Had: Requests for Disbursement Under the Rapid Credit Facility, Extension of the Extended Credit Facility Arrangement, and Rephasing of Access—Debt Sustainability Analysis

Requests for Disbursement under the Rapid Credit Facility, Extension of the Extended Credit Facility Arrangement, and Rephasing of Access-Press Release; Staff Report; and Statement by the Executive Director for Chad

Abstract

Requests for Disbursement under the Rapid Credit Facility, Extension of the Extended Credit Facility Arrangement, and Rephasing of Access-Press Release; Staff Report; and Statement by the Executive Director for Chad

Public Debt Coverage

1. The coverage of public debt includes state and local governments and the national oil company. As in the previous DSA, coverage includes the central government, as well as state guaranteed external debt owed by the public oil company “Société des Hydrocarbures du Tchad” (SHT) (Text Table 1). This scope encompasses all public external debt; other public sector entities (including sub-national government and other state-owned enterprises) do not have access to external financing. The Ministry of Finance census of public sector enterprises uncovered the outstanding domestic borrowing of the largest SOEs. Because these are mostly commercial arrears with no formal maturity, they have been added to the contingency analysis.

Text Table 1.

Chad: Coverage of Public-Sector Debt and Design of Contingent Liability Stress Tests

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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%.

2. The contingent liability stress test accounts for vulnerabilities associated with non-guaranteed state-owned enterprises (SOEs), possible unaudited domestic arrears, and financial markets (Text Table 1). The SOE census indicates that as of 2017, the Société de Raffinage de Ndjamena (SRN), Société Nationale d’Electricité (SNE) and Société Nationale de Ciment (SONACIM) have a combined debt of about CFA 540 billion or 9.5 percent of GDP.1 Contingent liabilities from financial markets are set at 5 percent of GDP, which represents the average cost to the government of a financial crisis in a low-income country since 1980. The audit of arrears has been completed but the government has not made specific plans for paying them, so the contingent liability is the full value of audited arrears, 6.9 percent of GDP.2 The contingent liability stress test is customized to 21 percent.

Background

A. Evolution and Composition of Debt

3. Chad’s external public and publicly guaranteed (PPG) debt burden has stabilized at about 25 percent of GDP since 2017. Chad’s recent debt problems derive from commercial borrowings (oil sale advances) from Glencore in 2013 to cover revenue shortfalls and in 2014 to purchase a share in the Doba Oil Consortium. Falling oil prices over 2014–16 were the primary reason for reduced revenues available to repay oil sales advances. This debt has since been restructured twice, most recently in early 2018, which has considerably reduced its burden. At end- 2019, outstanding PPG external debt stood at about $2.8 billion (25.6 percent of GDP). Chad’s CFAF-denominated debt held by the regional central bank (BEAC), the regional development bank (BDEAC), and bilateral creditors in the currency union (Republic of Congo, Equatorial Guinea, and Cameroon) amounts to 9.3 percent of GDP. It is not included in external debt, which is calculated on a currency basis.

4. The composition of external public debt has changed significantly over the past decade. The share of external debt from multilaterals has fallen sharply from about 87 percent in 2008 to 32 percent in 2019. The share of commercial debt, mostly to Glencore, which was virtually non-existent in 2008, soared following the 2014 crisis. It is now trending down briskly from a peak in 2016 of 53 percent to 39 percent at end-2019. Bilateral debt doubled over the past decade but, as a share of total debt, it is still less than commercial debt (Text Table 2). Consistent with the ECF arrangement, external debt is defined on a currency basis.

Text Table 2.

Chad: Domestic Debt Stock 2016–2019

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Source: Chadian authorities

Includes advances that were consolidated in 2017.

Issued through banks’ syndication

Auctionned in regional securities’ market.

Legal commitments, standing payment orders, and accounting arrears.

5. Domestic public debt has begun to decline in recent years (Text Table 3)3. Since 2017, domestic debt has been declining as the authorities aim to loosen the bank-sovereign nexus and reduce domestic arrears. However, in 2019 all maturing securities were rolled over into six-month T-bills as banks were not willing to accept longer maturities. Following a peak in 2015, debt to the BEAC was restructured and Chad stopped borrowing from the BEAC. In addition to the debt owed to BEAC (38 percent of total debt), some debt denominated in local currency is held within the CEMAC region, including about 9.8 percent of total debt owed to official bilateral partners and BDEAC, and in the form of securities that could be held by non-resident banks.

Text Table 3.

Chad: Macroeconomic Assumptions Comparison Table

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Sources: Chadian authorities and IMF staff estimates and projections.
Table 1.

Chad: External Debt Stock 2016–20191

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Sources: Chadian authorities, selected creditors, and World Bank and IMF staff estimates.

Includes only debt denominated in foreign currency.

The Glencore loan accounts for about 98 percent of commercial debt stock in 2017.

6. External payment arrears have dropped considerably since 2017. Due to liquidity challenges in 2016 and the first half of 2017, the government accrued external arrears vis-à-vis a number of multilateral, bilateral, and one commercial creditors (Mega bank from Taiwan province of China). By end-2018 about $63 million (0.6 percent of GDP) remained outstanding, mainly to bilateral creditors—debt to the Republic of Congo alone is about $53 million. After complications related to payment modalities, the authorities reached an agreement in July 2019 to pay the Angola debt in kind in cattle.4 Active discussions are underway to address all outstanding arrears, including with Equatorial Guinea, the Republic of Congo and Mega Bank. The agreement under negotiation with Equatorial Guinea will also entail in-kind payment, with the only remaining detail to decide being the price of the commodity (fresh meat). The Mega Bank negotiations have reached an agreement-in-principle that requires ratification. The pandemic has forced several negotiation meetings this spring to be postponed. The authorities have taken concrete steps to prevent further accumulation of arrears—including measures to improve coordination among relevant agencies and enhance debt servicing, including reactivation of an escrow account for the payment of external debt at the BEAC.

B. Macroeconomic Forecast

7. The DSA’s baseline scenario reflects policies underlying the ECF arrangement, the financing assumptions underlying the RCF request and medium-term projections that including the Glencore debt restructuring. The pandemic has impacted the growth projection compared to the previous DSA (June 2019) from 5.4 and 4.8 percent in 2020 and 2021 respectively to -0.1 and 6.1 percent. Both oil and non-oil GDP are expected to rebound in 2021. The outlook assumes that the ECF’s revenue-led fiscal consolidation will continue beyond the program horizon at a gradual pace and that spending control would be maintained. Export growth is expected to fall 30 percent in 2020 with oil prices having collapsed and production lower than initial projections at the time of the 5th review. Oil production is expected to continue to increase in the medium term, leading to higher oil revenues, higher exports and overall GDP growth (Text Table 4). The forecast is subject to heightened uncertainty as the economic impact of the pandemic unfolds. The baseline scenario assumes full clearance of external arrears in 2020. The authorities have a financing plan that should underpin gradual repayment of audited domestic arrears.

Text Table 4.

Chad: CI Score

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Source: IMF staff calculations. The CI cutoff for medium debt carrying capacity is 2.69.

8. The projected financing gaps in the balance of payments are assumed to be closed with concessional financing, which has not yet been identified. The discount rate is kept at 5 percent and the grant element of new borrowing is set at about 37 percent over the forecast horizon. With regards to domestic financing, the maturity structure lengthens across the 20 years of the forecast, in line with the authorities’ debt management plans. In accordance with assumed improvements in fiscal and financial sector health, the average real interest rate falls modestly to match levels seen in more developed markets in the region.

9. The forecast is broadly realistic. The projected 3-year fiscal adjustment is in line with historical data on LIC adjustment programs. Continued fiscal prudence and efforts to raise non-oil revenues beyond the current ECF arrangement horizon are expected to ensure a sustainable adjustment. The fiscal multiplier tool suggests that growth in 2020 and 2021 could differ from the projected consolidation. However, current extreme volatility weakens established relationships. Staff expect the pandemic to lower growth exceptionally this year and allow a stronger-than-normal rebound in 2021. Staff expect the private sector to drive growth, led by private investment, as shown in the lower left panel of Figure 4. New oilfield development projects have boosted expected private investment, while public sector investment remains low.

Figure 1.
Figure 1.

Chad: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2020–2030

Citation: IMF Staff Country Reports 2020, 134; 10.5089/9781513542140.002.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 2030. 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. The tailored commodity price stress test presented here does not account for the contingency mechanisms in the Glencore debt as Text Figure 3 does.
Figure 2.
Figure 2.

Chad: Indicators of Public Debt Under Alternative Scenarios, 2020–2030

Citation: IMF Staff Country Reports 2020, 134; 10.5089/9781513542140.002.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 2030. 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 3.
Figure 3.

Chad: Drivers of Debt Dynamics—Baseline Scenario

Citation: IMF Staff Country Reports 2020, 134; 10.5089/9781513542140.002.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 4.
Figure 4.

Chad: Realism Tools

Citation: IMF Staff Country Reports 2020, 134; 10.5089/9781513542140.002.A002

C. Country Classification and Determination of Stress Test Scenarios

10. The composite indicator (CI) based on October 2019 World Economic Outlook (WEO) projections and an update of the CPIA index to 2020 levels indicates weak debt carrying capacity for Chad. The CI combines the CPIA score, external conditions as captured by world economic growth and country-specific factors. The October 2019 data indicate weak debt carrying capacity, reflecting mainly a low CPIA, very low remittances, and a low level of foreign reserves (Text Table 5).

11. The debt sustainability analysis relies on six standard stress tests and a customized commodity price shock stress test (Figures 1 and 2 and Tables 3 and 4).5 Of the standard stress tests described in Table 3, the exports shock and the commodity price shock have the most relevance for Chad. The export shock assumes a one-standard deviation (21.1 percent) decline in exports in 2021 and 2020 (Text Figure 1). This stress test might approximate a scenario with much lower oil production or disruptions in export capabilities due to the pandemic. The commodity price shock assumes a one-standard deviation (35 percent) decline in oil prices from 2021–2026 (Text Figure 2). The customized oil price shock is further customized to account for contingency mechanisms which limit the negative effect of the shock in the near term.6 Accounting for the Glencore debt contract contingency mechanisms also captures the revenue impact of the oil price decline more precisely than the standard commodity shock.

Text Figure 1.
Text Figure 1.

Chad: Exports/GDP under Alternative Scenarios, 2020–2030

Citation: IMF Staff Country Reports 2020, 134; 10.5089/9781513542140.002.A002

Sources: IMF staff calculations.
Text Figure 2.
Text Figure 2.

Chad: Doba Oil Price under Alternative Scenarios, 2020–2030 (Dollars)

Citation: IMF Staff Country Reports 2020, 134; 10.5089/9781513542140.002.A002

Sources: IMF staff calculations.

Debt Sustainability

A. External Debt Sustainability

12. External debt risk has risen, though debt levels remain on a gradual downward trajectory over the forecast horizon. Under the baseline scenario the present value of PPG external debt-to-GDP ratio, the present value of PPG external debt-to-exports ratio and the debt service-to-exports ratio are all below their thresholds (Figure 1). The debt service-to-revenue ratio rises due to lower revenue and associated higher borrowing in response to the pandemic. However, it stays close to 18 percent, the target level for the 2018 Glencore debt renegotiation. Despite the significant impact of lower projected oil prices on oil revenue, oil revenue remains sufficient to service the Glencore debt. In fact, it would take a further significant decrease in petroleum prices below the baseline before oil revenue became insufficient to service the Glencore debt. Nonetheless, the debt service-to-revenue ratio is not expected to drop below its threshold of 14 percent until 2028 as the Glencore debt matures. These levels are higher than the previous DSA, but still below the unsustainable ratios felt during the 2015–2017 oil price shock, so staff view this level of debt service to be sustainable.

13. Under stress tests, the thresholds are substantially breached for all indicators. Under the shock scenarios, the exports stress test produces the most extreme scenario for all indicators except the debt service-to-revenue ratio, for which the commodity price stress test is the most extreme. Under the exports stress test all four indicator thresholds are breached through 2028. For the present value of PPG external debt-to GDP, present value of PPG external debt-to-exports, and debt service-to-exports ratios, levels approach those seen during Chad’s recent debt distress episode. Under the customized oil price shock scenario, the $75 million adjustment cap is met in 2021, so thereafter the Glencore contract provides no further cushion (Text Figure 3). Debt service to revenue—the factor that pushed Chad into debt distress—peaks at 27.8 percent, high but below ranges in the 30s seen in the last episode of debt distress.7 This scenario also puts the PV debt to GDP above the threshold from 2022 to 2024. Other stress tests may capture scenarios in which the pandemic accelerates and produces further disruption to GDP, revenues, or a combination of adverse developments. The outcomes of those stress tests were less extreme than the exports and commodity price stress tests.

Text Figure 3.
Text Figure 3.

Chad: Debt Service-to-Revenue Ratios

Citation: IMF Staff Country Reports 2020, 134; 10.5089/9781513542140.002.A002

Sources: Chadian authorities; IMF staff calculations.

B. Public Debt Sustainability

14. The benchmark for public debt is breached for five years under the baseline. Due to higher budget deficits related to the impact of the pandemic, the PV of total public debt-to-GDP ratio is projected to hit 42.7 percent at end-2020. This is about 8 percentage points above the 35 percent benchmark level associated with heightened public debt vulnerabilities and a weak debt carrying capacity. This is higher than the last DSA. The level declines thereafter, reaching 33.7 by 2025. The benchmark for public debt is also breached through at least 2025 for every contingency scenario.

C. Risk Rating and Vulnerabilities

15. Chad is at high risk of external debt distress and high overall risk of public debt distress. While debt vulnerabilities have declined since the beginning of the ECF arrangement, the impact of the pandemic can be seen in significantly higher debt risk indicator levels compared to the last DSA. The elevated path of debt service to revenue reflects the difficulties Chad will face maintaining oil revenue in the near term due to the pandemic. In addition, the pressures of the pandemic are expected to push Chad’s PV of total public debt-to-GDP ratio above the benchmark level in the near term. If downside risks materialize, the debt-service-to-revenue ratio will rise sharply, and the authorities would likely need to identify additional measures and approach creditors and development partners for additional debt relief or financing. As such, Chad’s external and overall debt is assessed to be at high risk of debt distress. Mechanically, the CFAF-denominated debt held by the BEAC, BDEAC, and bilateral creditors would weaken the external debt sustainability indicators if the external DSA were done on residency basis. These claims do not face currency risk, and institutional ties with the creditors are relatively strong. Nonetheless, some difficulties may still be faced in restructuring such debt if necessary, and the risks associated with the rollover of securities held by non-residents (the scale of which is unclear) remains even if it is limited.

16. Significant efforts are warranted to ensure debt remains on a downward trajectory. Elevated vulnerabilities reinforce the need to maintain prudent fiscal policy including on external and domestic borrowing. While progress has been made recently to reduce the stock of external and domestic arrears, Chad will need to refocus on clearing the remaining domestic arrears once the current fiscal pressures abate. Finally, continued effective inter-agency coordination to strengthen the capacity to record and monitor public debt is very important to better manage public debt.

D. Authorities’ Views

17. The authorities remain committed to improving Chad’s debt sustainability and consider that completing debt restructuring is key in the near-term. By negotiating payment-in-kind for the debt to Angola—and likely for the debt to Equatorial Guinea—Chad has monetized its livestock, an asset that is otherwise difficult for a land-locked country to exploit. The authorities anticipate that further negotiations with Libya and Congo will lower debt service meaningfully. Additionally, the authorities aspire to reduce domestic debt service by graduating from the rollover mechanism for placing Treasury bills and bonds to a market-based auction. As the pandemic crisis passes, the authorities expect that improving the non-oil economy’s growth performance will further improve debt sustainability.

Table 2.

Chad: External Debt Sustainability Framework, Baseline Scenario, 2009–2040

(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))/(1 +g+ρ+gρ) times previous period debt ratio, with r – nominal interest rate; g – real GDP growth rate, and ρ – 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 3.

Chad: Public Sector Debt Sustainability Framework, Baseline Scenario, 2017–2040

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections1/ Coverage of debt: The central, state, and local governments, central bank. Definition of external debt is Currency-based.2/ The underlying FV 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 4.

Chad: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2020–2030

(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 5.

Chad: Sensitivity Analysis for Key Indicators of Public Debt, 2020–2030/1

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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 and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

1

This figure ascribes 40 percent of SRN’s debt to the government, reflecting its 40 percent ownership share.

2

These arrears will be reflected in the debt stock in the next DSA in line with the clearance strategy adopted by the authorities. Further work is needed to identify the terms of the SOE debt so it can be included in totals of public debt.

3

State and local debt amounts to less than 0.1 percent of GDP.

4

Arrears to Angola were very small, so outstanding arrears at end-2019 were $61, below the de minimis threshold that would warrant an “in debt distress” rating.

5

The fourth panel of Figure 1 presenting debt service-to-revenue ratios under standard alternative scenarios does not include the Glencore debt contract contingency mechanisms.

6

Debt service under the Glencore contract includes a mandatory amortization and interest payment plus a cash sweep component that falls as the Doba oil price goes below a threshold. Because oil prices have fallen so far in the baseline, this contingency is fully exercised even in the baseline and the standard commodity price shock scenarios. As a second contingency mechanism, the contract allows Chad to defer some mandatory payments as prices fall, but the cumulative deferred amortization is capped $75 million. In the baseline (and standard commodity price shock) this contingency is exercised only partly and only in 2021.

7

As noted in DSA ¶11, the customized oil shock models the impact of oil prices on revenue, so it continues to differ from the standard commodity shock even after the contingency mechanism’s cap is reached in 2021.

Chad: Requests for Disbursement under the Rapid Credit Facility, Extension of the Extended Credit Facility Arrangement, and Rephasing of Access-Press Release; Staff Report; and Statement by the Executive Director for Chad
Author: International Monetary Fund. African Dept.