Democratic Republic of São Tomé and Príncipe: Request for Disbursement Under the Rapid Credit Facility—Debt Sustainability Analysis

Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Democratic Republic of S�o Tom� And Pr�ncipe

Abstract

Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Democratic Republic of S�o Tom� And Pr�ncipe

São Tomé and Príncipe: Joint Bank-Fund Debt Sustainability Analysis

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The country remains in debt distress due to prolonged unsettled external arrears. In addition, the significant domestic arrears of the large loss-making state-owned utility company (EMAE) reflect the severe liquidity constraints of the public sector. Staff assesses that the country has the capacity to repay the external arrears over time, as indicated by the external debt ratios. While the present value (PV) of external PPG debt-to-exports ratio breaches its threshold in 2020 due to the COVID-19 shock, all other external PPG debt burden indicators remain well below their thresholds throughout the projection horizon in the baseline scenario.2 While the PV of total public and publicly guaranteed (PPG) debt is currently above the high-risk benchmark, it can be deemed sustainable since the PV of PPG debt falls below the benchmark when accounting for the terms of formalized concessional debt of EMAE and the government to the country’s fuel supplier, ENCO. Furthermore, the country is committed to implement EMAE’s planned reforms and borrow externally only on concessional terms at a measured pace. The likelihood of contingent liabilities materializing, particularly ENCO’s arrears to its parent company Sonangol (a state-owned company of Angola), remains relatively low, given the close diplomatic ties between the two countries.

Macroeconomic projections: The COVID-19 shock is expected to lead to a contraction of the economy in 2020 with immediate and large BOP and fiscal financing needs. Real GDP growth in 2020 is projected to decline to -6.0 percent, compared with pre-crisis projections of 3.5 percent. Average real growth and inflation are both revised down to 4 percent and 3 percent, respectively (compared to 4.3 percent and 4 percent in the previous DSA), throughout the 2020–40 projection horizon. Export and import growth have also been revised slightly downward throughout the projection horizon. The domestic primary budget deficit is expected to reach 5.6 percent of GDP in 2020 compared with pre-COVID-19 projections of 1.7 percent of GDP, and now averages 1.1 percent of GDP through the projection horizon compared to 0.9 percent in the previous DSA. The larger financing needs in 2020 are projected to be covered by the RCF disbursement and other international support in the form of grants.3 The economy is expected to recover in 2021 to close to 2019 levels with the implementation of long-delayed construction projects and a recovery in tourism and global demand.

Figure 1.
Figure 1.

São Tomé and Príncipe: Indicators of External Debt Under Alternative Scenarios, 2020–2030

Citation: IMF Staff Country Reports 2020, 139; 10.5089/9781513542454.002.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.

São Tomé and Príncipe: Indicators of Public Debt Under Alternative Scenarios, 2020–2030

Citation: IMF Staff Country Reports 2020, 139; 10.5089/9781513542454.002.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.

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

Citation: IMF Staff Country Reports 2020, 139; 10.5089/9781513542454.002.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.

São Tomé and Príncipe: Realism Tools

Citation: IMF Staff Country Reports 2020, 139; 10.5089/9781513542454.002.A002

Table 1.

Sao Tome and Principe: External Debt Sustainability Framework, Baseline Scenario, 2018–2040

(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) + 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 PVof 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.

Sao Tome and Principe: Public Sector Debt Sustainability Framework, Baseline Scenario, 2018–2040

(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 d ifferences 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, 2020–2030

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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, 2020–2030

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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.

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 September 18, 2019 (IMF Country Report No. 19/315).

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 is 2.68 and its debt carrying capacity is assessed to be medium.

2

World Bank staff simulated a scenario assuming full disbursement of annual IDA allocations under credit terms, which did not affect the risk of external debt distress rating.

3

Compared with the previous DSA, the reduction of arrears to domestic suppliers in 2019 of US$15 million dollars (3½ percent of GDP) by incorporating these into the 2019 budget largely offset the proposed borrowing from the IMF’s Rapid Credit Facility in 2020 to combat the COVID-19 pandemic.

Democratic Republic of São Tomé And Príncipe: Request for Disbursement Under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for the Democratic Republic of São Tomé And Príncipe
Author: International Monetary Fund. African Dept.
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    São Tomé and Príncipe: Indicators of External Debt Under Alternative Scenarios, 2020–2030

  • View in gallery

    São Tomé and Príncipe: Indicators of Public Debt Under Alternative Scenarios, 2020–2030

  • View in gallery

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

  • View in gallery

    São Tomé and Príncipe: Realism Tools