Samoa: Staff Report for the 2019 Article IV Consultation—Debt Sustainability Analysis
Author:
International Monetary Fund. Asia and Pacific Dept
Search for other papers by International Monetary Fund. Asia and Pacific Dept in
Current site
Google Scholar Close
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
Download PDF (549.1 KB)

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.

article image
article image

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

article image
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

article image
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)

article image

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.

article image
article image

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

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

A bold value indicates a breach of the threshold.

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

Includes official and private transfers and FDI.

Table 4.

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

article image
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.

B. Public Sector Debt Sustainability Analysis

14. Total public debt follows a similar dynamic as the external debt. Under the baseline scenario, the PV of public debt-to-GDP ratio breach the benchmark in 2034 (Table 2). The natural disaster and contingent liability shocks result in a sharper deterioration in debt sustainability. The threshold is breached from 2027 and 2032, respectively (Figure 2).

Table 1.

Samoa: External Debt Sustainability Framework, Baseline Scenario, 2016–39

(In percent of GDP, unless otherwise indicated)

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

Includes both public and private sector external debt.

Derived as [r – g – ρ(1+g) + 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 PVof private sector debt is equivalent to its face value.

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

Table 2.

Samoa: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–39

(In percent of GDP, unless otherwise indicated)

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

Coverage of debt: The general government, central bank, 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.

Figure 2.
Figure 2.

Samoa: Indicators of Public Debt under Alternative Scenarios, 2019–39 1/

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

Risk Rating and Vulnerabilities

15. The debt outlook for Samoa is subject to several risks. PPG debt is expected to grow in the medium-term. The external debt-to-GDP ratio is expected to decrease in the short-term on the positive overall fiscal balance registered in FY2017/18 and the expected higher growth in FY2018/19 and FY19/20 due to the Pacific Games. After FY2020/21, the debt ratio is expected to increase again, driven by the negative primary balance. Samoa’s external debt breaches the high-risk threshold when the average annual impact of natural disasters and climate change on the medium-term growth, current account, and fiscal balance projections is included in the DSA baseline.

16. Samoa remains at high-risk of debt distress. Another major natural disaster or a materialization of implicit guarantees shock could substantially worsen the debt dynamics. While a mechanical assessment based on the output of the new DSF template would have resulted in a moderate risk assessment, staff’s judgement has been applied to conclude on a high-risk assessment as there is a high probability the threshold will be substantially and persistently breached in the long-run due to Samoa’s exposure to climate change despite government efforts to mitigate its impacts. The government should continue with recent efforts to consolidate and boost revenue collection, and build fiscal buffers to be prepared to respond to a future economic shock or natural disaster. Introducing a lower public debt-to-GDP target of 40 percent over the long term, associated with operational guidance on the overall deficit, would allow to reduce the level of risk in Samoa. The authorities should also make efforts to widen the coverage of debt data by producing and disseminating aggregate data on general government and public-sector debt (including non-guaranteed SOE debt).

Authorities’ Views

17. The authorities broadly agreed with the DSA assessment and expressed their commitment to reduce the long-term debt target to 40 percent of GDP. The authorities agreed that a lower long-term debt target of 40 percent of GDP (compared to the current target of 50 percent of GDP) is desirable, and would allow them to build fiscal buffers to respond to a large natural disaster, while ensuring adequate funding of development priorities. Consistent with the Medium-Term Debt Strategy, the authorities aim to fund development needs with grants and concessional loans to the extent possible. The authorities are currently working towards strengthening the monitoring and disclosing of fiscal risks from the SOEs with the assistance of PFTAC.

1

This DSA has been prepared jointly by the IMF and World Bank, following the revised LIC-DSF Framework and Guidance Note (2017) in effect as of July 1, 2018. Samoa’s debt carrying capacity is classified as strong, based on its Composite Indicator (CI) value of 3.31, based on the October 2018 WEO and updates to the CPIA index through 2017.Thresholds for debt burden indicators are those established in the revised framework.

2

This is due to a shortening of the period for analysis to a 10-year forecast horizon (from 20 years) under the revised LIC-DSF (Staff Guidance Note).

3

Since all the domestic debt is in tala and all the external debt is in foreign currency or SDRs, the residency-based classification is equivalent to the currency-based classification in the case of Samoa.

4

See Samoa Article IV consultation, 2017.

5

With respect to projected new borrowing from IDA and ADB, DSAs always assume terms that would prevail if the country was at low risk of debt distress, independent of current actual terms (which can change on a year to year basis). This is done to avoid a circular situation where the assumption that future commitments will be on grant terms would yield actual commitments on credit terms.

6

Detail in the IMF Working Paper 18/108, “The Economic Impact of Natural Disaster in Pacific Island Countries” (https://www.imf.org/en/Publications/WP/Issues/2018/05/10/The-Economic-Impact-of-Natural-Disasters-in-Pacific-Island-Countries-Adaptation-and-45826).

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Samoa: 2019 Article IV Consultation-Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for Samoa
Author:
International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2019: Issue 138
Publisher:
International Monetary Fund
ISBN:
9781498315647
ISSN:
1934-7685
Pages:
73
DOI:
https://doi.org/10.5089/9781498315647.002
  • Figure 3.
    View in gallery
    Figure 3.

    Samoa: Drivers of Debt Dynamics – Baseline Scenario

  • Figure 4.
    View in gallery
    Figure 4.

    Samoa: Realism Tools

  • Figure 1.
    View in gallery
    Figure 1.

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

  • Figure 2.
    View in gallery
    Figure 2.

    Samoa: Indicators of Public Debt under Alternative Scenarios, 2019–39 1/

Figure 3.

Samoa: Drivers of Debt Dynamics – Baseline Scenario
Figure 4.

Samoa: Realism Tools
Figure 1.

Samoa: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2019–39 1/
Figure 2.

Samoa: Indicators of Public Debt under Alternative Scenarios, 2019–39 1/