magnitude. Specifically:

Current Account (CA) gap model: The CA gap model indicates a “CA norm” of a surplus of 3.1 percent of GDP that largely reflects the relatively high net asset position of the economy relative to its key trading partners. This results in a CA gap of a -3.6 percent of GDP—consistent with an REER overvaluation of 3.2 percent. The current account gap is largely explained by a policy gap, notably, slow progress in addressing banking sector fragilities and in fiscal consolidation that contributed to loss of international reserves recorded by the CBSM. This loss was mostly driven by the decline in commercial banks’ and government’s deposits in 2017.

San Marino. External Balance Assessment, 2017

article image
Source: IMF staff.

REER Index model: The REER appears to be overvalued by 2.2 percent, suggesting that the REER is somewhat stronger than implied by fundamentals. The lower equilibrium level largely derives from lower credit level and growth in San Marino compared to its trading partners’ averages, thus indicating that San Marino’s REER should depreciate to be in line with its fundamentals.

Outlook and Risks

10. Growth is set to remain subdued owing to weak domestic and external demand. Staff’s baseline envisages an unsustainable “muddling-through” scenario, wherein the fundamental problems in the banking system are not fully addressed and economic conditions gradually deteriorate. Under this scenario, which assumes gradual banking system recapitalization, low liquidity, and continued contraction of bank balance sheets, real GDP is projected to grow by one percent on average in 2018–19, supported by exports and investment related to the construction of a large shopping center. Final consumption is projected to further contract as households continue to deleverage.3 Over the medium-term, growth is expected to converge to 0.5 percent as the completion of the investment project in 2019 and tight credit conditions will drag down investment growth, while less favorable external conditions will lower export growth. CBSM reserves, which are already below adequate levels, are projected to decline gradually, assuming no acceleration of deposit outflows. Unemployment is expected to remain elevated at about 8 percent, and inflation, which is largely driven by import prices, is set to modestly increase.

San Marino: Macro Projections, 2017–24

article image
Sources: IMF; International Financial Statistics; Sammarinese authorities; and IMF staff.

11. Significant downside risks dominate the outlook (Risk Assessment Matrix, Annex II). Domestically, the main risk stems from slow progress in banking sector repair, which would weigh on credit conditions, undermine confidence, increase liquidity pressures, and potentially threaten financial and economic stability. A full and upfront recognition of the state’s excessive commitments to the banking sector would exacerbate the already high fiscal risks, erode confidence, and increase vulnerabilities. It would also lead to higher debt-service payments, which would crowd-out productive spending and negatively affect medium-term growth. On the external side, weaker-than-expected growth in key trading partners, particularly Italy, would put a strain on export-oriented sectors and negatively affect residents working abroad.

Authorities’ Views

12. The authorities broadly concurred with staff’s risk assessment but were confident that structural reforms and stronger cooperation with Italy will support growth. They agreed that a delayed action in repairing the banking system endangers financial stability while excessive state support to banks would undermine fiscal sustainability. However, they argued that the recent steps to ease nonresidents’ hiring, which has already shown positive effects on employment, and further steps to improve the business climate could help attract foreign investment and shift the economy to a higher growth path. They also argued that the conclusion of the association agreement with the EU and the signing of the Memorandum of Understanding with the Bank of Italy could have significant benefits.

Policy Discussions

San Marino’s key challenges are to simultaneously restore banking system viability and credit supply, safeguard public finances, and promote sustained economic growth. This requires deep banking system restructuring, including through significant cost reduction and durable resolution of NPLs, strengthening banks’ capital and liquidity positions, and improvement of financial sector governance and oversight. The sizable bank recapitalization needs require a mix of private contributions and public support. An ambitious and growth-friendly fiscal consolidation and implementation of structural reforms would reduce vulnerabilities, improve competitiveness, and bolster potential growth.

A. Restoring Banking System Viability

Strengthening Banking System Liquidity and Capital Positions

13. Liquidity management should be urgently enhanced to preserve CBSM liquidity buffers. The CBSM has strengthened its liquidity monitoring and management framework. However, further efforts are needed to safeguard CBSM reserves, which are already below adequate levels (Annex III). The ELA framework needs to be aligned with best practice such that it will be restricted to fully-collateralized lending and provided only to solvent banks, contingent on approval of credible plans to repay loans at maturity. Well-developed measures and carefully crafted communication strategy are also urgently needed to respond to a potential resurgence in liquidity pressures and to safeguard the payment system. Limiting CBSM’s budget financing to only exceptional needs and on a temporary basis would also support CBSM liquidity buffers.

14. There is a pressing need to address capital shortfalls in the banking system. The AQR findings should be incorporated into banks’ financial statements and capital needs should be promptly addressed. The laws that allows banks to spread “AQR losses” over five years and protect subordinated debt holders should be repealed. The substantial recapitalization needs necessitate a mix of private and public contributions, with the amount of state support be guided by fiscal sustainability considerations (see ¶25). Specifically:

  • Private banks. Private banks should first attempt to raise capital from private sources. Banks that cannot meet the minimum capital requirement within the prescribed timeframe should be subject to corrective action with only systemically-important and viable banks benefitting from state support.

  • State-owned CRSM. CRSM is significantly undercapitalized, despite repeated state support in recent years. The government allowed CRSM’s losses of €485 million (around 30 percent of total assets) to be spread over 25 years starting from 2016 and committed to recapitalize the bank with public money. Upfront loss recognition and recapitalization from public and private sources are needed to bolster confidence, improve bank governance, and resume lending to the real economy. This, together with timely and deep balance sheet restructuring, will support CRSM’s return to profitability and re-privatization over the medium term.

Improving Efficiency and Profitability

15. San Marino’s banking system requires deep restructuring to increase efficiency and restore profitability. The system is overbanked and its high average cost-to-income ratio points to significant inefficiencies (Box 2). Improved efficiency should focus on significant cost reduction, including measures to review employees’ compensation and rationalize branch network. Plans to increase earnings through risky innovation projects should be resisted to avoid excessive risk taking and ensure the banking system soundness.

16. Tax credits on the banks’ balance sheets should be converted to government bonds. These assets do not generate income, but must be funded, and thus weigh heavily on banks’ viability and act as a deterrent to raising capital from private sources. Moreover, allowing the volume of tax credits to increase as recoveries from NPLs of failed banks fall introduces moral hazard and increases fiscal costs over time. Therefore, those tax credits should be converted into coupon-bearing government bonds to help restore banks’ long-term sustainability.

Resolving NPLs

17. Advancing NPL resolution is a key to restore long-term viability of banks and support financial intermediation. To facilitate a faster NPL resolution, banks should quickly improve collection and workout capacity and engage more proactively in loan restructuring, settlement, and sales of both collateral and NPLs. These efforts should be monitored by supervisors and supported by initiatives to remove legal, regulatory, and tax impediments, including by:4

  • Strengthening supervisory oversight to ensure that banks develop credible NPL resolution strategies with ambitious and realistic NPL reduction targets. Expectations should be set on the adequacy of loan-loss provisioning and timeliness of write-offs.

  • Expediting and maximizing recovery values through liquidation and enforcement, including by streamlining the administrative processes, lowering taxes and fees related to enforcement, and adequately staffing the judicial system. The recent decision to fully liberalize the real estate market is expected to support improved collateral and NPL recovery values.

  • Facilitating rehabilitation for viable debtors by modernizing the insolvency regime and increasing the flexibility of in-court restructuring agreements. The draft legislation to facilitate out-of-court debt restructuring is welcome yet wider creditor participation and stronger creditor protection would further improve its effectiveness.

  • Removing tax disincentives for NPL disposal by relaxing the cap on tax deductibility of loan-loss provisions and eliminating time limits for tax deductibility of write-offs as well as the transaction tax on debt transfers.

Strengthening Financial Sector Oversight and Reducing Risks

18. Bank resolution framework urgently needs to be overhauled. The CBSM’s resolution tools are limited, only allowing an intervention in failing banks to exercise a recovery operation or wind them down. Bringing CBSM resolution framework to international standards, including by providing it with purchase and assumption and bridge bank tools, strengthening its bank liquidation powers, and allowing greater flexibility with burden sharing options, would enable more effective interventions.

19. Reforming the CBSM, enhancing regulations and supervision, and improving communications are critical to safeguard financial stability. Banking supervisors need sufficient powers and adequate resources to implement the financial sector strategy, carry out regular bank inspections, and monitor systemic risks. Moreover, reviewing the CBSM law with a view of enhancing its independence, governance, accountability, and transparency as well as establishing macro-analysis, crisis management, and communication functions are a priority.

20. Sustained efforts are needed to contain financial integrity risks. The authorities reported the transposition of the 4th EU Anti-Money Laundering (AML) Directive to national laws, implementation of risk-based supervision by the Financial Intelligence Agency (FIA), and strengthening of AML/CFT legal and regulatory frameworks following the AML National Risk Assessment and Action Plan. Recent peer review report on the Exchange of Information on Request published by the OECD Global Forum upgraded San Marino’s overall rating from “Largely Compliant” to “Compliant” while the EU removed San Marino from its tax haven gray list. Continuous efforts are needed to mitigate financial integrity risks, including through implementing the OECD’s Base Erosion and Profit Shifting actions, strengthening FIA-police collaboration, and improving the effectiveness of transaction monitoring by financial institutions. The authorities’ plan to prepare a second National Risk Assessment is a step in the right direction.

San Marino’s Banking Sector Structure

The Sammarinese banking system has shrunk substantially in the post-crisis period. A large deposit withdrawal, predominantly by non-residents in response to the Italian authorities’ anti-tax evasion measures, led to a significant deleveraging of the Sammarinese banking system. Nonresidents’ deposits declined by nearly 90 percent and, consequently, residents’ deposits now account for most of total deposits and financial instruments issued to customers (85 percent at end-2018). Following several mergers and liquidations, the number of banks in operation halved from twelve to six, and banks’ total assets declined to 335 percent of GDP in late-2018 from 706 percent in 2008.

uA01fig13

Banking System Assets

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

*As of November 2018.Sources: CBSM and IMF staff.

The remaining banking system assets are concentrated in a few large banks. Among the six banks operating in San Marino, the two largest—the state-owned CRSM and Banca di San Marino (BSM), which is owned mainly by a non-profit organization—account for nearly 60 percent of the banking system’s total assets. The other banks are private with shareholders in both San Marino and abroad.

uA01fig14

Banks’ asset share

(Percent, end-2017)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Sources: CBSM and IMF staff.
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Banking sector efficiency

(2017)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Sources: CBSM, IMF Financial Access Survey, and IMF staff.

The slow restructuring process has led to an inefficient banking sector, contributing to persistent losses. Despite the significant banking system deleveraging, San Marino is still overbanked with the number of branches per adult being the highest in Europe. High overhead costs alongside declining revenue have pushed the cost-to-income ratio to a high level of 108.4 percent and, together with substantial provisioning needs, contributed to persistent banking sector losses and erosion of capital.

Authorities’ Views

21. The authorities recognized the urgency of addressing banking sector vulnerabilities but highlighted challenges. They expressed constraints in reaching agreement on a financial sector strategy with all stakeholders due to the substantial banking sector recapitalization costs and favored a gradual approach to bank recapitalization to mitigate the fiscal impact. The authorities argued that burden sharing, including applied to subordinated debt, is seen as a contentious issue and noted the necessity to fully guarantee the pension deposits to boost confidence and relieve liquidity pressures. They acknowledged that banks must improve efficiency, including through a substantial cost reduction. The CBSM recognized the urgency of improved powers and tools to effectively deal with failing supervised entities and to reduce potential fiscal costs. They also highlighted that recent actions, including improving banking system liquidity management and the AQR disclosure process, are important steps towards restoring the banking system’s health. In the near term, they plan to examine banks’ proposed recapitalization programs, strengthen bank oversight and governance, and take steps to accelerate NPL reduction while increasing cooperation with the Bank of Italy. The government, as the main shareholder of CRSM, is aware of the need to recognize losses as well as recapitalize and restructure the bank so that it returns to viability and contributes to the real economy, and noted that a system-wide approach to reduce NPLs is being prepared by the banks.

B. Safeguarding Public Finances and Ensuring Debt Sustainability

22. The 2019 budget aims to achieve a balanced position, net of government transfers to CRSM. The budget introduces new measures, which are projected to partly offset the expired one-off measures in 2018, and keep the fiscal position, excluding transfers to CRSM, broadly balanced. Nevertheless, it partly relies on one-off measures such as building regularization and tax on companies’ real estate while the reduction in transfers to the Institute of social security (ISS), which continues to record sizable deficits, is not sustainable without further pension reforms (Annex VI).5

23. The projected state transfers to CRSM are likely to result in a sizable deficit in 2019. The budget includes an allocation to CRSM of €10 million, in line with the pre-determined amortization of its legacy losses. Considering also staff’s estimate of the total allocation to CRSM, the deficit is projected to be significantly higher at 2.4 percent of GDP, which—with no fiscal adjustment in the course of the year—is expected to be largely financed by continued reliance on CBSM loans.

San Marino: Fiscal Projections, 2017–24

article image
Source: IMF staff.

24. A full and upfront cost recognition of past bank interventions would make public debt unsustainable. With a gradual recapitalization of CRSM and continued forbearance on the cost related to the banking system tax credits, the official public debt figure, which stood at 26 percent of GDP in 2017 is projected to creep up to about 41 percent of GDP in 2024. However, a full and upfront cost recognition arising from past bank interventions—namely CRSM legacy losses and tax credits given to banks for acquiring failed ones—would put public debt at an unsustainable level of about 77 percent of GDP in 2017. At this level, gross financing needs would account for about one-third of total revenue, posing significant stability risks, especially given the low liquidity buffers, lack of market access, and limited debt management capacity (Annex V).

25. An ambitious fiscal adjustment that relies on both revenue and expenditure measures is needed to put public debt on a sustainable path and gradually build fiscal buffers. Staff’s analysis indicates that a public debt of about 50 percent of GDP and government deposits covering at least two months of spending are appropriate medium-term fiscal anchors for San Marino.6 This implies that banking system recapitalization would need to be supported by private contributions and an ambitious, but socially acceptable, fiscal adjustment. While the speed and magnitude of the adjustment will ultimately depend on the modalities of the banking system recapitalization strategy, staff consider sustaining a primary surplus (excluding bank support) of about 2.5 percent of GDP is feasible through both revenue and expenditure measures:

  • Revenue. With the tax-to-GDP ratio well below peers, reflecting in part the significant loss of financial sector-related revenue in recent years, there is a considerable scope to broaden the tax base. The authorities’ plan to replace the single-stage import tax (Monofase) with a value-added tax (VAT) in 2020 would remove distortions and could yield additional revenue provided that rates are sufficiently high, exemptions are limited, and the implementation timeline is consistent with the tax administration capacity (Box 3). Other revenue measures, such as rationalizing wasteful tax rebates (e.g. on petroleum), broadening excise taxation, and maintaining some elements of the wealth tax would also help increase revenue.

  • Expenditure. Significant savings could be achieved by pension reforms that would allow containing transfers to the ISS (see Annex VI). Implementing key elements of the proposed reform, including the postponement of retirement age and transitioning into a defined-contribution system, would help safeguard the pension system sustainability and achieve budget savings. The authorities’ efforts to develop a wealth indicator for households could facilitate a better-targeting of social benefits, hence strengthen the ISS financial standing. Improving spending efficiency across government units by conducting comprehensive spending reviews would allow shifting resources towards growth-enhancing spending.

Possible Fisc al Adjustment Relative to 2018 1/

article image

In cumulative terms.

Source: IMF staff and the authorities’ National Stability and Development Plan.
uA01fig16

Tax Revenue, 2017

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Sources: Eurostat and IMF staff.

26. Additional PFM reforms would help support the fiscal adjustment. Priority should be given to reforming budget formulation, strengthening macro-fiscal planning, and enhancing fiscal reporting and transparency. Setting up a Treasury department within the Ministry of Finance will help improve debt management capacity and diversify the sovereign financing sources.

VAT Implementation in San Marino

The authorities plan to introduce a VAT in 2020. While the modalities are still under consideration, the VAT is planned to replace the current main indirect tax, the Monofase, which is a single-stage import tax levied on goods and related services (e.g. transport and insurance) refunded on exports. The Monofase has a relatively narrow base and represents 53 percent of all indirect taxes with a collection of 4.2 percent of GDP in 2017. The draft law is scheduled to be presented to Parliament in the first half of 2019 and has been developed in close discussion with the Italian authorities with a view to avoiding double-taxation and no taxation.

uA01fig17

San Marino: Tax Revenue

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: Sammarinese authorities.

Benefits: Adoption of the VAT will serve multiple purposes. First, it will increase economic efficiency by shifting taxation toward final consumption rather than inputs of production as is currently the case with Monofase. Second, the VAT will enhance San Marino’s economic integration with its main trading partners, allowing businesses to share the same system of taxation. Lastly, the VAT—if implemented correctly—could play an important role in broadening the tax base and mobilize revenue in the medium term. According to the authorities’ projections, the VAT would increase revenue collection by up to one percent of GDP compared to the Monofase.

Implementation challenges: The VAT presents opportunities but also some specific challenges for San Marino. International experience suggests that VAT is an important source of revenues for microstates. However, the absence of border controls and the fact that the customs authorities are outside the country (in Italy) can increase the risk of non-compliance. A successful implementation of the VAT in San Marino would require adoption of a modern and simple VAT system with sufficiently high rates and limited exemptions to avoid revenue losses and negative economic effects. Addressing tax administration capacity issues is critical to ensure a successful VAT adoption. This requires setting out a comprehensive implementation plan, restructuring and re-training the Tax Office workforce, and upgrading its IT system. Other key elements for a successful adoption include a sound VAT refund system, an efficient exchange of information with Italy on cross-border matters, and mitigation of tax avoidance and evasion. Two IMF technical assistance missions (May and November 2018) guided the authorities on implementation issues.

Authorities’ Views

27. The authorities recognized the fiscal risks related to banking system repair and concurred that fiscal reforms are needed to ensure debt sustainability. They acknowledged that the government’s transfers to CRSM could have an adverse impact on the 2019 fiscal balance but stressed their intention to introduce further measures during the year to contain the deficit, after CRSM financial statement is approved. The authorities noted the challenging political environment and the need to achieve broad agreement with social partners to ensure a successful implementation of indirect taxation and pension reforms. The authorities emphasized that the budget law prohibits the conversion of tax credits into government bond. They also underlined that domestic resources for banking system repair are insufficient and noted their intention to seek external financing.

C. Promoting a Sustained Economic Growth

28. Sustained efforts are needed to improve the business environment. Notwithstanding the welcome improvement in San Marino’s Doing Business score in recent years, the economy still performs poorly in several indicators, suggesting that there is scope to reduce structural impediments to better attract foreign investment and improve external competitiveness. Priority should be given to further reducing red tape, streamlining the judicial processes, improving corporate governance, and enhancing creditors and borrowers’ rights.

uA01fig18

Doing Business Score, Distance from the Frontier

(0–100, where 100 is the frontier)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Sources: World Bank, Doing Business.

29. Strengthening labor supply further will support higher productivity and enhance growth prospects. The recent “Development Law”, which eased the process for hiring nonresidents, has shown results. Yet, further relaxation, including by removing the surcharge on hiring nonresidents while expanding the range of residency permits to foreign workers would help reduce the skill mismatches, alleviate capacity constraints, and increase productivity. The recently established Office for Active Labor Market Policies could support higher employment and growth by more targeted social benefits as well as enhanced training and job search.

30. Increasing economic integration and addressing infrastructure gaps would increase competitiveness and help expand market access. The newly-established Economic Development Agency is expected to help expand market access for domestic firms, attract tourists, and promote higher foreign direct investments, while a conclusion of the Association Agreement with the EU would bring further benefits, including by simplifying the operations of Sammarinese firms abroad. These efforts should be complemented by higher investment in telecommunication and transportation to improve business connectivity with trading partners.

Authorities’ Views

31. The authorities reiterated their commitments to tackle structural impediments. They noted that further integration with Italy and EU would provide domestic companies better opportunities to expand and operate abroad and emphasized that improving infrastructure in telecommunication, for which important investment have already been made, and transportation will help increase connectivity and promote higher growth. Given the tight budget constraints, the authorities favored facilitating higher private investment, including in innovative sectors, by subsidizing firms’ loan interest payments, expanding tax incentives, reducing red tape, and utilizing public-private partnerships. The authorities emphasized the untapped potential in the tourism sector and underlined their plans to boost hotels’ capacity and develop skills in this sector.

Data

32. Progress has been made in enhancing data provision but more needs to be done. The authorities started using the standardized Report Forms to publish the IMF Monetary and Financial Statistics in 2018, and with the support of IMF technical assistance, produced balance of payment statistics for 2017 and international investment position for 2016–17. While data provision is broadly adequate for surveillance, data gaps, including in the balance of payment and external debt components, exist, requiring further efforts to improve the quality, frequency, and reporting of relevant statistics such that businesses and policymakers could better assess the state of the economy and make informed decisions.

Staff Appraisal

33. San Marino’s growth prospects are weighed down by legacy problems and downside risks. Past failures and deep-rooted weaknesses in the banking system have dampened credit conditions, undermined economic activity, and are now threatening financial stability and fiscal sustainability. Real GDP growth is set to remain subdued over the near and medium term on the back of continued banking system deleveraging and less favorable external conditions while elevated financial and fiscal fragilities pose significant downside risks. The external position is weaker than implied by fundamentals and desirable policy settings.

34. A significant policy adjustment is urgently needed to shift San Marino to a sustainable path of growth and prosperity. Restoring credit supply, stabilizing the banking system, and mitigating fiscal risks would require immediate implementation of a comprehensive strategy that will consist of banking system restructuring, an ambitious and growth-friendly fiscal consolidation, and structural reforms to boost competitiveness and bolster growth. A full commitment of all stakeholders in San Marino is critical for a successful implementation of this strategy.

35. Safeguarding CBSM liquidity buffers should be a priority. The CBSM reserves should be brought to adequate levels, including by aligning the ELA framework with best practice and restricting CBSM budget financing to only exceptional needs and on a temporary basis. Well-developed measures and a carefully-crafted communication strategy are crucial to respond to a potential resurgence in liquidity pressures and to safeguard the payment system.

36. Rapid progress on banking system restructuring is critical to restore viability. Upfront loss recognition and recapitalization are needed to improve confidence, restore financial intermediation, and increase banks’ resilience to shocks. Systemically-important and viable banks should benefit from state support to the extent feasible following burden sharing, while other undercapitalized banks that fail to raise fresh capital from private sources should be subject to corrective action. Converting tax credits held by banks into government bonds and significantly reducing banks’ operating costs are needed to support viability and capacity to build capital through internal means. High NPL levels need to be reduced to safe levels over the medium term through intensive supervisory oversight of NPL reduction targets as well as measures to remove tax, legal, and regulatory impediments.

37. Steps to strengthen financial sector oversight and further reduce risks would help safeguard financial stability. Enhancing the CBSM’s intervention powers and tools would substantially improve financial safety nets while strengthening supervisory capacity would ensure effective risk monitoring and timely interventions in failing banks. A review of the Central Bank law is needed to enhance its independence, governance, and accountability. Sustained efforts to contain financial integrity risks, including in the context of the ongoing preparation of the second National Risk Assessment are welcome.

38. Putting public debt on a sustainable path and gradually building fiscal buffers require a broader fiscal strategy. Limiting the state’s contribution to bank recapitalization and adoption of a credible fiscal adjustment, which relies on indirect tax and pension reforms, rationalization of wasteful tax rebates, and improvement of spending efficiency, are needed to safeguard public finances and build adequate fiscal buffers. Strengthening debt management capacity and diversifying the sovereign financing sources are also critical to reduce fiscal risks.

39. Addressing structural weaknesses and expanding market access are important to promote higher growth. Policies should focus on strengthening the labor supply, including by further relaxing hiring restrictions of nonresidents, better targeting social benefits, and delaying the retirement age. Further improvements in the business climate, increasing economic integration and closing the infrastructure gaps, particularly in transportation and telecommunication, would boost foreign investment and medium-term growth.

40. Efforts to improve data provision need to be sustained. San Marino has made a welcome progress in improving data provision and reporting. Ensuring that sufficient resources are allocated to the Statistical Office and the CBSM would help close the remaining data gaps and improve the frequency, coverage, and reporting of relevant statistics, thus allowing businesses and policymakers to make informed decisions.

41. Staff propose that the next Article IV consultation with the Republic of San Marino follows the standard 12-month cycle.

Figure 1.
Figure 1.

San Marino: Macroeconomic Developments

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: World Economic Outlook, UPECEDS, and IMF staff.
Figure 2.
Figure 2.

San Marino: High Frequency Indicators

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: Central Bank of San Marino and IMF staff.
Figure 3.
Figure 3.

San Marino: Fiscal Developments

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: Eurostat, Sammarinese authorities, and IMF staff.
Figure 4.
Figure 4.

San Marino: Financial Sector

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: Central Bank of San Marino and IMF staff.
Table 1.

San Marino: Selected Economic and Social Indicators, 2016–24

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Sources: International Financial Statistics; IMF Financial Soundness Indicators; Sammarinese authorities; World Bank; and IMF staff.

For the central government.

2018 data are as of September 2018 for Deposits and as of August 2018 for the others.

2017–18 data do not reflect 2017 AQR results. 2018 data are as of September 2018.

CBSM supervisory data. Supervisory data reflect retrospective revisions made by banks in closing their annual financial statements and loans to banks are excluded.

Table 2a.

San Marino: Statement of Operations for Budgetary Central Government, 2016–24

(Millions of euros)

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Sources: Sammarinese authorities; and IMF staff.
Table 2b.

San Marino: Statement of Operations for Budgetary Central Government, 2016–24

(Percent of GDP)

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Sources: Sammarinese authorities; and IMF staff.
Table 3.

San Marino: Balance of Payments, 2017–24

(Millions of euros)

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Sources: San Marino Statistical Office and IMF staff.

Preliminary estimates for 2017 and 2018.

Table 4.

San Marino: Depository Corporate Survey, 2012–18 1/

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Sources: International Financial Statistics and IMF Staff.

Data beginning in June 2015 accord to the IMF’s monetary and financial statistics methodology, and are not strictly comparable to earlier periods.

Table 5.

San Marino: Financial Soundness Indicators, 2012–18

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Sources: Sammarinese authorities; IMF International Financial Statistics; and IMF staff.

2017–18 data do not reflect 2017 AQR results.

CBSM supervisory data. Supervisory data reflect retrospective revisions made by banks in closing their annual financial statements and loans to banks are excluded.

Annex I. Asset Quality Review and Staff’s Estimate of Bank Recapitalization Needs

1. The CBSM recently updated the Asset Quality Review (2017 AQR update) to reassess banks’ asset quality and identify their recapitalization needs. This exercise updated the 2016 AQR, which was performed by an international consulting firm and used June 2016 data. The 2017 update was carried out by the CBSM with the assistance of another consulting firm. It used June 2017 data and broadly followed the ECB comprehensive assessment methodology for data integrity validation, assessment of loan classifications, collateral valuations, and loan provisions. The update largely relied on the 2016 AQR and did not involve any fresh credit file reviews or independent collateral valuations. The exercise covered six banks, one leasing company, and one closed NPL fund, which comprise about 91 percent of San Marino financial system’s assets when CRSM’s exposure to Delta and other closed NPL fund assets are excluded. Banks capital requirements and additional provisions were assessed against both international standards (Basel III) and San Marino regulations.1

2. Based on the 2017 AQR update, a capital shortfall in the banking system is estimated to be €540 million (39 percent of GDP) under the application of the San Marino capital requirements, which are materially weaker than international standards. The capital shortfall at end-2018 is composed of the outstanding CRSM legacy losses (€465 million) and re-estimated capital shortfalls in the banking system based on the 2017 AQR update (€75 million).2 The application of fully loaded Basel III capital standards would require significantly higher capital levels due to higher provisioning, higher minimum capital requirements and full deduction of deferred tax assets (DTAs)3. Yet, even with less stringent requirements under the domestic capital requirements, the identified capital shortfalls are sizable, reflecting a substantial increase in provisioning needs. The exercise resulted in the NPL ratio (excluding the CRSM’s exposure to Delta group) increasing to 51 percent from 44 percent, but it would be about 55 percent if the NPLs in the closed funds were included, and even higher if the residual exposure to Delta Group (subsequent to the 2018 sale of Delta Arcade portfolio) was included.

uA01fig19

San Marino: Banking System Recapitalization Needs

(Percent of GDP, staff estimate)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

* Higher capital levels will be required under the application of the EU standards, which are expected to be transposed in 2019 with a transition period. Sources: CBSM and IMF staff.

3. Banking system recapitalization should also consider banks’ tax credits, amounting to €211 million (15 percent of GDP). Past bank resolutions were funded by the government through providing tax credits to banks that acquired a failed bank as compensation for the excess liabilities over assets of the failed bank. The tax credits do not generate any income, but must be funded, and thus constitute an indirect tax on banks that weighs heavily on their profitability and act as a major deterrent to attracting fresh private investment. Replacing tax credits with interest-bearing assets (e.g. government bonds) would help restore banks’ viability and improve attractiveness for private investors.

4. Bank recapitalization should be a key element in the authorities’ financial sector strategy. While caution is needed, given that the estimates are based on the 2017 AQR update results, which is becoming outdated with time, the outstanding recapitalization needs—the sum of capital shortfalls and tax credits—are estimated to be €751 million (54 percent of GDP). Private banks should be required to promptly address their capital shortfalls from private sources. Those who fail to meet the capital requirement would need to be subject to corrective action or, if systemically important, receive necessarily restricted state support following agreement on recapitalization and restructuring plan. A strategy to meet additional recapitalization needs to implement Basel III should also be considered carefully.

Annex II. Risk Assessment Matrix1

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Annex III. Reserve Adequacy for San Marino

1. San Marino’s system-wide liquidity buffers have declined considerably in recent years. The aggregate liquidity buffers—comprised of international reserves and decentralized liquidity buffer held by commercial banks outside the CBSM1—have fallen sharply in 2015–17 on the back of significant deposits outflows by both residents and non-residents, withdrawal of government deposits, and CBSM liquidity support to the banking system and the government. At end-2018, the overall liquidity stood at €758 million, slightly deteriorated from end-2017, and nearly half of the liquidity buffers in 2014.

uA01fig20

Liquidity buffers

(millionsof euros)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Sources: CBSM, MoF and IMF staff.

2. The international reserves appear low by both standard reserve adequacy metrics and the Fund ARA EM metric.2 Standard metrics such as the imports coverage ratio, the ratio of reserves to short-term external debt, and the ratio of reserves to broad money, indicate that the international reserves in San Marino are below what is considered to be an adequate level, though significant variations exist among these indicators in terms of the size of the reserve shortage. The Fund ARA EM metric—a composite metric designed to better capture a range of capital outflow risks— shows that the international reserves only amount to 47 percent of the metric, significantly below the range which is generally considered to be adequate (100–150 percent). These results suggest the importance for San Marino to build up reserves.

uA01fig21

Reserve coverage metrics

(as of end 2018)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Note: ARA EM metric is defined as 10% of exports of goods and services, 30% of non-resident sight deposits, 20% of other liabilities to non-residents, and 10% of broad money. 2018 import/export is an esimate. Broad Money and other liablity data are as of August, 2018. Sources: CBSM, IMF Monetary and Financial Statistics, and IMF staff.

3. Reserve adequacy assessment in San Marino warrant further analysis taking into account some specificities of the Sammarinese economy. As a fully euroized economy that does not have access to external markets, San Marino largely relies on the international reserves as a buffer against possible liquidity shocks faced by the banking system and the government. The decentralized liquidity buffer could help against liquidity shortages and possible capital outflow risks, yet they cannot fully substitute for the international reserves as they are outside the CBSM’s control and, in the absence of a well-functioning interbank market, they can only be used against liquidity pressures of the commercial bank holding the assets.

4. In light of above, staff developed an alternative metric to measure reserve adequacy against liquidity risks in the banking sector and the public sector. Specifically, the metric is composed of the following two elements:

  • Liquidity needs in the banking sector: Demand deposits placed by commercial banks at the CBSM should be readily available for redistribution to commercial banks in need, as they are a part of banks’ liquidity buffers. In episodes of acute liquidity pressure, the CBSM should stand ready to provide liquidity to solvent banks, which run out of their own liquidity buffer by easing reserve requirements and provision of loans through a formalized Emergency Liquidity Assistance (ELA) framework. Thus, the metric should cover 100 percent of demand deposits of banks, reserve requirements at the CBSM, and contingent liabilities to banks.

  • Liquidity needs in the public sector: With currently no access to external market, the level of CBSM reserves should also be sufficiently high to provide short-term liquidity support to the government to mitigate fiscal shocks or seasonal financing needs. Additionally, the CBSM accepts demand deposits from other public institutions such as SOEs and pension funds, which should be readily available to the institutions as part of their liquidity management. Thus, the metric covers (i) two standard deviations of the historical series of CBSM financing provided to the government, which are roughly equal to two months of government spending, as fiscal buffer that the CBSM needs to set aside for the government, (ii) any committed credit line the CBSM has given to the government, and (iii) 100 percent of demand deposits from other public institutions.

uA01fig22

GIR coverage and banking sector liquidity

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Note: Reserve coverage is defined as gorss international reserves as a share of the reserve needs. The latter is the sum of (1) reserve requirements, (2) sight deposits (excl. the government deposits), (3) fiscal buffer, and (4) credit lines (expected loans) to banks and the government. Sources: CBSM and IMF staff calculations.
uA01fig23

Reserve Needs

(millions of euros, as of end 2018)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Note: Demand deposits of public institutions exclude the government deposits at the CBSM for liquidity buffer purpose.Sources: CBSM, IMF Monetaryand Financial Statistics, and IMF staff.

5. The proposed metric suggests that the international reserves are well below levels adequate for prudential purposes. The international reserves have fallen to 72 percent of their adequate level at end-2018 from around 120 percent in early-2017 owing to the increased CBSM loans and credit lines to the government and banking sector and investment in illiquid securities. Based on this metric, the gross international reserves at end-2018 are estimated to be €96 million below the minimum reserve level. CBSM may need to hold a higher buffer if further liquidity support to banks and volatility of government cashflows becomes likely.

Annex IV. Implementation of IMF Recommendations

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Annex V. Debt Sustainability Analysis

Banking system recapitalization needs jeopardize public debt sustainability. Staff’s baseline scenario, which includes the states’ excessive commitments to the banking system (CRSM’s legacy losses and tax credits given to banks) suggests that the implicit public debt stood at about 77 percent of GDP in 2018. This level, which is unsustainable for San Marino given its limited domestic financing options, lack of market access, and weak debt management capacity, highlights the need for an ambitious and durable fiscal adjustment, stronger public debt management, and carefully controlled public sector contributions in the banking system recapitalization strategy to limit public debt increases. While data weaknesses limit the analysis on external indebtedness, gross external debt is projected to decline over the medium term due to continued capital outflows, including from the domestic banking system.

1. The official public debt figure has yet to fully recognize significant fiscal commitments to the banking system. The government committed to amortize the CRSM legacy losses, which currently stand at €465 million, over a period of 25 years, but has yet to fully recognize their fiscal cost as part of public debt. Banking system tax credits, which were given to banks to cover the asset-liability gap when they absorbed failed banks, are also not fully recognized as fiscal liabilities. This suggests that the implicit public debt, which staff estimate at about 77 percent of GDP in 2018, is well above the official public debt of 27.5 percent of GDP.1

2. The implicit public debt is projected to remain broadly flat over the medium term. Staff baseline scenario indicates that the implicit public debt is projected to increase only slightly to 78.3 percent of GDP by 2024 as sustained primary deficits are projected to be offset by growth-interest rate differentials (Figure A5.1). As large part of the estimated implicit public debt has not been incurred by the government yet, gross financing needs are projected to remain at around 5 percent of GDP, increasing over time (Figure A5.2).

Figure A5.1.
Figure A5.1.

San Marino: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(In percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: IMF staff.1/ Public sector is defined as central government.2/ Based on available data.3/ Long-term bond spread over German bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r – π(1+g) – g + ae(1+r)]/(1 +g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r – π (1 +g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
Figure A5.2.
Figure A5.2.

San Marino: Public DSA—Composition of Public Debt and Alternate Scenarios

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: IMF staff.

3. A full and upfront recognition of the state’s financial commitments to the banking system would bring public debt to an unsustainable level. The baseline scenario does not consider interest payments on the unrecognized fiscal costs since no debt has been formally issued by the authorities. However, incorporation of estimated interest payments of the implicit public debt would result in an increase of gross financing needs to about 8 percent of GDP (around 30 percent of revenue), posing significant rollover risks, especially given the limited domestic financing options, no market access, and weak debt management capacity.2 Adverse economic conditions will further amplify these risks (see adverse scenarios below and Figure A5.3). This also implies that the largely green heat map (Figure A5.4) is not indicative for San Marino, as the debt thresholds are calculated for countries with established market access. Staff analysis highlights the need for an ambitious and durable fiscal adjustment, stronger public debt management, and careful design of banking system recapitalization modalities to limit public debt increases.

Figure A5.3.
Figure A5.3.

San Marino: Public DSA—Stress Tests

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: IMF staff.
Figure A5.4.
Figure A5.4.

San Marino: Public DSA—Risk Assessment

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: IMF staff.1/ The cell is highlighted in green if debt burden benchmark of 85% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.2/ The cell is highlighted in green if gross financing needs benchmark of 20% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 400 and 600 basis points for bond spreads; 17 and 25 percent of GDP for external financing requirement; 1 and 1.5 percent for change in the share of short-term debt; 30 and 45 percent for the public debt held by non-residents.4/ Long-term bond spread over German bonds, an average over the last 3 months, 04-Sep-18 through 03-Dec-18.5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

4. Several adverse scenarios were considered to further assess the sustainability of government debt. These standardized scenarios, which are applied to the baseline, include low growth, a deterioration in the primary balance, realization of contingent liabilities, and high borrowing costs. The results indicate that public debt is highly vulnerable to adverse macroeconomic conditions:

  • Real growth shock. Real GDP growth rate is assumed to decline by one-standard deviation below the baseline during 2019–20 and the interest rate increase by 25 basis points for one percent of GDP deterioration of the primary balance compared to the baseline. Under this scenario, the public debt ratio would increase to 82 percent of GDP by 2020, and to 90 percent of GDP by 2024.

  • Primary balance shock. A deterioration of 1.5 percentage points of GDP in the primary balance in both 2019–20 is expected to increase the public debt by 3 percentage points relative to the baseline, reaching 81 percent of GDP by 2024.

  • Contingent liability shock. Additional costs related to banking system repair (10 percent of GDP) accompanied by lower growth in 2019–20 and higher borrowing cost (by additional 300 basis points) will increase public debt rapidly in an unsustainable manner to about 100 percent of GDP by 2024. Gross financing needs increase to about 9 percent of GDP.

  • Real interest rate shock. Under this scenario, which envisages an interest rate increase of 300 basis points, public debt is projected to increase to 80 percent of GDP by 2024.

  • Combined macro-fiscal shock. Under this scenario, which is a combination of the above shocks (excluding the contingent liability shock), the public debt would reach 84 percent of GDP by 2020, and then gradually increase to 93 percent of GDP by 2024.

5. San Marino’s gross external debt is set to decline on the back of continued, albeit more moderate, capital outflows. San Marino’s gross external debt stood at 89 percent of GDP in 2017, where deposit liabilities of deposit-taking corporations accounted for the largest component. With continued capital outflows, including from the banking system, gross external debt is projected to have declined to 78 percent of GDP in 2018 and remain on a downward trajectory over the medium term, reaching a level of 53 percent of GDP by 2024. All else equal, lower growth, a deterioration in the current account, and a slower price growth relative to that in key trading partners (real exchange rate depreciation) would result in a higher trajectory of external debt relative to the baseline.

6. The analysis is subject to a number of caveats reflecting limited data availability. First, due to lack of data, gross external debt does not include FDI debt instrument liabilities, and as a result, gross financing needs may be underestimated. In addition, limited availability of external sector historical data required making assumptions about averages and standard deviations of key variables, such as non-interest current account balance, export and import growth, and non-debt creating capital flows, that are used for the stress tests.

Figure A5.5.
Figure A5.5.

San Marino: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.3/ One-time real depreciation of 10 percent occurs in 2020. Because San Marino is a fully euroized economy, the real depreciation entails a one-time 10 percent decline in the domestic price level.
Table A5.1.

San Marino: External Debt Sustainability Framework, 2017–24

(In percent of GDP, unless otherwise indicated)

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Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator)

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period. Due to lack of data, it has been assumed that short-term external debt is equal to one third of total external debt, while medium- and long-term amortization amounts to 10 percent of nominal GDP. These assumptions reflect Italian external debt data.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Annex VI. Demographic Pressure and Pension Reform1

A. Introduction

1. Population ageing will pose significant fiscal challenges in San Marino. With projected fertility rates remaining below replacement levels in the future, a slower population growth and high life expectancy are expected to triple the old-age dependency ratio over the next forty years, posing significant challenges to the sustainability of the welfare system. The authorities’ efforts to address the demographic pressures and implement a pension reform as part of their National Stability and Development Plan are timely, particularly given the fiscal risks that are related to banking system recapitalization and the needed fiscal adjustment to ensure public debt sustainability.

B. Demographic Outlook

2. Slow population growth and high longevity will lead to a rapidly ageing society. According to UN projections (2017 Revision of the UN World Population Prospect), San Marino’s population will continue to grow in the coming decades, but at a gradually slower pace. The population will start declining by 2050, in line with trend observed in other EU countries, as the fertility rate, which is already below replacement levels (1.33 births per woman), is expected to remain low over the coming decades.2 In addition, the average life expectancy in San Marino is 84.6 years and among the highest in the world, reflecting in part the universal coverage and quality of the health care system.3 With a ratio of people aged 65 and older to those aged 15 to 64 years already reaching 30 percent in 2017, a level close to the EU average, the old-age dependency ratio is expected to significantly increase in the coming decades. According to staff projections, this ratio is expected to reach 60 percent by 2050 and stabilize thereafter, thus impacting the already generous social security system, whose biggest outlays are concentrated on pensions and healthcare (seeBoxA6.1).4

uA01fig24

Population growth

(percent 10-year intervals)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

uA01fig25

Old-Age Dependency Ratio

(ratio of elderly overworking age population, percent)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

C. Challenges from Population Ageing

3. Spending on pensions has increased rapidly. As a share of GDP, spending on pensions has more than doubled since 2004, rising from 5 percent to about 13 percent in 2017. This rapid increase has occurred despite the two pension reforms approved in 2005 and 2011, which were implemented to address the negative impact of demographic pressures. Several factors contributed to this development5 First, thanks to increased longevity, the increase in the old-age dependency ratio has steadily contributed to more spending on pensions for the same level of GDP. Second, spending per pensioner has grown faster than GDP per worker due to the economic crisis and the contraction in GDP that followed. While an increase in contribution rates and an extension of the contributory periods approved during the past reforms have positively affected overall contributions as a share of GDP, their growth has stalled in the aftermath of the crisis due to lower labor force participation. Moreover, the ratio of pensioners to population aged 65 and older has increased from 107 in 2000 to 138 percent in 2017, contributing to a deterioration in the pension fund’s deficit.

uA01fig26

Pension Fund Contributions, Spending and Balance

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: Sammarinese authorities and IMF staff.
uA01fig27

Change in ordinary pension expenditures

(Percent)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: Sammarinese authorities and IMF staff.

4. Pension spending is projected to increase further owing to continued demographic pressure. In a baseline scenario, spending on pensions is projected to reach around 26 percent of GDP by 2040 and slowly decline to 25 percent by 2070. This projection, which is broadly consistent with the authorities’ official estimates, assumes that growth of pensions in San Marino is only determined by the growth of old-age dependency ratio (IMF projections).

5. The trajectory of pensions spending in San Marino exceeds that in many EU countries. On average, spending on pension is expected to remain broadly constant in percent of GDP at the EU level: it will slightly increase in 2040 and then decline by 2070. This bell curve trajectory is also observed in Italy, with pensions spending trending upward until 2040, and then slow down by 2070 as the impact of the pension system stabilizers and past reforms start to produce their effects (European Commission, 2018). For other EU countries for which pension spending is expected to follow an upward trend, the increase is more modest compared to what is expected in San Marino.

uA01fig28

Pension Expenditure Projection-San Marino

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: Sammarinese authorities, Commission services, Economic Policy Committee.
uA01fig29

Pension Expenditure Projection-Selected EU countries

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: Sammarinese authorities, Commission services, Economic Policy Committee.

6. The current pension system is unsustainable. Notwithstanding the impact of previous pension reforms, the deficit of the pension fund is projected to reach 10 percent of GDP by 2030. Assuming that the central government transfers to ISS are kept at a maximum of 25 percent of total contributions, these will likely be insufficient to finance the deficit, requiring a drawdown of reserves. While the reserves accumulated in the pension fund are currently high (about 27 percent of GDP), they are projected to contribute to the financing of the deficit only up to 2030, before depleting and exercising unsustainable pressures on the budget. This rapid depletion of pension fund reserves may also have systemic implications for the banking system given the already low level of liquidity. This highlights the need for further pension reforms to safeguard financial and fiscal sustainability.

uA01fig30

Pension Fund Deficit and Financing

(percent of GDP)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: Sammarinese Authorities and staff estimates.

D. Reform Options

7. Past reforms have increased retirement age and contribution rates while introducing a second, fully-funded pillar. Statutory retirement ages for both females and males have been brought in line with those observed in other EU countries (Table A6.1) and are set to increase to 66 years by 2021. The minimum years of contributions for old-age retirement has been increased to 20 years, though early retirement is now possible at age 60 with at least 40 years of contributions. The reforms have progressively increased and equalized the mandatory contribution rates across various categories of workers. The 2011 reform introduced a second pillar, a capitalization system, mandatory for both dependent and self-employed, administered by the Fondo di Previdenza Complementare della Repubblica di San Marino (FONDISS).6 The 2019 Budget has reduced the favorable fiscal treatment of pension income compared to general income, by reducing the income tax deduction on pensions.

Table A6.1.

Public Pension Systems and Demographic Indicators in Selected European Countries

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Sources: EU Commission, Sammarinese authorities, and IMF staff calculations.

The benefitratiois the average pension divided by the average wage.

As of 2016. As of 2019 for San Marino

The dependency ratio is the ratio between persons aged 65 and over and persons aged 15–64.

The coverage ratio is the total number of pensioners as a share of the population aged 65 and over.

8. Despite these reforms, pension benefits in San Marino remain among the highest in Europe. The benefit ratio (average pensions divided by average wages) is 71 percent and is high compared to an EU average of 50 percent (Table A6.1). While past reforms have reduced the replacement rate, pensions remain generous compared to other systems.7 Pensionable earnings included in the calculation of the benefits are based on the previous 20 years before retirement, which leads to higher pension spending. Many countries have instead adopted pension benefits formulas which use the full career earnings as the reference to calculate pension entitlements, thereby linking benefits and contributions, while retirement ages increase automatically with life expectancy. Also, on average, accrual rates in Europe are between 1.5 and 1.7 percent, which on average guarantees replacement rates around 50 percent.

9. Early retirement options are generous. The system has two types of early retirement: the early retirement without penalties (“quota 100”) and early retirement with penalties. Both types affect heavily the sustainability of pension spending considering the demographic changes and steady reduction in the number of employee per pensioner. Furthermore, the penalties for early retirement before age 60 are exceptionally low: retiring at 57 (i.e. eight years before the normal retirement age) incurs a total penalty of 20 percent while, in comparator countries, the total reduction ranges between 38.4 and 57.6 percent. Retiring six years early incurs a penalty of 10 percent—only one-third to one-fourth of what other countries apply in order to discourage early retirement.

10. Further changes will be needed to stabilize the pension deficit. As the system is already registering a structural deficit, the proposed reforms should focus on reducing the pension system funding gap, limiting the amount of resources transferred from the public budget and sustaining future fiscal sustainability (see DSA, Annex V). The policies needed to address imbalances in pension systems will require changes to the parameters of the system, like statutory retirement age, contribution rates and the way benefits are calculated. The combination of these policy changes should be designed to guarantee that public pensions provide for adequate living standards.

11. The scope for further parametric reforms could be conducted through a careful actuarial review in the context of the ongoing policy discussions. Reform proposals currently discussed include an increase in retirement age, the passage to a defined contribution system and incentives for complementary pensions (see Box A6.2). Further changes might be necessary to stabilize pension spending. As a way of illustrating the trade-offs involved when it comes to parametric reforms,8 if San Marino were to stabilize pension spending at 13.3 percent of GDP by 2030, it would be necessary to reduce pension benefits across the board by 40 percent without increasing payroll taxes or retirement age. On the other hand, stabilization of pension spending could be obtained by increasing retirement age by 5.1 years, without cutting benefits or increasing payroll taxes, or increasing payroll taxes by 18.2 percentage points without raising retirement age of cutting benefits. Any combination of the above policies could still stabilize the pension spending (see chart below),9 with a modest increase in social contributions rates.10 These policies will not fully eliminate the funding gap and may require further state support. However, capping state support at 2 percent of GDP could lead to saving of about 1 percent of GDP per year while allowing to stabilize pension reserves by 2030. Other reforms currently under discussion could be introduced to permanently stabilize pension deficit after 2030 and ensure that the fiscal transfers and liquidity levels remain adequate and do not jeopardize fiscal sustainability and financial stability. To ensure these policy objectives are achieved, more detailed pension fund projections will be needed.

uA01fig31

Reform Options to Stabilize Pension Spending by 2030

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: IMF staff
uA01fig32

Projected Pension Spending and Impact of Reforms

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Source: IMF staff

San Marino’s Social Security System

San Marino provides a wide range of social security benefits. The system of social security is managed by the Institute for Social Security (ISS), a public entity partly financed by the central government. Spending on social security benefits by ISS can be classified into three main groups: healthcare, temporary benefits, pensions. Spending on healthcare and pensions account for more than 85 percent of total spending. The remaining share, which is spending on temporary benefits, is represented by family allowances, unemployment-related benefits and compensations for occupational sickness and injuries. As of end-2017, spending on social security totaled €295 mill. (21 percent of GDP).

uA01fig33

Social Protection Benefits

(Share of Total Value)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Spending on pension is aligned with EU average. When compared to national income, the level of spending on social security is below the level observed in bigger countries like France, UK and Italy, but somewhat above the level observed in countries with smaller population size, like Malta and Cyprus. San Marino spends relatively less than the EU average on healthcare and other benefits, while spending on pension is close to the EU average. Also, in relative terms, San Marino spends a higher amount on pensions compared to the rest of the EU by almost ten percentage points, a level which is similar to Italy and Cyprus.

uA01fig34

Social Protection Spending by Function

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 085; 10.5089/9781498304887.002.A001

Pension Reform Proposals

The government has been discussing with social parties a set of reforms to address the sustainability of the pension system. While the discussions are ongoing and a draft reform is not available, these are some of the proposals that the government has advanced:

  • Increase in retirement age. A minimum retirement age of 63 years with 40 years of contributions (“Quota 103”) for early retirement and an increase in statutory retirement age to 67 years for old-age pensions.

  • Defined contribution. The introduction of a defined contribution mechanism based on actuarially fair rules.

  • Automatic adjustment. The retirement age would be automatically linked to life-expectancy.

  • Part-time retirement. The mechanism would enable workers approaching retirement age to reduce their working hours and to be granted an early partial seniority pension.

  • Working in retirement. Retirees benefitting from old-age pension would be allowed to continue to work and pay into the pension funds.

  • Means-testing. The minimum pensions would satisfy a means-test.

  • Expanding complementary pensions. The proposals intend to incentivize the use of complementary pension systems. These include increasing the deductibility of contributions paid by employers and workers and governance reforms to improve investment rules which provide inadequate returns.
1

Preliminary GDP estimates for 2018 will be available at end-2019.

2

Five banks were issued €211 million of tax credits, with about half allocated to CRSM. These perpetual instruments, which may increase over time during semiannual revaluations of the NPLs of failed banks, can be used only to offset future tax liabilities. However, the tax credits are unable to generate income or absorb losses, are not marketable or transferrable, and would possibly result in a cost to the state should a bank be liquidated.

3

Household debt, as measured by households’ loans from the domestic banking system, declined to 41 percent of GDP in 2017 from 60 percent of GDP in 2013.

4

The 2016 Selected Issues Paper provides a comprehensive discussion on the impediments for NPL resolution.

5

The cut in transfers will require ISS to draw on its own reserves from the banking system. In no reform scenario, the ISS structural deficit is likely to drain these reserves by 2030 and potentially worsen banks’ liquidity positions.

1

CRSM’s exposure to Delta was included in the 2016 AQR, but excluded from the 2017 AQR update since the bank made a significant write down related to Delta exposure in the 2016 financial statements.

2

Since the 2017 AQR update used June-2017 data, the end-2018 capital shortfall levels are estimated by taking into account the major changes in banks’ financials between June-2017 and end-2018.

3

Additional capital needs under the Basel III standards are estimated as the sum of (i) additional capital shortfalls under the Basel III identified by the 2017 AQR update, (ii) outstanding DTAs at end-2017, and (iii) expected increase in DTAs due to additional losses to be recorded under the application of Base III.

1

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities.

1

This includes cash, deposits and loans available within 7 days, and securities that can be readily converted to cash but does not include deposits at CBSM and Sammarinese banks.

1

The sharp increase in the implicit public debt in 2017 follows the 2016 AQR, which identified a significant capital shortfall in state-owned bank, CRSM, mainly due to additional provisions related to Delta portfolio.

2

The issuance of government debt would result, depending on the structure of debt, in additional 1–1.5 percent of GDP interest payments between 2019–24.

1

Prepared by Salvatore Dell’Erba (EUR), with helpful comments and suggestions from Mauricio Soto and Csaba Feher (FAD).

2

Due to the considerable uncertainty surrounding long-term demographic projections, the UN produces three different scenarios, a “low”, “medium” and “high” scenario characterized by different assumptions on the assumed fertility rates. The results presented here are based on the medium-variant projection, which assumes that the global fertility level will decline from 2.5 births per woman in 2010–15 to 2.2 in 2045–50, and then fall to 2.0 by 2095–2100.

3

Evans, D, A. Tandon, C. Murray, and J. Lauer, 2000, “The Comparative Efficiency of National Health Systems in Producing Health: An Analysis of 191 Countries,” GPE Discussion Paper No. 29, EIP/GPE/EQC, World Health Organization, Geneva.

4

The UN does not provide projections for the old-age dependency ratio for San Marino. San Marino’s old-age dependency ratio is projected using the Economic Policy Committee’s Working Group on Ageing Populations and Sustainability projections for Italy.

5

Pension expenditure to GDP is the product of four main factors: the benefit ratio (average pension divided by GDP per worker); the coverage ratio (pensioners per population aged 65 and older); the inverse of the labor force participation and the old-age dependency ratio (population of 65 and older to population 15–64). See IMF (2015). The chart focuses on the growth of ordinary pensions, excluding privileged pensions.

6

The contribution rates for the mandatory individual accounts are 2 percent of gross earnings (payroll) for employees (employers) and 3 percent of income for self-employed.

7

The benefit is calculated as follows. An accrual rate 2 percent is multiplied by the numbers of year of contributions until half of the legally established average annual income (€45,501 for 2018), a 0.75 percent rate (1.5 percent for coverage before 2012) is used for the excess amount, leading to an average replacement rate of 55 percent. The reference earnings used to calculate the benefit are the average daily earnings of the last 20 years (10 year before 2012) before retirement, adjusted for the cost of living index, divided by the number of contributing days and multiplied by 16.615.

8

The following calculations are based on a simplified pension expenditure projection model developed by the Fiscal Affairs Department, with the aim to illustrate policy options and identify tradeoffs. They are not based on an actuarial analysis and therefore the results are subject to caveats.

9

Allowing an increase in retirement age by 3 years by 2030 (a policy in line with what is projected in Italy, for instance) would yield a further reduction in pension expenditure by 3.5 percentage points of GDP. A benefit reduction (15 percent) targeted to higher pensions (above the minimum established legal income) could yield another 1.2 percent of GDP in savings. Providing full indexation only to lower pensions and partial indexation to pensions above the minimum, bringing the average indexation to 50 percent could yield another 0.8 percent of GDP in savings. These set of reforms could thus reduce the pension spending by 5.5 percentage points of GDP by 2030 compared to the no reform baseline scenario.

10

An increase in social contributions by 3 percentage points would yield about 1.3 percentage points of GDP in savings. This increase would maintain the total contribution rates still below the levels observed in Italy, allowing San Marino to maintain a competitive edge in attracting cross-border businesses and workers, but it could be an upper bound estimate. This reform, coupled with the reforms presented above, would reduce the pension deficit by 6.8 percent overall.

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Cover IMF Staff Country Reports
Republic of San Marino: 2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of San Marino
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2019: Issue 085
Publisher:
International Monetary Fund
ISBN:
9781498304887
ISSN:
1934-7685
Pages:
61
DOI:
https://doi.org/10.5089/9781498304887.002

Real GDP (2005=100)

Non-performing Loans and Cumulative Change in the Banking Sector Assets

Real GDP Growth

(Percent)

Number of Enterprises

(Percent, contribution to growth in 3-month average)

Unemployment Rate and Employment Growth

(3-month average yoy, percent)

Banking System Deposits

(millions of euros)

Banking Sector Liquidity

(In percent)

Non-performing loan distribution

(precent of total NPLs, net of provisions, September2018)

Fiscal Buffers and the Overall Fiscal Balance

CPI-Based REER and Export Market Share

(Index Jan. 2007=100; increase is appreciation)

Share of San Marino’s Exports of Goods in World’s Exports

(percent)

Banking System Assets

Banks’ asset share

(Percent, end-2017)

Banking sector efficiency

(2017)

Tax Revenue, 2017

(Percent of GDP)

San Marino: Tax Revenue

(percent of GDP)

Doing Business Score, Distance from the Frontier

(0–100, where 100 is the frontier)
Figure 1.

San Marino: Macroeconomic Developments
Figure 2.

San Marino: High Frequency Indicators
Figure 3.

San Marino: Fiscal Developments
Figure 4.

San Marino: Financial Sector

San Marino: Banking System Recapitalization Needs

(Percent of GDP, staff estimate)

Liquidity buffers

(millionsof euros)

Reserve coverage metrics

(as of end 2018)

GIR coverage and banking sector liquidity

Reserve Needs

(millions of euros, as of end 2018)
Figure A5.1.

San Marino: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(In percent of GDP unless otherwise indicated)
Figure A5.2.

San Marino: Public DSA—Composition of Public Debt and Alternate Scenarios
Figure A5.3.

San Marino: Public DSA—Stress Tests
Figure A5.4.

San Marino: Public DSA—Risk Assessment
Figure A5.5.

San Marino: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Population growth

(percent 10-year intervals)

Old-Age Dependency Ratio

(ratio of elderly overworking age population, percent)

Pension Fund Contributions, Spending and Balance

(percent of GDP)

Change in ordinary pension expenditures

(Percent)

Pension Expenditure Projection-San Marino

(percent of GDP)

Pension Expenditure Projection-Selected EU countries

(percent of GDP)

Pension Fund Deficit and Financing

(percent of GDP)

Reform Options to Stabilize Pension Spending by 2030

Projected Pension Spending and Impact of Reforms

Social Protection Benefits

(Share of Total Value)

Social Protection Spending by Function

(Percent of GDP)