Myanmar: Staff Report for the 2018 Article IV Consultation—Debt Sustainability Analysis
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
10 Apr 2019
eISBN:
9781498307093
Language:
English
Keywords:
ISCR; CR; FDI project approval; deposit auction rate; capital goods import; inflation rate.; rate; PPG debt indicator; dynamics equation; debt-carrying capacity; debt distress; debt carrying capacity; Debt sustainability analysis; Public and publicly-guaranteed external debt; Debt sustainability; financing challenge
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2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Myanmar

Abstract

2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Myanmar

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Myanmar’s risks of external debt and overall debt distress continue to be assessed as low. Under the new low-income country debt sustainability framework, debt carrying capacity of Myanmar has improved and all external debt and total public debt indicators remain below their respective indicative thresholds under the baseline scenarios and stress tests. External debt indicators are most vulnerable to shocks to nondebt flows and exports, reflecting the importance of FDI flows to the external position. Meanwhile, public debt indicators are most sensitive to a natural disaster shock, underscoring the importance of strengthening buffers to enhance resilience against shocks, including via continued revenue mobilization measures and building international reserves. Over the medium term, the authorities intend to expand external borrowing (mainly on concessional terms) to support large scale infrastructure projects under the Myanmar Sustainable Development Plan. Increasing the export base, maximizing concessional loans and improving the primary deficits would help keep the debt burden contained. Efforts to target infrastructure projects with high returns and financing these with concessional financing, including assessing fiscal risks of PPPs to limit and report contingent liabilities would benefit debt sustainability. Strengthening the business environment and governance, including in the natural resource sector would raise the investment outlook and potential growth.

Public Debt Coverage and Country Classification

1. The coverage of public sector debt used in the DSA is consolidated general government debt, government-guaranteed debt and social security funds. SOE debt is on lent and is therefore included in the coverage of public external debt.1 There is no outstanding debt to the IMF.

Coverage of Public Sector Debt

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Source: IMF staff calculations

2. The new LIC DSF determines the debt sustainability thresholds by calculating a composite indicator (CI). In the previous debt sustainability framework (DSF), debt-carrying capacity was determined by the World Bank’s CPIA score. Under this methodology, Myanmar was classified as having weak policy performance with a Country Policy and Institutional Assessment (CPIA) average of 3.07 for the period 2014–16. The CI, however, is based on a weighted average of several factors such as the country’s real GDP growth, remittances, international reserves, and world growth and the CPIA score.2 The calculation of the CI is based on 10-year averages of the variables, across 5 years of historical data and 5 years of projection, and the corresponding CPIA. For Myanmar, the CI score based on both the 2018 April WEO and 2018 October WEO data corresponds to a medium rating and thus the final debt carrying capacity classification for this DSA is medium. Thus, compared with the previous DSF methodology, the PV of debt-to-exports threshold has now increased from 100 percent to 180 percent while the debt service-to-exports and debt service-to-revenue thresholds remain unchanged. The indicative threshold for the PV of total public debt-to-GDP has been increased from 38 to 55 percent of GDP. A summary of the thresholds used in the exercise are included in the table below.

Applicable Thresholds

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Background on Debt

3. Myanmar’s total public debt is estimated to be 38.5 percent of GDP as of FY2018.3 Public debt in this DSA covers public domestic debt (59.1 percent of total public debt in FY2018) and public and publicly guaranteed (PPG) external debt (58.2 percent of total public debt in FY2018).4 Domestic debt comprises T-bills and T-bonds, a large share of which–mostly 3-month T-bills–is held by the central bank. The largest share of PPG external debt is held by bilateral creditors amongst which China and Japan are the largest creditors. International Development Association (IDA) and the Asian Development Bank (ADB) are the largest multilateral creditors (Table 1).

Table 1.

Myanmar: External Debt Sustainability Framework, Baseline Scenario, 2015–38

(In percent of GDP, unless otherwise indicated)

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

Includes both public and private sector external debt.

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

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

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

Defined as grants, concessional loans, and debt relief.

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

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

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

Myanmar: PPG External Debt

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Source: Myanmar authorities.

4. Total private external debt is estimated to be 12.3 percent of GDP as of FY2018. Total external debt includes revised estimates of private external debt benefitting from the intensive ongoing TA in external sector statistics. Thus, total external debt, a total of PPG external and private external debt, is estimated to be 28.4 percent of GDP as of FY2018.5

5. Contingent liabilities include potential recapitalization needs of the banking system. The banking system is adjusting to the 2017 prudential regulations by converting overdraft to term loans, deleveraging and recognizing previously unreported non-performing loans. With bank capital positions and profitability low in most private banks, banks will need to recapitalize through time. The government is assessing restructuring options for the state-owned banks based on the findings of recent diagnostics studies, which may entail fiscal costs of recapitalization. While data limitations hinder a full assessment of potential NPLs and recapitalization needs, the uneven loan loss recognition and inadequate provisions, large exposures, and low capital position of banks indicate systemic concerns. A shock covering 5 percent of GDP has been added to the analysis to account for potential recapitalization needs.

Coverage of Contingent Liabilities

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Source: IMF staff calculations.

The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE’s debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.

6. The authorities plan on increasing their reliance on external borrowing particularly for the several infrastructure projects in support of the Myanmar Sustainable Development Plan (MSDP). To achieve the SDGs, the MSDP recognizes that a second wave of reforms with greater investments in both physical and human capital are needed. Key investments include those under the China-Myanmar Economic Corridor (such as the Kyaukpyu port), as well as with ODA from India (the Sittwe port and the planned India-Myanmar-Thailand trilateral highway) and Japan (the Thilawa special economic zone and Mekong-Japan Connectivity Initiatives) and other projects funded by multilateral donors (the East-West corridor). To finance these and other projects, the Myanmar authorities continue to seek external borrowing on concessional terms while limiting financing on commercial terms to projects assessed to have a high return on investment.

7. The authorities also intend to use more extensively Public-Private Partnerships (PPPs). The authorities have started to improve their public investment management framework, including for PPPs. They have recently issued the Project Bank Notification which aims at improving investment planning by identifying and screening infrastructure projects. They are also committed to building capacity of the Ministry of Planning and Finance to analyze and select these infrastructure projects. Given their limited experience with privately-financed investment, these are likely to create large fiscal commitments and in turn significant fiscal risks.6

Macro Forecasts and Scenarios

A. The Baseline Scenario

8. The assumptions in the baseline scenario are consistent with the macroeconomic framework presented in the staff report. The main assumptions in the baseline are:

  • Real GDP growth. Economic growth is expected to gradually rise close to 7 percent over the medium-term, but its pace is somewhat slower compared to the previous DSA anticipating weaker FDI inflows and macro-financial spillovers of the on-going bank restructuring process.7

  • Inflation. Headline inflation was moderate but has spiked recently due to higher fuel prices and kyat depreciation. Inflation is projected to rise temporarily given the pass-through of kyat depreciation and higher oil prices.

  • Current account. The current account deficit narrowed in FY2017/18 largely financed by sustained FDI inflows, keeping international reserves at about three months of imports. The current account deficit is projected to increase to around 5 percent of GDP over the short to medium term reflecting a relatively stronger demand for imports including oil.

  • External financing. Project financing from large creditors is currently in place, however, budget financing from creditors remains uncertain. Multilateral financing is expected to remain stable, while bilateral financing is projected to pick up from 2021 onwards. The medium-term outlook for FDI and external financing has become more uncertain than previously and is dependent on how the humanitarian crisis in Rakhine unfolds. FDI inflows are expected to slow down over the medium-term to slightly below 4 percent of GDP.

  • Fiscal outlook. Fiscal deficit for FY2018/19 is projected to increase as budget execution improves. The greater appetite for government securities as banks deleverage provides a window to raise government securities issuance and fund the deficit in an uncertain environment for external financing. The primary deficit is expected to increase over the medium term as budget execution improves which will help close the SDG gaps in education, health and infrastructure.

  • Realism of the baseline. The shift in PPG external debt-to-GDP ratio compared with the DSA from five years ago (2013) arises from the large debt relief the country received. Cross-country experience suggests that the baseline fiscal expansion is feasible, and the projected growth path is in line with a fiscal multiplier of 0.2.8

Key Macroeconomic Assumptions: FY2018 – FY2023 (average)

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Source: IMF staff calculations. FY2018 runs from October 2017 to September 2018. Thereafter, all fiscal years are on a October to September basis.

B. Staff Scenario Analysis

9. Two financing scenarios, a downside and an upside scenario, illustrate the potential impact stemming from these risks on the economy and policy trade-offs. A prolonged humanitarian crisis in Rakhine state and lack of progress in addressing concerns of the international community on the refugee repatriation process could further reduce concessional donor financing and fiscal space. A withdrawal of GSP+ trade preferences from the EU on human rights concerns poses an added risk to exports and investor confidence. FDI project approvals, a leading indicator of FDI inflows, has already fallen sharply since the humanitarian crisis intensified in 2017. The downside scenario assumes a higher share of new borrowing on non-concessional terms and lower FDI inflows and exports over the medium-term based on negative investor sentiment and development partner sentiment compared with the baseline. This necessitates a reduction in government spending and results in depreciation pressures that leads to lower growth and higher inflation. On the upside, progress on the humanitarian crisis would facilitate a resumption in higher external concessional financing including budget support that allows higher SDG related spending and rebuilding of international reserves, lowering risk premia and crowding-in investment, supporting an uplift in growth. The shocks under both scenarios are temporary and it is assumed that over the medium-to-long term the economy converges towards the baseline.

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Myanmar: FDI Approval

(In million of USD, accumulative basis)

Citation: IMF Staff Country Reports 2019, 100; 10.5089/9781498307093.002.A003

Sources: Myanmar authorities; and IMF staff calculations.

Medium Term Assumptions for Staff Scenarios

In the low financing scenario, as a share of GDP, external financing from multilateral official donors has been reduced by approximately half while FDI has been reduced by 0.4 percent. An export shock, corresponding to the exposure to the European market (a reduction in exports of goods by US$500 million on average annually), is also included. Given the lower external financing, government project spending has been reduced by 0.2 percent of GDP, however, central bank financing of the deficit has been increased which has increased domestic interest payments by 20 percent over the medium term. The increase in the central bank financing implies a depreciation of the exchange rate (6 percent on average) and an increase in inflation expectations (2.5 percent on average). In this context, growth in the scenario is expected to be around 5 percent over the medium term. In the upside high financing scenario, financing (including budget support) is expected to improve as is FDI (by 0.5 percent of GDP on average) on the premise that good progress will be made on the humanitarian crises. This is reflected in increased financing from major multilateral and bilateral donors (by 0.6 percent of GDP) which in turn increases project spending (by 0.7 percent of GDP). The exchange rate depreciates while inflation increases, but at a pace slower than the low financing scenario (by 1.0 percent and 0.7 percent). Growth is higher on average by 0.8 percent in medium term.

Myanmar: Scenario Analysis (FY2018 – FY2023)

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Source: IMF staff calculations. FY2018 runs from October 2017 to September 2018. Thereafter, all fiscal years are on a October to September basis.

10. Under both scenarios, the PV of public-debt ratio remains under its indicative thresholds. In the downside scenario, the PV-of-public-debt to GDP ratio deteriorates throughout the projection period under the assumption that new borrowing will be contracted on non-concessional terms and economic growth will slow down. The debt-service-to-revenue ratio deteriorates due to higher debt service payments falling due relatively earlier compared to the baseline. Similarly, in the upside, the deterioration of the PV-of-public-debt to GDP ratio from the initial rapid accumulation of debt from both concessional and non-concessional resources is small due to the higher spending assumed for productive investments and in turn higher growth. The debt-service-to-revenue ratio marginally improves compared to the baseline from the assumption that revenue collection is stronger in a higher growth environment.

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Indicators of Public Debt—Staff Scenarios, 2018–2028

Citation: IMF Staff Country Reports 2019, 100; 10.5089/9781498307093.002.A003

Source: IMF staff estimates.

External and Public Debt Sustainability

11. All external PPG debt indicators remain below the policy relevant thresholds in the baseline scenario (Figure 1). The PV of external debt-to GDP ratio is expected to grow gradually and then decline from 12.3 percent in FY 2018 to around 10 percent over the projection period corresponding to new disbursements for key infrastructure projects, including those envisioned under the MSDP. However, the standardized stress tests show that a shock to non-debt flows has the largest negative impact, causing a deterioration of three external debt ratios—the PV of debt-to-GDP ratio, PV of debt-to-exports ratio and the debt service-to-revenue ratio (Figure 2). This shock underscores the importance of preserving robust investor sentiment in Myanmar. The impact from the humanitarian crises is starting to reflect in weakening foreign investor sentiment and donor financing. The debt service-to-exports ratio is affected by a shock to exports highlighting the need to expand the export base and the importance of the new ongoing gas explorations. The authorities need to build up policy buffers, particularly domestic revenues and foreign reserves and continue their efforts with structural reforms to improve growth potential and resilience and promote economic diversification.

Figure 1.
Figure 1.

Myanmar: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2018–2028 1/2/

Citation: IMF Staff Country Reports 2019, 100; 10.5089/9781498307093.002.A003

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2028. Stress tests with one-off breaches are also presented (if any), while these one-off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.
Figure 2.
Figure 2.

Myanmar: Indicators of Public Debt Under Alternative Scenarios, 2018–28 1/

Citation: IMF Staff Country Reports 2019, 100; 10.5089/9781498307093.002.A003

* Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections.Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2028. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.

12. The PV of total public debt-to-GDP ratio lies comfortably below the public debt benchmark (Figure 2). The standardized sensitivity analysis shows that the largest shock that pushes the PV of public debt-to-GDP in FY 2028 to reach 40 percent of GDP is the natural disaster shock (Figure 2, Table 4).9 It is estimated that natural disasters in Myanmar have generated a direct economic loss of 1.82 percent of GDP every year (2006–15), on average (Myanmar Selected Issues 2018). Natural disasters affect debt sustainability through damaging long-term growth and increasing borrowing for reconstruction needs. To more effectively mitigate the impact of climate-related disasters, the authorities need to enhance preparedness and response ability through addressing weaknesses in ex-ante resilience and ex-post adaptive capacity. The vulnerability to this shock also highlights the need for stronger growth in the medium term and the importance of building fiscal and external buffers.

Table 2.

Myanmar: Public Sector Debt Sustainability Framework, Baseline Scenario, 2015–38

(In percent of GDP, unless otherwise indicated)

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

Coverage of debt: The central, state, and local governments plus social security, government-guaranteed debt. Definition of external debt is Residency-based.

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

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

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.

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

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

Table 3.

Myanmar: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2018–28

(In percent)

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

A bold value indicates a breach of the threshold.

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

Includes official and private transfers and FDI.

Table 4.

Myanmar: Sensitivity Analysis for Key Indicators of Public Debt 2018–28

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

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.