Samoa: Staff Report for the 2019 Article IV Consultation—Debt Sustainability Analysis
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
17 May 2019
eISBN:
9781498315647
Language:
English
Keywords:
ISCR; CR; debt; Samoa; GDP statistics; authority; U.S. dollar; private sector; exchange rate; GDP growth; debt service; Natural disasters; Debt sustainability analysis; Public and publicly-guaranteed external debt; Pacific Islands
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2019 Article IV Consultation-Press release; Staff Report; Staff Statement; and Statement by the Executive Director for Samoa

Abstract

2019 Article IV Consultation-Press release; Staff Report; Staff Statement; and Statement by the Executive Director for Samoa

Public Debt Coverage

1. Central government and central government-guaranteed debts are covered in this report. Public and Publicly Guaranteed debt accounted for 57.2 percent of GDP in FY2017/18, allocated between central government debt (50.3 percent of GDP) and central government-guaranteed debt (6.9 percent of GDP). The government-guaranteed debt includes SOE debt, which is explicitly guaranteed by central government. The Samoa National Provident Fund, a social security fund, does not owe debt. There is no sub-national government structure in Samoa, nor extra budgetary funds. The Central Bank of Samoa is not allowed to contract debt on behalf of the government. Non-guaranteed SOE debt estimates are not available and cannot be included in PPG debt. The definition of external and domestic debt is based on residency3. The authorities are currently working towards strengthening the monitoring and disclosing of fiscal risks from the SOEs with the assistance of PFTAC. The creation of a debt management unit would also improve debt data coverage.

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

Background on Debt

2. Public debt increased to 50.3 percent of GDP in 2017/18, from 49.1 percent in FY2016/17. The depreciation of the Tala against the main loan currencies, the continuous disbursements of external loans and limited increase in GDP contributed to the increase of the debt-to-GDP ratio.

3. Public external debt was US$421 million at the end of FY2017/18, increasing by 3.6 percent with respect to FY2016/17. The outstanding public external debt at the end of FY2017/18 was SAT1.09 billion, 51 percent from multilateral creditors – including IDA and ADB – and 49 percent from bilateral creditors – including China and Japan. The increase in public external debt and in debt service was driven by the loss of access to exclusive grant funding from IDA and ADB in 2015 and 2016, and on further disbursements of previously contracted loans from bilateral creditors for large infrastructure projects.

Samoa: Evolution of Public Debt, FY 2015/16 – FY 2017/18

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Sources: Samoan authorities; and IMF staff estimates.

4. Domestic debt remains below 1 percent of GDP. All domestic public debt is held by domestic creditors and issued in local currency. It is mainly composed by government loans provided by the central government to public entities.

Samoa: Stock of Public Debt at the End of FY 2017/18

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Sources: Samoan authorities; and IMF staff estimates.

5. Guarantees accounted for 6.9 percent of GDP in FY2017/18, with public and publicly guaranteed (PPG) debt totaling 57.2 percent of GDP. Government-guaranteed debt is held by domestic creditors and accounted for 6.9 percent of GDP in 2017/18, from 7.9 percent in 2016/17.

Methodology and Assumptions

6. The underlying assumptions are consistent with the macroeconomic framework, based on updated data provided by the authorities and estimates by staff. The baseline scenario incorporates the effects of natural disasters and climate change over the longer term. The years 2019–24 are assumed to be disaster free to simplify the policy discussion of the near-term outlook. From 2025 onwards, the baseline incorporates the average long-term effects of natural disasters and climate change by lowering GDP growth by 1.3 percentage points (pp) annually, raising the current account deficit by 1.5 pp and increasing the fiscal deficit by 1.5 pp vis-à-vis disaster-free projections to reflect the country’s historical experience. These are consistent with the findings of staff’s analysis on the impact of natural disasters.4 The discount rate used to calculate the net present value of external debt is 5 percent. The main assumptions are:

  • Real GDP growth is projected to rebound to 3.4 percent in FY2018/19 driven by commerce, infrastructure spending, and the development of the transport and communication sector. Growth in FY2019/20 is expected to spike to 4.4 percent driven by tourism related to Samoa hosting the Pacific Games (PG) in July 2019, before normalizing at about and 2.2 percent in the medium-term. To account for the average impact of natural disasters, the growth rate is lowered by 1.3 percentage points after 2024.

  • After a temporary increase driven by the impact of cyclone Gita on local food prices, a one-time increase in education fees, and higher price on imported fuel, inflation is expected to stabilize at around 2.8 percent over the medium term.

  • The current account deficit is projected to remain below 1 percent of GDP between 2019–2024. The current account recorded a temporary surplus of 2.3 percent of GDP in 2017/18 driven by higher than average remittances, on the aftermath of Cyclone Gita, and tourism receipts. Remittances are expected to normalize from 2018/19, but tourism receipts are projected to remain strong in anticipation of the PG. To account for the average impact of natural disasters, the deficit is widened by 1.5 percentage points after 2024.

  • The overall fiscal balance is projected to return to deficit from FY2017/18. Given recently-legislated increases in public servant wages for cost of living adjustment, the projected reduction in budget support grants and the need to scale up infrastructure projects, staff projects a 1.2 percent of GDP deficit in 2018/19, which will widen to 2.7 percent in 2023/24. To account for the average impact of natural disasters, the deficit is widened by 1.5 percentage points after 2024.

  • Continued eligibility for concessional borrowing from MDBs is assumed for the forecast period to finance the fiscal deficit. The grant element of new loans is 40 percent on average. It is assumed that borrowing from the IDA and the Asian Development Bank is on full credit terms5.

Samoa: Baseline Macroeconomic Assumptions

(In percent of GDP, unless otherwise noted)

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7. The new realism tools suggest that the projections are reasonable. Both external and public PPG debt projections are in line with last year DSA (Figure 3). At the same time factors contributing to debt dynamics remain broadly in line with historical contribution, with the exception of the impact of current account balance and price that is due to temporary factors. The primary balance is expected to be -2.4 percent of GDP in 2020/2021. This belongs to the middle of the distribution of other countries experience. Forecasted real growth in 2019 and 2020 is higher than paths obtained based on plausible fiscal multiplier effects. This is due to the exceptionally low GDP growth in 2017/18, the basis year to calculate the growth path, and to the projection of additional and temporary expected growth in FY2018/19 and FY2019/20 due to the Pacific Games. Public investment has declined in FY2017/18 due to the completion of large infrastructure projects in the previous fiscal year but is expected to rebound in FY2019/20. Public capital stock is expected to contribute to about one third of the GDP growth, in line with historical data and previous DSA (Figure 4).

Figure 3.
Figure 3.

Samoa: Drivers of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2019, 138; 10.5089/9781498315647.002.A003

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAswere produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.
Figure 4.
Figure 4.

Samoa: Realism Tools

Citation: IMF Staff Country Reports 2019, 138; 10.5089/9781498315647.002.A003

Country Classification

8. The country’s debt-carrying capacity remains strong, though the indicator has declined. Samoa’s Composite Indicator (CI) index, which has been calculated based on the October 2018 WEO and 2017 CPIA, is 3.31, indicating that the country’s debt-carrying capacity is high in the revised LIC-Debt Sustainability Framework. The CI is lower than during the previous version of the DSA, but remains associated with a strong rating. The rating is the highest among the Pacific island countries (PICs), and debt is therefore assessed against a higher threshold compared to other PICs.

9. The relevant indicative thresholds for the countries with a strong CI rating are 55 percent for the PV of debt-to-GDP ratio, 240 percent for the PV of debt-to-exports ratio, 21 percent for the debt service-to-exports ratio, and 23 percent for the debt service-to-revenue ratio. These thresholds are applicable to public and publicly guaranteed (PPG) external debt. The benchmark for the PV of total public debt under strong capacity is 70 percent.

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Determination of Scenario Stress Tests

10. Given the severity and frequency of natural disasters in Samoa, a tailored stress test for a natural disaster shock was conducted. Parameters for this test were based on staff research6 and assume a one-off shock of 21 percent to the debt-GDP ratio in 2019, corresponding to the impact of the median natural disaster shock in the country history, and a reduction of real GDP growth and exports by 3 percent and 6 percent respectively.

11. The stress test for the combined contingent liabilities accounts for implicit liabilities and a potential financial market shock. Default settings of the contingent liability test were used to reflect the likely consequences of a contingent liability shock on the debt path in Samoa. The stress test for contingent liabilities amounts 7 percent of GDP, comprising 2 percent of GDP of non-guaranteed SOE debt and 5 percent of GDP of financial market shock.

Debt Sustainability

A. External Debt Sustainability Analysis

12. Under the baseline scenario, Samoa’s external debt path is projected to breach the indicative benchmark from 2036 and onward (Figure 1). The PV of debt-to-GDP ratio is expected to increase gradually from 33.4 in 2019 to 39.1 in 2029 and to reach 60.3 in 2039, on the increase of external borrowing to finance construction of infrastructure. The PV of external debt-to-GDP ratio breaches the indicative threshold of 55 percent in 2036. The ratio of the PV of external-debt-to-exports ratio also breaches the threshold of 240 percent in 2036. As a large share of the external debt remains on concessional terms, debt service remains limited and does not breach the indicative threshold.

Figure 1.
Figure 1.

Samoa: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2019–39 1/

Citation: IMF Staff Country Reports 2019, 138; 10.5089/9781498315647.002.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 2029. 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.

13. Stress tests confirm the vulnerability of debt dynamics to natural disasters and contingent liabilities. A natural disaster shock has the largest negative impact on the debt trajectory, causing a breach of the threshold for the PV of debt-to-GDP ratio from 2030 (Figure 3). There is a protracted and significant breach of the PV of debt-to-GDP and PV of debt-to-exports after a severe natural disaster shock but also after the contingent liability shock (from 2035 and onward, Table 3).

Table 3.

Samoa: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–39

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

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

Includes official and private transfers and FDI.

Table 4.

Samoa: Sensitivity Analysis for Key Indicators of Public Debt, 2019–39

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Sources: Country authorities; and 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.