Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Cabo Verde

Abstract

Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Cabo Verde

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Cabo Verde’s risk of external and overall debt distress is rated “high” as in the previous DSA (July 2019) with risks tilted to the downside. However, public and publicly guaranteed (PPG) debt is assessed to be sustainable, conditional on the implementation of prudent fiscal policies following the COVID-19 crisis and in view of manageable debt service ratios.

The shocks from the COVID-19 pandemic will heavily impact tourism, the most important sector of Cabo Verde’s economy, and are expected to deepen current account and fiscal deficits, resulting in a higher debt path compared to the previous DSA. The baseline scenario assumes that concessional loans from multilateral institutions and grants will help cover the health costs and financing needs triggered by the global health crisis. However, debt sustainability is subject to considerable downside risks, including from a more severe or prolonged impact of the COVID-19 shock.

Both the present value (PV) of PPG external debt-to-GDP ratio and of total public debt-to-GDP ratio breach their respective thresholds over the medium term under the baseline scenario, signaling a high risk of external and overall debt distress. In addition, they are particularly sensitive to export, depreciation, and contingent liabilities shocks. However, they are both projected to gradually decline as the forecast horizon advances, falling below their thresholds from 2024 and 2028 onwards, respectively. Similarly, the PV of PPG external debt-to-exports ratio exhibits a continuous downward trend over the projection period. In addition, debt service indicators are forecast to remain below their respective thresholds. Based on PPG external and overall debt dynamics, PPG debt is deemed sustainable.

Figure 1.
Figure 1.

Cabo Verde: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2020–30

Citation: IMF Staff Country Reports 2020, 136; 10.5089/9781513542263.002.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.
Figure 2.
Figure 2.

Cabo Verde: Indicators of Public Debt Under Alternative Scenarios, 2020–30

Citation: IMF Staff Country Reports 2020, 136; 10.5089/9781513542263.002.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.

Cabo Verde: Drivers of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2020, 136; 10.5089/9781513542263.002.A002

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

Cabo Verde: Realism tools

Citation: IMF Staff Country Reports 2020, 136; 10.5089/9781513542263.002.A002

Sources: Country authorities; and staff estimates and projections.
Table 1.

Cabo Verde: External Debt Sustainability Framework, Baseline Scenario, 2017–40

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections1/ 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 PVof 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.

Cabo Verde: Public Sector Debt Sustainability Framework, Baseline Scenario, 2017–40

(In percent of GDP, unless otherwise indicated)

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Sources Country authorities; and staff estimates and projections1/ Coverage of debt: The central government plus 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.

Cabo Verde: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2020–30

(Percent)

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Sources: Country authorities; and staff estimates and projections.

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.

Cabo Verde: Sensitivity Analysis for Key Indicators of Public Debt, 2020–30

(Percent)

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Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

1

Debt coverage is the same as in the last DSA.

2

The Composite Indicator score is 3.283, with a classification of strong debt-carrying capacity.

Cabo Verde: Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Cabo Verde
Author: International Monetary Fund. African Dept.
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    Cabo Verde: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2020–30

  • View in gallery

    Cabo Verde: Indicators of Public Debt Under Alternative Scenarios, 2020–30

  • View in gallery

    Cabo Verde: Drivers of Debt Dynamics – Baseline Scenario

  • View in gallery

    Cabo Verde: Realism tools