Grenada: Staff Report for the 2019 Article IV Consultation—Debt Sustainability Analysis
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
03 Jul 2019
eISBN:
9781498323000
Language:
English
Keywords:
ISCR; CR; debt; Grenada; deficit; dynamics equation; data coverage need; debt portfolio; creating flow; service-to-revenue ratio; Natural disasters; Public and publicly-guaranteed external debt; Debt sustainability analysis; Caribbean; debt coverage; baseline scenario
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2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Grenada

Abstract

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

Debt Coverage

1. Public debt in this DSA is defined as the sum of central government debt (including arrears on principal and interest), overdue membership fees to international organizations, and government-guaranteed debt. It does not include non-guaranteed debt of public enterprises and limited liability companies, notably PDV Grenada’s debt on account the Petrocaribe arrangement. 1 Until recently, gaps and time lags in the public enterprises’ reporting hampered complete coverage of public sector debt. Substantial improvement in the comprehensiveness and timeliness of the non-guaranteed debt data has been made more recently, which could enable to expand the coverage. Non-guaranteed debt is estimated at around 15 percent of GDP, including 11½ percent of GDP for the Petrocaribe arrangement. Grenada does not have subnational government debt.

2. The contingent liability stress test accounts for the risks from the estimated stock of SOE debt as well as ongoing PPPs and financial markets. The stock of enterprise-related debt is substantial and is reflected in the contingent liability stress test.2 The weight of the PPP shock is based on default settings, with information taken from the World Bank’s database. (Grenada’s fiscal responsibility law puts a cap on PPP-related government liabilities at 5 percent of GDP). Contingent liabilities from financial markets are set at the minimum value of 5 percent of GDP, which represents the average cost to the government of a financial crisis in LICs since 1980. Estimates for other elements not covered are either zero (there is no central bank debt borrowed on behalf of the government) or need to be firmed up in the context of developing a comprehensive presentation of consolidated non-financial public sector debt, which is planned to be developed by the authorities.

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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%.

Recent Developments

3. Debt reduction and regularization has progressed, but arrears remain with a few bilateral creditors. Debt restructuring in the context of the 2014–17 ECF-supported program contributed around 12 percentage points to the reduction of public debt, which fell from 108 percent of GDP in 2013 to 63½ percent of GDP in 2018, largely reflecting high economic growth and fiscal adjustment. However, arrears of some US$19 million owed to non-Paris Club official bilateral creditors including Trinidad and Tobago, Algeria, and Libya remain to be regularized. 3 The authorities report progress in advancing negotiations as of early 2019, particularly with Algeria (9.2 percent of the total bilateral arrears). The authorities have continued to make payments on overdue membership fees in line with the revised schedule published in mid-2017, settling the overdue fees of US$ 2½ million for the Caribbean Community Secretariat, Eastern Caribbean Supreme Court, University of West Indies, and others in 2018. Recent U.S. sanctions on Venezuela blocked payments on Grenada’s Petrocaribe debt at the turn of 2018–19. And most of government-guaranteed debt of some 2½ percent of GDP at end-2017 was converted into non-guaranteed debt through a refinancing operation.

4. Most portfolio characteristics of Grenada’s debt continued to improve in 2018. Consistent with their debt strategy, the authorities sought to extend maturities of domestic short-term debt and refrained from borrowing in the regional securities market (RGSM) in 2018. The authorities received substantial external concessional financing, notably from the World Bank but also from other multilaterals. The combination of extension of domestic maturities and long-term concessional financing resulted in an increase in the average time to maturity from 8.2 to 9.0 years in 2018. Average time to re-fixing of the debt portfolio similarly increased from 7.8 to 8.6 years, and the average effective interest rate on public debt declined from 3.5 to 3.0 percent last year. As expected from the financing structure and because of the successful restructuring, the share of multilateral debt increased further by 4.6 percentage points during 2018 (Figure 3). The composition of domestic debt showed a further shift towards longer maturity bonds and treasury notes, and away from short-term T-bills. The shares of bonds and treasury notes climbed by 4.0 and 4.1 percentage points respectively, but that of T-bills declined by 3.7 percentage points in 2018 (Figure 2).

Figure 1.
Figure 1.

Grenada: Composition of Central Government Debt

Citation: IMF Staff Country Reports 2019, 192; 10.5089/9781498323000.002.A003

Figure 2.
Figure 2.

Grenada: Domestic Debt by Instrument Type

Citation: IMF Staff Country Reports 2019, 192; 10.5089/9781498323000.002.A003

Figure 3.
Figure 3.

Grenada: Foreign Debt by Creditor Category

Citation: IMF Staff Country Reports 2019, 192; 10.5089/9781498323000.002.A003

Figure 4.
Figure 4.

Grenada: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2019–2029 1/

Citation: IMF Staff Country Reports 2019, 192; 10.5089/9781498323000.002.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. 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.

5. Debt management and debt data coverage need to be further enhanced. The Fiscal Responsibility Law’s (FRL) medium-term public debt target of 55 percent of GDP is a key fiscal anchor that is supported by the FRL’s operational targets on the primary balance and spending growth, as well as institutional reforms. The authorities’ debt management capacity would benefit from further reform efforts, including in data management and IT system enhancements, building on the Debt Management Performance Assessment (DeMPA) undertaken with the World Bank in 2018. The Ministry of Finance (MoF) is monitoring non-guaranteed debt of SOEs, which is important in the context of FRL’s debt targets. Such monitoring and the quality of information, especially for the debt of SOEs converted from the guaranteed debt, needs to be further enhanced, formalized, and reported publicly, particularly as debt approaches the 55 percent of GDP ‘fiscal’ threshold. In this regard, it is recommended that a broader coverage of the debt that includes non-guaranteed debt of public enterprises be used. At the same time, the exact definition of PPPs is being discussed between government and the fiscal responsibility oversight committee created in the context of the FRL.

6. The situation and status of Petrocaribe debt should be reviewed to improve analysis of risks to Grenada’s debt profile in the context of the country’s medium-term debt strategy. Given recent developments regarding Venezuela (including sanctions), the deteriorating financial situation and changes in management of PDV Grenada, and the fact that most other ECCU countries are including such arrangements in the stock of government debt, a careful assessment of Grenada’s Petrocaribe liabilities is needed. This would further help to inform the government’s medium-term debt management strategy (revised in late 2018) incorporating increased availability of highly concessional external financing, including from the World Bank. Such financing and substantial receipts under the Citizenship-by-Investment (CBI) program have put into sharper relief the need to enhance efficiency of asset management, comprehensive reporting, and the capacity for asset/liability operations. Recent steps toward operationalizing a contingency fund to address the consequences of shocks including natural disasters are welcome and should be followed up with the fund’s full operationalization and adequate financing. Implementation of an integrated disaster resilience (or risk management) strategy would further support debt sustainability and resistance to shocks.

Macroeconomic Assumptions

7. The macroeconomic assumptions are based on a slightly improved outlook relative to the last Article IV Consultation in 2018. Real GDP growth for 2018–23 is higher that under the 2018 Article IV consultation by 0.2 percentage points reflecting construction in tourism-related projects and the expansionary effects of an eventual weakening of strong primary surpluses toward the end of the forecast horizon. Long-term potential growth is projected to remain around 2¾ percent as previously assessed. Continued compliance with the FRL is assumed. Primary fiscal surpluses are expected to continue to significantly overperform the FRL’s 3.5 percent of GDP floor through 2020 but then decline to become small primary deficits as permitted by the fiscal rule. Revisions to the services trade and primary income accounts due to improved quality of the source data have resulted in an increase in the external current account deficit by about 3–8 percent of GDP each year relative to that estimated during the 2018 Article IV consultation. The current account deficit would average around 10 percent of GDP in the medium term. Given that the estimated and projected current account deficit is higher than previously projected due to statistical revisions, it is important that Grenada continues to attract sufficient FDI, which was also adjusted upward by the statistical revisions, to ensure external debt sustainability. The baseline includes estimated average costs of natural disasters. 4

8. Financing assumptions have been updated based on most recent data. The latest financing projections from the World Bank’s international development association (IDA) program and existing Caribbean Development Bank (CDB) projects have been incorporated. Also, it is assumed that the pending disbursement from the China loan5 will be committed from 2019 onwards. As a result, external financing is projected to increase in the short term. In the long run, the government is assumed to mainly rely on concessional loans from the World Bank6 and CDB for external financing. As for domestic financing projections, the extension of the maturity of the domestic portfolio by gradually introducing longer-dated securities, highlighted in the government’s Medium-Term Debt Management Strategy, is assumed to be implemented.

9. Newly-added realism tools indicates that short-term growth is conservatively forecasted, given the projected fiscal adjustment (Figure 7). The potential natural disaster shock and a weak financial system could form the background for this outturn. It should be noted that Grenada does not envision policy-based fiscal adjustment during the projection period. Also, the projected fiscal adjustment lies in the lower quartile of the distribution of past adjustments of the primary fiscal deficit, indicating that the projection is modest. The improved outlook on the macroeconomic indicators, such as stronger primary surpluses lowering public gross financing needs, enhanced the projected external debt to GDP and public debt to GDP ratios relative to the previous DSA as shown in Figure 6.

Figure 6.
Figure 6.

Grenada: Drivers of Debt Dynamics—Baseline Scenario External Debt

Citation: IMF Staff Country Reports 2019, 192; 10.5089/9781498323000.002.A003

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LCDSAs were 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 7.
Figure 7.

Grenada: Realism Tools

Citation: IMF Staff Country Reports 2019, 192; 10.5089/9781498323000.002.A003

1/ Not applicable to Grenada because of absence of relevant data.

DSA Update: Macroeconomic Assumptions

(In percent of GDP, unless otherwise specified)

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Source: Grenadian authorities and IMF staff projections

2018 Article IV current account figures include revisions from BPM5 to BPM6.

10. Grenada continues to be assessed at medium debt-carrying capacity. The rating is based on the CI score, which captures the impact of the different factors through a weighted sum of the 2017 World Bank’s Country Policy and Institutional Assessment (CPIA) score, the country’s real GDP growth, remittances, international reserves, and world growth.7 Under the CPIA, Grenada continues to be rated as a medium performer, with the average rating of 3.48 for 2015–17.

Calculation of the CI Index

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Public and External DSA

11. The total (external plus domestic) PPG-to-GDP ratio is projected to gradually decline up to 2024 and broadly stabilize thereafter. The key drivers of the projected decline in PPG debt-to-GDP in the next few years are sizable primary surpluses and GDP growth as reflected in the updated macroeconomic assumptions. The PV of debt-to-GDP ratio remains well below benchmark in the baseline scenario, reflecting continued access to concessional financing, including a large disbursement from the World Bank on IDA terms in mid-2018 (Figure 5).

Figure 5.
Figure 5.

Grenada: Indicators of Public Sector Debt Under Alternative Scenarios 2019–2029

Citation: IMF Staff Country Reports 2019, 192; 10.5089/9781498323000.002.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.

12. External PPG debt-to-GDP ratio is also projected to trace a downward path. The thresholds under the baseline scenario are not breached, in line with the DSA published under the 2018 Article IV Consultation. Nevertheless, due to the remaining unresolved arrears to official bilateral creditors, Grenada’s DSA rating stands unchanged at “in debt distress” from the last assessment of July 2018.

13. Under stress tests thresholds are breached for all key indicators of PPG external debt under an export shock. The present value of debt-to-GDP remains above its threshold under all stress tests except shocks to real GDP growth, primary balance, and other flows8 (Table 3). It reaches its highest value under the exports shock in 2021 (i.e., 73.5 percent or 33.5 percentage points above its threshold), due to the tourism (exports) driven economy. The natural disaster shock, assuming a 10 percent of GDP impact and follow-on interactions in real GDP growth and exports growth shocks9, raises the ratio to 53.7 percent in 2029. For the present value of debt-to-exports, debt service-to-exports ratio, and debt service-to-revenue ratio, the exports shock is the most extreme shock as well.

Table 1.

Grenada: External Debt Sustainability Framework Baseline Scenario 2016–2039

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

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

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

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

Defined as grants, concessional loans, and debt relief.

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

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

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

Table 2.

Grenada: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–2039

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

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

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

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

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

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

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

Table 3.

Grenada: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–2029

(In Percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

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

Includes official and private transfers and FDI.

Table 4.

Grenada: Sensitivity Analysis for Key Indicators of Public Debt 2019–2029

(In Percent)

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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.