Democratic Republic of São Tomé and Príncipe:Request for a 40-month Arrangement Under the Extended Credit Facility—Debt Sustainability Analysis

Democratic Republic of Sao Tome and Principe: Request for a 40-month Arrangement Under the Extended Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Democratic Republic of Sao Tome and Principe

Abstract

Democratic Republic of Sao Tome and Principe: Request for a 40-month Arrangement Under the Extended Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Democratic Republic of Sao Tome and Principe

Public Debt Coverage

1. In line with the revised DSA framework, the coverage of total PPG debt relative to the previous DSA has been expanded to include the arrears of a state-owned enterprise (SOE)—a utility company (EMAE), to its oil supplier ENCO (Text Table 1).2 3 There are three other fully state-owned enterprises: ENAPORT that runs the country’s ports, ENASA that runs the country’s airport, and Correios that provides postal service. ENASA and ENAPORT have been able to cover their expenses in recent years and seem to be able to service their own debt (although no reliable data is available); Correios is much smaller and no data is available about its debt either. Therefore, their commercial borrowings are not included under the baseline scenario in the public debt. To account for the potential contingent liabilities associated with SOEs other than EMAE, the default value of 2.0 percent of GDP is used.4 The complete coverage of the contingent liability stress test is presented in Text Table 2.5 Contingent liabilities from financial markets are set at their default value of 5 percent of GDP, representing the average cost to the government of a financial crisis since 1980 in LICs.6 The $30 million disputed loan from Nigeria is covered in the contingent liability stress tests for prudence. Finally, an additional contingent liability shock is also considered for the external DSA, where ENCO’s external arrears of $189.4 million (46.5 percent of GDP) at end-2018 to its parent company Sonangol in Angola are included in the country’s external PPG debt and are assumed to be fully repaid in 20 years, starting from 2019.7

Text Table 1.

São Tomé and Príncipe: Public Debt Coverage under The Baseline Scenario

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Sources: IMF and World Bank staff.
Text Table 2.

São Tomé and Príncipe: Coverage of the Contingent Liabilities’ Stress Test

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The default shock of 2 percent of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.).

The ENCO to Sonangol arrears shock is not applied to the public DSA because ENCO’s claims on the government and EMAE are already included in the domestic PPG debt.

Sources: IMF and World Bank staff.

Background

A. Debt

2. Central government direct and guaranteed debt declined by 2 percent of GDP during the recently-expired program (2015–18); but total PPG debt increased by 6 percent of GDP to 96 percent (Text Table 3).8 The decline is attributed to steady GDP growth, repayment of past oil price subsidy debt using yields from higher domestic than import prices, no new debt contracting, and delayed disbursements of some existing loans. However, this decline was more than offset by EMAE’s arrears to its fuel supplier, ENCO, accumulated during the same period.9 In 2018, such arrears rose by US$16 million, at a higher pace than the US$14 million accumulation in 2017. The arrears increased further by US$9.4 million during the first half of 2019 and may rise by a higher amount in the second half based on seasonality. In addition, a comprehensive review by the Ministry of Finance identified additional government arrears to domestic suppliers of about US$25 million (around 6 percent of GDP), due to poor budgetary planning and a shortfall of project grants and loans. Total PPG debt also includes debt by some central public entities (such as the parliament and the court), which borrowed with the approval by the Ministry of Finance.

Text Table 3.

São Tomé and Príncipe: PPG Debt Stock

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Sources: Country authorities, EMAE, ENCO, and IMF staff estimates

Including the 4.8 million USD debt with Angola contracted after the 2007 HIPC debt relief.

Due to the statistical discrepancy in the authorities’ debt data.

Commitment‐based, and these suppliers reside domestically in the country.

Including the arrears from HidroEquador S.A. to ENCO.

Commercial debt guaranteed by the government.

3. The country continues to engage actively with bilateral creditors to regularize post-HIPC arrears. In total, such arrears stood at 2.6 percent of 2018 GDP (US$10.7 million), which are to Angola (US$4.8 million), Brazil (US$4.3 million), and Equatorial Guinea (US$1.7 million). An agreement with the Brazilian government was reached, pending ratification by the Brazilian Senate. The government has actively sought debt rescheduling agreements with Angola and Equatorial Guinea. These arrears are reflected in the debt stock.

Text Table 4.

São Tomé and Príncipe: Arrears and Disputed Debt

(As of end-2018)

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B. Macroeconomic Forecast

4. The macroeconomic assumptions are updated. The current DSA assumes slightly slower real GDP growth (4.3 percent) and a more moderate GDP deflator (2.8) than the previous DSA (Text Table 5), reflecting recent developments, including the revision of GDP that lowered the GDP deflator in recent years. Inflation is revised upwards to capture the high inflation at end-2018 and end-June 2019, as well as the one-off impact of the introduction of the VAT that is expected in 2020. Meanwhile, FDI remains similar as that in the July 2018 DSA, reflecting still high external interest in the country’s oil explorations. In addition, exports are expected to accelerate as the tourism strategy is being implemented with World Bank support, and the sector boosted gradually by improvement of infrastructure, a new international payment system (currently expected to be completed in about three years), and a new tourism school. In line with an IMF Extended Credit Facility arrangement requested by the government, it is assumed that the budget deficit will be mainly financed by grants and concessional loans. In addition, the current account will also be financed by FDI. The realism tools indicate that the baseline fiscal adjustment is optimistic. This is mainly because the primary deficit includes EMAE’s loss, which stood at 3.8 percent of GDP in 2018 and is expected to decline significantly (to 1.0 percent of GDP by 2023) as the company is being revamped under a program supported by the World Bank and European Investment Bank.

Text Table 5.

São Tomé and Príncipe: Macroeconomic Assumptions

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IMF Country Report No. 18/251

C. Country Classification

5. The country’s debt carrying capacity is assessed to be medium under the new LIC DSF and the cross-country assessment updated in April 2019. The new Composite Index (CI) of debt carrying capacity reflects macroeconomic variables, such as real GDP growth, remittances, reserves, and world growth (Text Table 6), in addition to CPIA, which was the only indicator under the previous framework. This along with other revisions to the framework confirms São Tomé and Príncipe as a medium debt-carrying capacity country. The applicable thresholds for the ratios of the present value (PV) of PPG external debt relative to GDP and exports are 40 percent and 180 percent, compared with 30 and 100 percent respectively in the last DSA that assessed the country as having a weak debt-carrying capacity. The threshold for the PV of total PPG debt also rose to 55 percent (from 38) of GDP. The thresholds for PPG external debt service (to exports and to revenue) remain unchanged.

Text Table 6.

São Tomé and Príncipe: Classification of Debt Carrying Capacity

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Debt Sustainability

D. External Debt Sustainability

6. Under the baseline scenario, all external PPG debt stock and debt service ratios stay well below their thresholds (Figure 1). This is an improvement relative to the last DSA, where the PV of debt-to-exports breached its threshold. This improvement is mostly driven by the aforementioned increases of the thresholds. Solvency indicators improve over time under the baseline and the most extreme shock scenarios due to economic growth, fiscal consolidation, slow debt accumulation, expansion of the tourism sector, and constrained imports, while liquidity indicators remain steady and comfortably below their associated thresholds throughout the projection horizon. These results suggest that the external PPG debt is sustainable.

Figure 1.
Figure 1.

São Tomé and Príncipe: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2019–20291/

Citation: IMF Staff Country Reports 2019, 315; 10.5089/9781513517407.002.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.

7. Under the most extreme shocks, two indicators breach their associated thresholds (Figure 1). The PV of debt service-to-exports ratio and the debt-service-to-revenue ratio remain below their thresholds under the most extreme shocks, which are an exports shock and a combined contingent liabilities shock, respectively. By contrast, the PV of debt-to-GDP ratio and PV of debt-to-exports ratio breach their respective thresholds from 2019 to 2029 but decline gradually under the most extreme shocks, both of which are also a combined contingent liabilities shock. As Text Table 2 shows, the main contingent liabilities in this extreme scenario is ENCO’s external arrears to Sonangol (46.5 out of 60.9 percent of GDP), which may ultimately fall on the government.11 These results highlight the importance of developing a clearance plan for EMAE’s arrears to ENCO, as well as promoting strong export growth.

E. Public Debt Sustainability

8. Total PPG debt can be deemed sustainable under programmed policies.12 Under the baseline, the PV of the total PPG debt-to-GDP ratio breaches the benchmark, mainly because of the inclusion of EMAE’s arrears to ENCO13 and newly identified government arrears to private suppliers (see ¶2) (Figure 2). Note that the DSF uses the nominal value of domestic PPG debt while calculating the PV of total PPG debt. The PV of PPG debt as calculated, taking into account the PV of the terms of payments to ENCO by the government and EMAE is also presented (the black dash line in Figure 2).14 Both agreements have extended payment periods and bring the PV of total PPG debt-to-GDP ratio below the benchmark of 55 percent of GDP starting in 2019. Hence, staff assesses that total PPG debt is sustainable provided EMAE’s planned reforms are implemented and the country continues to borrow externally only at concessional terms at a measured pace.

Figure 2.
Figure 2.

São Tomé and Príncipe: Indicators of Public Debt Under Alternative Scenarios, 2019–2029

Citation: IMF Staff Country Reports 2019, 315; 10.5089/9781513517407.002.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.

9. All the three total PPG debt ratios (PV of debt-to-GDP, PV of debt-to-revenue, and debt service-to-revenue) are most sensitive to a primary balance shock. Under such a shock, the three ratios would rise in the near term before declining gradually in the medium-to-long term. In addition, given that EMAE’s arrears to ENCO are denominated in foreign currency, the country’s debt is subject to currency risk, even though such arrears are treated as domestic debt under the residency-based definition.

Debt Distress Qualification and Conclusions

10. São Tomé and Príncipe’s classification remains to be in debt distress. This is because the regularization of São Tomé and Príncipe’s post-HIPC sovereign arrears (to Angola, Brazil, and Equatorial Guinea, totaling around 2.6 percent of GDP) is still ongoing. The significant arrears of EMAE to its supplier also reflect the severe liquidity constraints of the public sector. Staff assesses that São Tomé and Príncipe has the capacity to repay these arrears over time. São Tomé and Príncipe continues to actively seek rescheduling agreements with the creditors.

11. Compared with the last DSA, there are fewer threshold breaches of external PPG debt indicators, while the total PPG debt indicators have deteriorated. All external PPG debt indicators remain below their respective thresholds under the baseline scenario. These results can be attributed largely to a stronger debt-carrying capacity based on the revised Composite Indicator under the new DSF and the associated higher indicator thresholds. However, for total PPG debt, additional government arrears to suppliers identified recently and a more comprehensive coverage of public sector liabilities, including the inclusion of EMAE’s arrears, have revealed previously uncaptured debt vulnerabilities and led to a large baseline breach of the PV of debt-to-GDP indicator benchmark. While this ratio falls below the benchmark if the PV of the repayments to ENCO by the government and EMAE are taken into account, EMAE’s large losses and associated arrears nonetheless highlight the importance of reforming EMAE to containing fiscal risk.

12. Risks around the baseline are substantial. In particular, stress tests show that the country’s debt is especially vulnerable to shocks to exports, combined contingent liabilities, and the fiscal primary balance. The stress test based on a customized extreme scenario reveals that the risk stemming from ENCO’s large external arrears to Sonangol could be high in the near term, even though some key external debt ratios fall below the thresholds in the medium term and the strong diplomatic tie between São Tomé and Príncipe and Angola could be a potential mitigating factor to this extreme scenario.

13. Overall, the analysis highlights the importance of containing EMAE’s losses and maintaining strong policies in order to reduce debt-related risks. Such policies include deepening EMAE reforms, continuing fiscal consolidation and revenue mobilization, eschewing non-concessional loans, improving the business climate to attract non-debt flows, strengthening macroeconomic policies as envisaged under the program to support the exchange rate peg, and promoting tourism and private sector-led growth. In addition, the country should eschew non-concessional loans. To balance debt sustainability concerns while address the country’s large investment need, contracting of new concessional loans should be limited to 3 percent of GDP, and external debt disbursements should not exceed 1.5 percent of GDP. These parameters can be adjusted according to the development of debt vulnerability and can be relaxed once the vulnerability decreases. In this context, the country should strive to finance large projects with non-debt generating means, including by grants.

Authorities’ Views

14. The authorities broadly agreed with the assessment. They are committed to continuing the effort to regularize the long-standing external arrears. They also recognized the significant risk to debt sustainability from the large and persistent loss by EMAE, which have translated to large arrears to ENCO, and are committed to implementing EMAE reforms to achieve debt sustainability. They also pledge to borrow only at concessional terms and at a measured pace to reduce debt vulnerability over time.

Table 1.

Sao Tome and Principe: External Debt Sustainability Framework, Baseline Scenario, 2017–2039

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt.2/ Derived as [r – g – ρ(1+g) + Ɛα (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, Ɛ = nominal appreciation of the local currency, and α = share of local currency-denominated external debt in total external debt.3/ 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.4/ Current-year interest payments divided by previous period debt stock.5/ Defined as grants, concessional loans, and debt relief.6/ 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).7/ Assumes that PV of private sector debt is equivalent to its face value.8/ 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.

Sao Tome and Principe: Public Sector Debt Sustainability Framework, Baseline Scenario, 2017–2039

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.1/ Coverage of debt The central government plus social security and extra budgetary funds, central bank, government-guaranteed debt. Definition of external debt is Residency-based.2/ 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.3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.4/ 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.5/ 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.6/ 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.

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

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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.

São Tomé and Príncipe: Sensitivity Analysis for Key Indicators of Public Debt, 2019–2029

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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.

Figure 3.
Figure 3.

São Tomé and Príncipe: Drivers of Debt Dynamics – Baseline Scenario–External Debt

Citation: IMF Staff Country Reports 2019, 315; 10.5089/9781513517407.002.A003

1/ Difference betw een anticipated and actual contributions on debt ratios.2/ Distribution across LICs for w hich LIC DSAs w ere 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.

São Tomé and Príncipe: Realism Tools

Citation: IMF Staff Country Reports 2019, 315; 10.5089/9781513517407.002.A003

1

The DSA update was prepared by IMF and World Bank staffs in collaboration with the authorities of São Tomé and Príncipe. The analysis updates the previous Joint DSA dated July 9, 2018 (IMF Country Report No. 18/251). The DSA follows the IMF and World Bank Staff Guidance Note on the Application of the Joint Fund-Bank Debt Sustainability Framework (DSF) for Low-Income Countries (LICs) (February 2018). The country’s Composite Indicator score was 2.698 and its debt carrying capacity was assessed at to be medium under the revised LIC DSF and the cross-country assessment updated in April 2019.

2

The country’s debt stocks are zero for some new elements covered under the revised DSA framework, including the social security fund and central bank debt borrowed on behalf of the government. There is no other government guaranteed debt that is excluded from this DSA.

3

ENCO registers domestically in São Tomé and Príncipe, with 77.6 percent of its shares owned by Sonangol (an Angolan SOE) and 16.0 percent owned by São Tomé and Príncipe’s government. The government’s arrears to ENCO were regularized in 2016, and EMAE’s arrears of $104.4 million as of end-July 2019 were regularized in August 2019.

4

Based on preliminary data, at end-2018, ENAPORT had commercial loans amounting to about $2.2 million that mature in August 2028; ENASA had two commercial loans of $0.3 million (maturing in September 2028) and $2.0 million (maturing in June 2029), respectively. In total, these loans amount to $4.5 million, or about 1 percent of GDP. There are four other profitable enterprises, in which the government has a minority stake.

5

Consistent with the previous DSA, pre-HIPC initiative arrears (13.5 percent of GDP) are excluded, on the assumption of debt forgiveness. One pre-HIPC PPP debt of 11.2 percent of GDP is excluded, consistent with the treatment of other pre-HIPC debt. Details about this loan are presented in Text Table 4.

6

“Guidance Note on the Bank-Fund Debt Sustainability Framework for Low Income Countries,” February 2018, Paragraph 68.

7

In the event that ENCO is liquidated, its claims on the government, EMAE, and other elements of the public sector could be transferred mostly to Sonangol, which may demand repayments. Note that ENCO’s claims on EMAE and the government are not included in the baseline external debt stock even though they are denominated in USD, as the DSA uses the residency-based assumption (these claims are regarded as domestic debt in the baseline). The size of the Sonangol shock (46.5 percent of GDP) is calibrated to capture the maximum amount of liabilities that would need to be assumed by the government should the contingency materializes; this is a worst-case scenario given that ENCO is a joint venture that is majority (77.6 percent) owned by Sonangol, an Angolan company. The government and private entities of São Tomé and Príncipe hold 16.0 and 6.4 percent of stakes, respectively.

8

Due to the broadened debt coverage discussed above, the “central government direct and guaranteed debt” in this DSA has the same coverage as the “total PPG debt” in the previous DSA. Consistent with the new DSF framework, the term “total PPG debt” refers to the broadened coverage that includes the central government and EMAE (the government’s arrears to EMAE are excluded during the consolidation).

9

These arrears include those by HidroEquador, which belongs to the EMAE parent company but reports losses separately. EMAE’s arrears to ENCO have increased substantially since 2016 due to an expansion of the electricity distribution network.

10

These amounts remained unchanged as of end-June 2019.

11

The size of the Sonangol shock (46.5 percent of GDP) is calibrated to capture the maximum amount of liabilities that would need to be assumed by the government should the contingency materializes.

12

As in the previous DSA template, only one of the three total PPG debt ratios (debt-to-GDP ratio) has a benchmark (instead of a strict threshold) in the new template. In addition, the negative real interest rates on domestic debt in Figure 2 are due to the low nominal interest rates (relative to inflation), which are in turn due to the excess liquidity in the banking system.

13

After an expansion of the electricity network, EMAE’s losses rose to about 4 percent of GDP on average annually during 2016–18, compared with an average of 1.5 percent of GDP in Sub-Saharan Africa.

14

The repayment schedule for EMAE to ENCO covers both the existing stock of debt and any new arrears that may arise until EMAE returns to an operating surplus.

Democratic Republic of Sao Tome and Principe: Request for a 40-month Arrangement Under the Extended Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Democratic Republic of Sao Tome and Principe
Author: International Monetary Fund. African Dept.
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    São Tomé and Príncipe: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2019–20291/

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    São Tomé and Príncipe: Indicators of Public Debt Under Alternative Scenarios, 2019–2029

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    São Tomé and Príncipe: Drivers of Debt Dynamics – Baseline Scenario–External Debt

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    São Tomé and Príncipe: Realism Tools