Cote D’ivoire: Sixth Reviews Under the Arrangement Under the Extended Credit Facility and the Extended Arrangement Under the Extended Fund Facility, and Request for Extension and Augmentation of Access—Debt Sustainability Analysis

Sixth Reviews Under the Arrangement Under the Extended Credit Facility and the Extended Arrangement Under the Extended Fund Facility, and Request for Extension and Augmentation of Access; Press Release; Staff Report; Staff Supplement; and Statement by the Executive Director for the Cote d'Ivoire

Abstract

Sixth Reviews Under the Arrangement Under the Extended Credit Facility and the Extended Arrangement Under the Extended Fund Facility, and Request for Extension and Augmentation of Access; Press Release; Staff Report; Staff Supplement; and Statement by the Executive Director for the Cote d'Ivoire

Public Debt Coverage

1. The definition of public debt covers the central government, social security, and government guarantees to other entities in the public and private sectors, including to state-owned enterprises (Text Table 1). Debt includes state-owned enterprises (SOEs) guaranteed debt by the government (2.2 percent at end-2018) and on-lent debt from the government (4 percent). The rest of SOEs debt (that is, the part that is neither guaranteed nor on-lent by the government), which represents 1.5 percent of GDP at end-2018, is currently not included in the baseline due to limited information on revenues. The authorities are working on compiling the missing information. A contingent liability tailored test is designed to fully capture risks associated with SOEs’ debt, as well as public-private partnership (PPP) capital stock (Text Table 1).

Text Table 1.

Côte d’Ivoire: Coverage of Public Sector Debt and Design of the Contingent Liability Stress Test

article image

The default shack 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%.

Source: IMF staff estimates and country authorities

Debt Landscape

2. External debt, defined on a currency basis, increased by 6.1 percentage points of GDP in 2018 and is projected to increase by 1.5 percentage points of GDP in 2019, before gradually declining in percent of GDP.2 The increase in 2018 includes the two Eurobonds issued in March 2018 (4.7 percent of GDP) and the government-guaranteed loan to restructure the debt of the state-owned oil refining company (SIR) in December 2018 (1.4 percent of GDP). The projected increase in 2019 includes a counter-guarantee for a World Bank guarantee and a comfort letter, both to back a loan to support arrears clearance at CI-ENERGIES and enhance its credit quality (0.8 percent of GDP). External debt excluding C2D3 is therefore projected to reach 34.7 percent of GDP at end-2019. It is then projected to gradually decline over the 2020–28 period.

3. Reflecting in large part the Eurobond issuances, the share of commercial creditors in external debt rose in 2018. It reached over 54.4 percent at end-2018 from 52.8 percent at end-2017 (Text Table 2), which is fully accounted by the Eurobond issuances. Multilateral creditors represented 24.2 percent of external debt, while bilateral creditors accounted for 18.5 percent of the external debt stock at end-2018.

Text Table 2.

Cote d’lvoire: Composition of External Debt per Creditor Group

article image
Sources: Ivoirien authorities; and IMF staff estimates.

4. Reliance on domestic sources of financing is expected to decline further in 2019–23, before rebounding. Domestic debt had increased by 2.7 ppt of GDP between 2012 and 2017, reaching 19.9 percent of GDP in 2017.4 Reversing that trend, domestic debt was back to 17.2 percent of GDP in 2018 and is projected to decrease further by about 2 percent of GDP in 2019. It would continue decreasing until 2023, before picking up again over 2023–28. This reflects the combination of (i) the authorities’ strategy to fund gross financing needs in a balanced way between domestic and foreign currency sources, and (ii) the fact that rollover needs of domestic debt are larger than those of external debt in the next few years. The scenario assumes that after substantial Eurobond issuances in 2017–18 and more moderate recourse to international financial markets in 2019 and projected for 2020, the authorities would continue to tap international markets every year going forward in the same manner. However, the authorities should remain mindful not to not excessively reduce their recourse to the regional financial market in the next few years, as this would run counter to the WAEMU-wide efforts to support the development of that market.

Underlying Assumptionst

5. The assumptions in the baseline scenario are consistent with the macroeconomic framework outlined in the staff report for the sixth reviews under the EFF/ECF blended arrangements (Text Table 3). These include sustained but moderating GDP growth, subdued inflation, a gradual improvement in the external position, compliance with WAEMU fiscal deficit convergence criterion of 3 percent of GDP from 2019 onward, and a move toward more commercial debt to cover the gross financing needs as Côte d’Ivoire transitions to emerging market status.

  • Sustained but moderating GDP growth over the medium term. Real GDP growth is expected to remain broadly unchanged in the medium-term compared to the previous DSA, averaging 6.9 percent during the first five years of the projection period (2019–24). Growth is supported by robust domestic demand and positive net exports in the medium term. Reflecting a stabilization process, real GDP is projected to grow by almost 5.7 percent over 2025–30 on average and 5.6 percent over 2031–39 as investment normalizes and net trade contributions lessen further into the projection period.

  • Subdued inflation. Inflation is expected to remain subdued at about 2 percent, reflecting good domestic supply conditions and the strength of the Euro to which the CFA Franc is pegged.

  • A stabilized deficit at 3 percent. This reflects the government’s efforts to mobilize domestic revenue and contain non-priority expenditure to meet the WAEMU fiscal deficit convergence criterion of 3 percent of GDP from 2019 onward.

  • The current account deficit is projected to narrow over the projection horizon. It is projected to gradually narrow from 4.7 percent of GDP in 2018 to 3 percent by 2024, reflecting higher exports of transformed primary products and slower import growth as investment and associated service and equipment imports normalize. These assumptions are subject to downside risks including unfavorable terms-of-trade shocks and weaker-than-expected global growth in the context of rising protectionism.

  • Commercial debt financing. Côte d’Ivoire’s financing needs are expected to be covered mainly by commercial debt in the medium term as it transitions toward an emerging market economy. The government is expected to rely on both concessional and non-concessional lending to satisfy its financing needs. This is consistent with the authorities’ medium-term debt management strategy, which envisages a balanced split between sources in domestic and foreign currencies to meet gross financing needs over the period 2019–23.

Text Table 3.

Côte d’Ivoire: LIC DSA Macroeconomic Assumptions

article image
Sources: Ivoirien authorities, and IMF staff estimates

Changes from the 4th review DSA reflects an updated nominal GDP following the release of final 2017 national accounts and estimates 2018 national accounts and revised CFA/USD exchange rate assumptions.

C2D grants are excluded from revenue and grants.

C2D grants are excluded from official transfers.

6. The realism of the macroeconomic framework is confirmed by several checks (Figure 6). The projected medium-term debt-creating flows do not deviate significantly from the historical outturns. The projected fiscal adjustment for the next three years is below the top quartile of the distribution of approved Fund-supported programs for LICs since 1990. The assumed fiscal consolidation plans are consistent with the WAEMU regional fiscal deficit convergence criterion of 3 percent of GDP, to which the authorities have committed starting from 2019. Regarding the relation between fiscal adjustment and growth paths, the baseline projection does not deviate significantly in 2019 from the growth paths with LIC’s typical fiscal multipliers extracted from the empirical literature in 2019. The contribution of government capital to real GDP growth is projected to increase slightly over the medium term.

Figure 1.
Figure 1.

Côte d’Ivoire: Stock of External Public Debt, 2012–28

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 366; 10.5089/9781513522852.002.A002

Sources: Ivoirien authorities and IMF staff estimates.
Figure 2.
Figure 2.

Côte d'Ivoire: Stock of Domestic Public Debt 1/, 2012–2028

(Percent of GDP)

Citation: IMF Staff Country Reports 2019, 366; 10.5089/9781513522852.002.A002

1/ Central government only.Sources: Ivoirien authorities; and IMF staff estimates.
Figure 3.
Figure 3.

Côte d’Ivoire: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2019–291/

Citation: IMF Staff Country Reports 2019, 366; 10.5089/9781513522852.002.A002

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.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 4.
Figure 4.

Côte d’Ivoire: Indicators of Public Debt Under Alternative Scenarios, 2019–29

Citation: IMF Staff Country Reports 2019, 366; 10.5089/9781513522852.002.A002

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.
Figure 5.
Figure 5.

Côte d’Ivoire: Drivers of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2019, 366; 10.5089/9781513522852.002.A002

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs 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 6.
Figure 6.

Côte d’Ivoire: Realism Tools

Citation: IMF Staff Country Reports 2019, 366; 10.5089/9781513522852.002.A002

Country Classification and Determination of Scenario Stress Tests

7. Côte d’Ivoire has a medium debt carrying capacity. As in the latest DSA, the debt carrying capacity depends on a Composite Indicator (CI) that includes the CPIA and other variables from the macroeconomic framework.5 With a CI score of 2.97, Côte d’Ivoire has a medium debt carrying capacity, which determines the relevant external debt burden thresholds and total public debt benchmarks.

Text Table 4.

Côte d’Ivoire: CI Score

article image

8. Given Côte d’Ivoire’s continuous reliance on global capital markets, a tailored test for international market financing was conducted. Côte d’Ivoire issued sizeable Eurobonds in 2017 and 2018 and is tapping international markets for smaller amounts in 2019. Its debt management strategy aims at leveraging global capital markets to finance part of the country’s gross financing needs over 2019–23. Consequently, a tailored test for market financing assumes a temporary increase in the cost of new commercial external borrowing by 400 basis points combined with a nominal depreciation of 15 percent of the CFAF vis-à-vis the US$ and a shortening of maturities and of grace periods.6

9. A contingent liability tailored shock was conducted to capture potential fiscal risks arising from SOEs, PPPs, and the financial market. This tailored stress tests include the standardized 2 percent of GDP— which is in the order of magnitude of the 1.5 percent of GDP SOEs’ debt stock that is not already included in the debt stock. It also includes a 1¼ percent of GDP shock to accommodate potential fiscal risks on 35 percent of the PPP capital stock, and a financial sector shock of 5 percent of GDP.

10. Standard stress tests on real GDP growth, primary balance, exports, current transfers, foreign exchange (FX) depreciation, and tailored test on commodity price have also been applied. The first four shocks set each of the above variables to its historical average minus one standard deviation, or to its baseline projection minus one standard deviation, whichever is lower, for 2019 and 2020. The FX depreciation considers a nominal depreciation of 30 percent of the CFAF vis-à-vis the US$ in the first year of the projection. The commodity price shock captures the impact of a sudden one standard deviation decline in commodity prices.

External Debt Sustainability Analysis

11. The external DSA assessment indicates that all Public and Publicly Guaranteed (PPG) debt indicators are below their corresponding thresholds for the next ten years in the baseline scenario. The PV of external debt-to-GDP is expected to decrease from 28 percent in 2019 to 26 percent in 2029 (Text Table 1 and Figure 3) as growth continues, fiscal consolidation takes place in 2019 and the tight fiscal position is maintained throughout the projected horizon and as the authorities rely on a balanced mix of loans in domestic and foreign currencies to meet their gross financing needs. A liability management operation, conducted in October 2019,7 has resulted in smoother repayment peaks in 2024, 2025, and 2032, and lower indicators over 2019–29 compared to the December 2018 DSA. The two new Eurobonds will be due in 2029–31 and 2038–40. The peak in debt service-to-revenue ratio will be reached in 2031 and is projected to decrease henceforth.

12. Among all the considered shock scenarios, the one on exports has the largest negative impact on Côte d’Ivoire’s external debt sustainability. Under the standard stress test on exports, the debt-service-to-revenue ratio breaches the threshold starting in 2025. Likewise, under the market financing stress test the debt service-to-export ratio breaches the threshold starting in 2025. These results underscore the downside risks for debt sustainability originating from external shocks (such as negative terms of trade shocks) and to market financing (such as rising interest rates) that could hit the Ivoirian economy. While the stock indicators remain below their respective thresholds under the most extreme shock scenarios, they are close to them from 2021 onwards.

Public Debt Sustainability Analysis

13. Under the baseline scenario, the PV of public debt-to-GDP ratio is below its threshold of 55 percent (Figure 4). The PV of public debt-to-GDP is expected to slightly decrease over the projection period, from 43.1 percent in 2019 to 39.7 percent in 2029. Meanwhile, the PV of debt-to-revenue ratio decreases from 212.7 percent in 2019 to 189.9 percent in 2029. Finally, the debt service-to-revenue ratio remains in the region of 32 percent, with its level initially declining somewhat from 2019 to 2023, before increasing again to reach in 2029 a level similar to the one in 2019.

14. Stress tests highlight that Côte d’Ivoire’s most extreme public debt vulnerability could emerge from a shock to GDP growth and commodity prices (Figure 4 and Table 4). Under the standard stress test of real GDP growth shock, the PV of public debt-to-GDP would breach its corresponding threshold of 55 percent starting in 2022, to reach 89.9 percent in 2029. This shock would lead to an explosive pattern of the three debt and debt service indicators. In addition to highlighting the very strong sensitivity to GDP growth shocks, this underscores the importance of minimizing forecast errors by pinpointing projections of real GDP growth as precisely as possible through a strong statistical system and capacities. Under the tailored test of commodity price, PV of public debt breaches the threshold in 2023 and remain above until 2029.

Table 1.

Côte d’Ivoire: External Debt Sustainability Framework, Baseline Scenario, 2016–39

(Percent of GDP; unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.1/ Includes both public and private sector external debt,2/ Derived as [r – g – p[1+g)]/[1+g+p+gp] times previous period debt ratio, with r – nominal interest rate; g – real GDP growth rate, and p – growth rate of GDP deflator in U.S. dollar terms,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.

Côte d’Ivoire: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–2039

(Percent of GDP; unless otherwise indicated)

article image
Sources: Country authorities: and staff estimates and projections,1/ Coverage of debt: The central government plus social security, central bank, government-guaranteed debt. Definition of external debt is Currency-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.

Côte d’Ivoire: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–29

(Percent)

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.

Côte d’Ivoire: Sensitivity Analysis for Key Indicators of Public Debt, 2019–29

(Percent)

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.

Risk Rating and Vulnerabilities

15. The debt sustainability analysis under the new DSA indicates that Côte d’Ivoire remains at moderate risk of external debt distress as in the December 2018 DSA. While none of the external debt indicators breaches their corresponding threshold under the baseline scenario, the ratios of the external debt service-to-revenue and debt service-to-exports increase gradually starting in 2021, and standard stress tests show that they would cross the threshold in the most extreme shock scenarios. This reinforces the need to intensify revenue mobilization and diversify the export base through structural transformation over the medium term. It is also crucial to have a prudent external borrowing strategy aimed at balancing the costs and risks of new loans to preserve Côte d’Ivoire’s borrowing space and medium-term debt sustainability.

16. The new DSA also indicates that the overall risk of debt distress is moderate, but stress tests highlight vulnerabilities to shocks both on the external and total debt. While the overall debt sustainability risk is moderate, the PV of public debt-to-GDP breaches its threshold of 55 percent starting in 2023 under the most extreme shock (growth) arising from the standard stress tests. While the October 2019 liability management operation has resulted in a smoother path for liquidity indicators, external debt service ratios to GDPs and exports would still breach their threshold starting in 2025 under the most extreme shock (exports and market financing).

17. The authorities may have reduced vulnerabilities related to repayment peaks in the short run, but they need to continue building resilience against shocks to debt sustainability (Figure 7). The DSA results highlight the need to carefully monitor debt indicators, ensure that GDP growth projections are conducted in a cautious way, implement judicious policies to preserve macroeconomic stability and have full oversight of SOE debt contracting. Within this context, the authorities should work toward fully integrating SOE debt in their debt sustainability assessment. To create fiscal space, the authorities should also increase their efforts in mobilizing domestic revenue while containing public expenditure.

Figure 7.
Figure 7.

Côte d’Ivoire: Qualification of the Moderate Category, 2019–291/

Citation: IMF Staff Country Reports 2019, 366; 10.5089/9781513522852.002.A002

Sources: Country authorities; and staff estimates and projections.1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.

Authorities’ Views

18. The authorities broadly agreed with the main conclusions of the DSA, particularly that Côte d’Ivoire remains at moderate risk of debt distress. They concurred with the importance of strengthening the monitoring of public sector debt and intend to maintain a medium-term debt management strategy that ensures continued moderate risk of debt distress. They also stressed their active debt management approach, favoring borrowing in euros to limit currency risk, while increasing the average maturity of external debt to reduce rollover risks. In particular, they pointed to the liability management operation conducted in October 2019 to smooth repayment peaks in 2024, 2025, and 2032 in relation with existing bullet-payment Eurobonds. Recognizing the risk related to repeated and substantial reliance on foreign currency borrowing in the recent years, their medium-term debt management strategy envisages a balanced split between sources in domestic and foreign currency to meet their financing needs over 2019–23. While they acknowledged the need to foster the deepening of the regional debt market to better leverage domestic savings for development objectives, they flagged that sustained presence on international capital markets helped reinforcing their status as a frontier economy and protected against the limited liquidity and depth of the regional market.

1

This DSA updates the previous Joint DSA dated December 14, 2018 (IMF Country Report No. 18/367). Côte d’Ivoire’s debt carrying capacity, calculated based on the October 2019 WEO and the World Bank’s 2018 CPIA is classified as medium. The applicable thresholds to the public and publicly guaranteed external debt are: 40 percent for the PV of debt-to-GDP ratio, 180 percent for the PV of debt-to-exports ratio, 15 percent for the debt service-to-exports ratio, and 18 percent for the debt service-to-revenue ratio. The applicable benchmark for the PV of total public for medium debt carrying capacity is 55 percent of GDP.

2

In this DSA, Public and Publicly Guaranteed external debt excludes French claims under C2D debt-for-development swaps, which were cancelled in the context of beyond HIPC debt relief. Under the C2D mechanism, debt service due on these claims is returned as grants to the government to finance development projects. Flows associated with the C2D process are included by IMF staff in the external and fiscal accounts to capture gross cash flows (debt service and grants). See IMF Country Report nº14/358 and Supp.1, 11/21/2014 for a detailed discussion. The amount in the DSA also excludes CFAF-denominated external debt.

3

The Debt Reduction-Development Contract (C2D) is a debt restructuring tool under which Côte d'Ivoire continues to service its bilateral debts to France and Spain until repayment, but the amounts are transferred back to the country as grants to finance poverty reduction programs.

4

A large part of the domestic debt consists of securities issued in the regional auction and syndication debt markets.

5

The other variables from the macroeconomic framework consist of five variables: real GDP growth, remittances, import coverage of reserves, the square of import coverage of reserves, and world economic growth. The CI uses ten years of data (5 years of history and 5 years of projections) to smooth out economic cycles.

6

The share of USD denominated debt is estimated to be decreasing over time. The considered shortening of maturities of commercial external borrowing are as follows. If the original maturity is greater than 5 years, the new maturity is set to 5 years. If the original maturity is less than 5 years, the new maturity is shortened by 2/3.

7

In October 2019, the authorities issued a EUR 1.7 bn Eurobond. A significant part of it, EUR 1.4 bn, was used to refinance debt repayment peaks coming due in 2024/2025/2032 and switch some Eurobonds from dollars into euros. Half of the Eurobond issuance was with a 12-year maturity at 5.875 percent and the other half with a 32-year maturity at 6.875 percent.

Cote d'Ivoire: Sixth Reviews Under the Arrangement Under the Extended Credit Facility and the Extended Arrangement Under the Extended Fund Facility, and Request for Extension and Augmentation of Access; Press Release; Staff Report; Staff Supplement; and Statement by the Executive Director for the Cote d’Ivoire
Author: International Monetary Fund. African Dept.
  • View in gallery

    Côte d’Ivoire: Stock of External Public Debt, 2012–28

    (Percent of GDP)

  • View in gallery

    Côte d'Ivoire: Stock of Domestic Public Debt 1/, 2012–2028

    (Percent of GDP)

  • View in gallery

    Côte d’Ivoire: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2019–291/

  • View in gallery

    Côte d’Ivoire: Indicators of Public Debt Under Alternative Scenarios, 2019–29

  • View in gallery

    Côte d’Ivoire: Drivers of Debt Dynamics – Baseline Scenario

  • View in gallery

    Côte d’Ivoire: Realism Tools

  • View in gallery

    Côte d’Ivoire: Qualification of the Moderate Category, 2019–291/