Cameroon : 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 R

Abstract

Requests for Disbursement Under the Rapid Credit Facility, Extension of the Extended Credit Facility Arrangement, and Rephasing of Access-Press Release; Staff R

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This provides an update to the joint IMF-World Bank LIC-DSA for the 5th review under the concurrent ECF arrangement (IMF Country Report No. 20/48) from January 2020, in the context of the Cameroonian authorities’ request for a disbursement under the Rapid Credit Facility to help meet a financing shortfall as a result of the Covid-19 pandemic. It includes updated projections for the macroeconomic framework and new information on borrowing. Cameroon remains at high risk of external and overall public debt distress; however debt remains sustainable conditioned on the availability of concessional resources and avoidance of additional non-concessional borrowing. The assessment is driven by breaches of the two thresholds for external debt service under the baseline, which have further intensified due to the incorporation of the Covid-19 shock, as well as a new one-off breach in the PV of debt-to-exports ratio and a worsening of market financing risks. However, a range of factors support the conclusion that debt remains sustainable. This rating is highly vulnerable to a range of risks and if downside risks were to materialize, the authorities would likely need to identify additional measures to ensure that debt is sustainable.

1. Highly preliminary estimates suggest Cameroon’s public debt reached 42.9 percent of GDP at end-December 2019 (text table 1). This increase was largely driven by disbursements of multilateral and bilateral financing and the issuance of government bonds. Preliminary data on non-concessional external disbursements and new borrowing suggests that end-December PCs were met, remaining well below the ceiling for the latter (text figure 1). As of mid-March 2020, disbursements and borrowing appear limited, mainly driven by budget support and the signing of AfDB projects. A small amount of external arrears arose in April (10 billion CFAF) due to the Covid-19 shock but are in the process of being cleared.

Text Table 1.

Cameroon: Public and Publicly Guaranteed Debt, 2017–19

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Sources: Cameroonian authorities, and IMF staff calculations.

Data is very preliminary and could likely be revised.

2019 data as of end-September.

Excludes budget support.

Text Figure 1.
Text Figure 1.

Cameroon – Key Debt Developments

Citation: IMF Staff Country Reports 2020, 185; 10.5089/9781513546339.002.A002

Sources: Bloomberg, Cameroonian authorities’, IMF staff calculation and projections.

2. Updated macroeconomic assumptions incorporate the expected economic impact of the Covid-19 pandemic (text table 2). The shock is expected to concentrate in 2020, severely lowering growth and exports and widening the fiscal deficit, due to revenue losses and urgent spending needs. It is also projected to drag into 2021, owing to lower commodity price projections and delays in investment projects.

Text Table 2.

Cameroon: Key Macroeconomic Assumptions, 2016–38

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Sources: Cameroonian authorities; IMF staff calculations.

The year of the DSA refers to the latest year with actual data. The updated DSA 2017 refers to the DSA prepared in September 2018, while DSA 2017 was prepared in June 2018.

3. There are also changes in a number of financing assumptions (text table 3). In particular, 2020 includes budget support from the AfDB that was slightly delayed due to administrative reasons. Furthermore, the financing under the RCF at 136 billion FCFA was added to 2020 as well as an unallocated external financing gap over the medium term, which would allow restoring NFAs close to the level of the 5th review. Financing terms for the unallocated financing gap are assumed to be at IDA terms, reflecting expected additional financing from various sources (World Bank, AFDB, France, BDEAC) and the authorities’ commitment to seek and prioritize concessional borrowing. Project loan disbursements are lowered for 2020, reflecting potential delays in imports, and shifted towards more concessional financing reflecting the authorities’ commitment to prioritize concessional financing. As the last domestic bond issuance in mid-March was undersubscribed by 15 percent and inflation revised up, domestic interest rates are raised by 1 percentage point for 2020. Given that SONARA is expected to benefit from lower oil prices, external short-term debt in the medium term has been reduced to 0.1 percent of GDP as its viability should be restored more quickly.

Text Table 3.

Cameroon: Key Financing Assumptions (in CFAF billion)

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budget support was delayed from 2019 to 2020

4. Cameroon remains at high overall risk of public debt distress, but debt remains sustainable. As previously, thresholds are breached for the two external debt service indicators, due to the fragile liquidity situation. The Covid-19 shock aggravates these breaches in the short-term and raises debt stock projections. In addition, the PV of debt-to-exports ratio now breaches its threshold in 2020 due to the severe drop in exports and market financing risks have increased to moderate with a recent jump in EMBI spreads. Yet, staff continues to assess debt as sustainable due to a range of factors:

  • Debt indicators remain on non-explosive paths and debt stock indicators remain below their thresholds under the baseline, except for a one-off breach.

  • The debt-service-to-revenue ratio is on a clear downward trajectory and falls below the threshold after 2023.

  • The breach of the debt-service-to-exports ratio has become more severe but remains largely due to the inclusion of SONARA’s short-term supplier debt (text figure 1), which is backed by imported oil and is sensitive to rollover and reprofiling assumptions.

  • The lower oil prices are expected to benefit SONARA and reduce its vulnerabilities, given the fixed domestic market price of refined oil.

  • While SONARA does have external arrears, the authorities have only guaranteed one of SONARA’s loans which has no outstanding payments and has been discontinued.

  • The first principal payment of the Eurobond is only coming due in 2023, by when external market financing conditions are projected to have normalized.

  • The baseline does not include the possible G20 debt service suspension, which could cover as much as 100 billion CFAF in 2020 and which the authorities are actively assessing to take part in.

  • This rating is highly vulnerable to a range of risks. Key downside risks include a more protracted and severe Covid-19 shock, and realization of contingent liabilities, including from SONARA’s potential reconstruction costs or delays in the expected restoration of its viability. On the upside the G20 debt service suspension and a successful reprofiling of SONARA’s arrears, which stands to benefit from lower projected international oil prices, could lower debt-service ratios. If downside risks materialize, the authorities would likely need to identify additional measures to ensure that debt is sustainable. Allowing for new non-concessional borrowing would further weaken already compromised debt sustainability, go against the authorities’ interest and undermine their efforts to secure international community’s support in an environment in which G-20 just agreed on debt service suspension on bilateral government loans for low-income countries.

Table 1.

Cameroon: External Debt Sustainability Framework, Baseline Scenario, 2016–39

(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 debt2/ 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 stock5/ 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.

Cameroon: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–39

(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 central bank, government-guaranteed debt, non-guaranteed SOE debt. Definition of external debt is Residency-based.2/ The underlying PVof external debt-to-GDP ratio under the public DSA differs from the external DSAwith 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.
Figure 1.
Figure 1.

Cameroon: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2019–29

Citation: IMF Staff Country Reports 2020, 185; 10.5089/9781513546339.002.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 2.
Figure 2.

Cameroon: Indicators of Public Debt Under Alternative Scenarios, 2019–29

Citation: IMF Staff Country Reports 2020, 185; 10.5089/9781513546339.002.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.
Table 3.

Cameroon: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–29

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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.

Cameroon: Sensitivity Analysis for Key Indicators of Public Debt, 2019–29

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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.

Cameroon: Drivers of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2020, 185; 10.5089/9781513546339.002.A002

1/ Qfference between anticipated and actual contributions on debt ratios.2/ Qstribution 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.Sources: Cameroonian authorities; and IMF staff estimates and projections.
Figure 4.
Figure 4.

Cameroon: Realism Tools

Citation: IMF Staff Country Reports 2020, 185; 10.5089/9781513546339.002.A002

Cameroonian authorities; and IMF staff estimates and projections.
Figure 5.
Figure 5.

Cameroon: Market-Financing Risk Indicators

Citation: IMF Staff Country Reports 2020, 185; 10.5089/9781513546339.002.A002

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

Debt coverage has remained unchanged compared to the previous DSA (IMF Country Report No. 20/48).

2

Cameroon’s Composite Indicator score is 2.76 based on the October WEO 2019 and the World Bank’s 2018 CPIA. This implies that Cameroon has medium debt-carrying capacity.

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