Democratic Republic of São Tomé and Príncipe: First Review Under the Extended Credit Facility and Request for Augmentation of Access, Rephasing of Access, and Financing Assurances Review —debt Sustainability Analysis

First Review Under the Extended Credit Facility and Request for Augmentation of Access, Rephasing of Access, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for the Democratic Republic of S�o Tom� and Pr�ncipe

Abstract

First Review Under the Extended Credit Facility and Request for Augmentation of Access, Rephasing of Access, and Financing Assurances Review-Press Release; Staff Report; and Statement by the Executive Director for the Democratic Republic of S�o Tom� and Pr�ncipe

Public Debt Coverage

1. In the DSA framework for São Tomé and Príncipe, PPG debt coverage includes the central government and EMAE, a state-owned enterprise (SOE) providing utility.4 5 EMAE has been accumulating arrears over the years to its fuel supplier, ENCO, totaling over 26 percent of GDP at end-2019.6 7 Three SOEs besides EMAE— ENAPORT, ENASA, and Correios—are not included in the analysis due to lack of reliable data. Nevertheless, the potential liabilities from these SOEs are modeled by using the default value of 2 percent of GDP. Contingent liabilities from financial markets are also set at their default value of 5 percent of GDP. In addition, the contingent liability stress test further includes disputed debt of $30 million from Nigeria. The authorities maintain that its repayment was conditional on oil revenues, which have no near-term prospect for materialization. Finally, for the external DSA, the contingent liability shock also includes ENCO’s external arrears to Sonangol, which reached an estimated $205 million (around 51 percent of GDP) in end-2019 as well as an estimated fine of $12.4 million (around 3 percent of GDP) imposed by the Permanent Court of Arbitration regarding country’s improper seizure of a Maltese ship in 2013.

Text Table 1.

São Tomé and Príncipe: Public Debt Coverage Under The Baseline Scenario1

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Sources: IMF and World Bank staff.

Include the large loss-making utility company EMAE.

Text Table 2.

São Tomé and Príncipe: Coverage of the Contingent Liabilities’ Stress Test

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The default shock of 2 percent of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country’s public debt definition (1.).

The ENCO to Sonangol arrears shock is not applied to the public DSA because ENCO’s claims on the government and EMAE are already included in the domestic PPG debt.

Sources: IMF and World Bank staff.

Background

A. Debt

2. Total PPG debt increased by around 14 percentage points of GDP in 2019 relative to 2015 to around 98 percent, while Central government debt increased by close to 2.5 percentage points over the same time period.PPG debt includes the arrears of the state-owned utility company, EMAE, to its fuel supplier ENCO, which rose to around $111 million in 2019 from $43 million in 2015. The expansion of the electricity distribution network and the associated large losses are key drivers for the rise in PPG debt.

3. The country continues to engage actively with bilateral creditors to regularize post-HIPC arrears, with the amount remaining unchanged.The arrears add up to $10.7 million, or 2.3 percent of 2019 GDP, and are owed to Angola (US$4.8 million), Brazil (US$4.3 million), and Equatorial Guinea (US$1.7 million). An agreement with the Brazilian government was reached, pending ratification by the Brazilian Senate. The government has also actively sought debt rescheduling agreements with Angola and Equatorial Guinea. These post-HIPC arrears are reflected in the debt stock.

Text Table 3.

São Tomé and Príncipe: PPG Debt Stock

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Sources: Country authorities, EMAE, ENCO, and IMF staff estimates

Including the 4.8 million USD debt with Angola contracted after the 2007 HIPC debt relief.

Commitment-based, and these suppliers reside domestically in the country.

Including the arrears from HidroEquador S.A. to ENCO.

Commercial debt guaranteed by the government.

Text Table 4.

São Tomé and Príncipe: Arrears and Disputed Debt

(As of end-2019)

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These amounts remained unchanged as of end-June 2019.

B. Macroeconomic Forecast

4. The COVID-19 shock is causing a contraction of the economy in 2020 with the recovery expected over a few years.GDP in 2020 is projected to decline by 6.5 percent, compared with pre-crisis projections of a 3.5 percent increase. Average real growth and inflation are both revised down to 4 percent and 3.1 percent, respectively (compared with 4.3 percent and 4 percent in the September 2019 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 now averages 1.3 percent of GDP through the projection horizon compared with 0.9 percent in the previous DSA. The larger financing needs in 2020 are expected to be covered by the RCF disbursement and other external grants.8 The economy is expected to recover in 2022 to close to 2019 levels with the implementation of long- delayed construction projects and a recovery in tourism and global demand.

Text Table 5.

Macroeconomic Assumptions

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IMF Country Report No. 19/325

C. Country Classification

5. The country’s debt carrying capacity is assessed to be medium under the new Composite Index.The debt-carrying capacity in the DSA is captured by a Composite Index (CI), introduced in 2019, that reflects macroeconomic variables, such as real GDP growth, remittances, reserves, and world growth in addition to the previously used CPIA. The CI classifies São Tomé and Príncipe as a medium debt-carrying capacity country (Text table 6). The applicable thresholds for the ratios of the present value (PV) of PPG external debt relative to GDP and exports are 40 percent and 180 percent, compared with 30 and 100 percent respectively in the 2018 DSF that assessed the country as having a weak debt-carrying capacity. The threshold for the PV of total PPG debt is now 55 percent of GDP (compared to the lower value of 38 percent in 2018). The thresholds for PPG external debt service to exports and revenue remain unchanged.

Text Table 6.

São Tomé and Príncipe: Classification of Debt Carrying Capacity

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Debt Sustainability

A. External Debt Sustainability

6. The DSA indicates that total external PPG debt is sustainable under the program (Figure 1).Under the baseline scenario, the external PPG debt stock and debt service ratios remain below their threshold values throughout the projection horizon, except for a one-time breach of the debt-to-exports ratio. The PV of PPG external debt-to-GDP ratio remains 7–18 percentage points below its threshold of 40 percent. The PV of PPG external debt-to-exports ratio remains 40–70 percentage points below its threshold of 180 percent of GDP apart from 2020 and 2021 when the threshold is breached due to an estimated fall in GDP growth caused by the pandemic. Moreover, these solvency indicators improve over time due to fiscal consolidation, cautious external borrowing, economic growth, and an improved current account balance. The liquidity indicators remain well below their threshold values of 15 and 18 percent for the debt service-to-exports and debt service-to-revenue ratios respectively. Like the solvency indicators, the liquidity ratios also improve over time reflecting higher exports and revenues.

Figure 1.
Figure 1.

São Tomé and Príncipe: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2020–2030

Citation: IMF Staff Country Reports 2020, 232; 10.5089/9781513552118.002.A003

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.

7. While the baseline scenario is sustainable, the solvency of external debt is of concern in the presence of extreme shocks.The solvency indicators breach their threshold values under the most extreme shock scenario, while the liquidity indicators remain below the threshold. The shocks in this scenario are an exports shock and a combined contingent liability shock. The latter includes the potential repayment of the Nigeria loan (7.1 percent of GDP), payment of Permanent Court of Arbitration fine (3.1 percent of GDP), ENCO’s arrears to Sonangol (51.4 percent of GDP) which may ultimately fall on the government, as well as the standard assumption of a financial market bailout. The PV of debt-to-GDP ratio and PV of debt-to-exports ratio breach their respective thresholds throughout either all or most of the projection horizon but decline over time. As Text Table 2 indicates, ENCO’s external arrears to Sonangol (51.4 out of 68.7 percent of GDP) represent the primary contingent liability in this extreme shock scenario.9 These results highlight the importance of developing a clearance plan for EMAE’s arrears to ENCO, as well as promoting strong export growth.

B. Public Debt Sustainability

8. Total PPG debt is deemed sustainable under the baseline scenario (Figure 2).The PV of discounted PPG debt remains below the threshold of 55 percent throughout the projection horizon if the agreed repayment terms of debt owed to ENCO by EMAE and the government are taken into account (where the grant element is over 80 percent), reforms to EMAE are implemented, and the country continues to borrow externally only at concessional terms at a measured pace. The PV of discounted PPG debt is around 50 percent of GDP in 2020 and is projected to decrease over time to around 33 percent of GDP by 2030. Compared with the DSA issued on April 2020 in the context of RCF, PPG debt/ GDP has declined further due to an increase in grants of over 4 percent of GDP in financing COVID-19 related spending.

Figure 2.
Figure 2.

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

Citation: IMF Staff Country Reports 2020, 232; 10.5089/9781513552118.002.A003

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.

9. All the three total PPG debt ratios (PV of debt-to-GDP, PV of debt-to-revenue, and debt service-to-revenue) are most sensitive to a primary balance shock.Under such a shock, the three ratios would rise in the near term before declining in the medium-to-long term. In addition, given that EMAE’s arrears to ENCO are denominated in foreign currency, the country’s debt is subject to currency risk, even though such arrears are treated as domestic debt under the residency-based definition.

Debt Distress Qualification and Conclusions

10. São Tomé and Príncipe’ remains in debt distress as in the previous DSA. This is because the regularization of São Tomé and Príncipe’s post-HIPC sovereign arrears (to Angola, Brazil, and Equatorial Guinea) is still ongoing. The significant arrears of EMAE to its supplier also reflect the severe liquidity constraints of the public sector. Staff assesses that São Tomé and Príncipe has the capacity to repay these arrears over time as long as the country implements reforms to the loss-making SOE, EMAE, and continues to borrow externally at concessional terms. São Tomé and Príncipe continues to actively seek rescheduling agreements with the creditors.

11. Compared with the 2019 DSA, the PPG external and total debt indicators have improved, while nominal total PPG debt has increased.The PV of discounted PPG debt remains around 5- 22 percentage points below its threshold of 55 percent throughout the projection horizon. All external PPG debt indicators also remain below their respective thresholds under the baseline scenario. However, for total PPG debt, additional government arrears to suppliers identified recently and a more comprehensive coverage of public sector liabilities, including the inclusion of EMAE’s arrears, have revealed previously uncaptured debt vulnerabilities and led to a large breach of the PV of debt-to-GDP indicator benchmark. While this ratio becomes sustainable if the PV of the repayments to ENCO by the government and EMAE are taken into account, EMAE’s losses and associated arrears nonetheless highlight the importance of reforming EMAE to contain fiscal risk.

12. The baseline is subject to substantial external risks. Stress tests indicate that the country’s debt is especially vulnerable to shocks to exports, combined contingent liabilities, and the fiscal primary balance. A particular stress test based on an extreme scenario, which accounts for ENCO’s significant external arrears to Sonangol, reveals that the associated risks could be high in the near term, even though key external debt ratios recover to below their threshold values in the medium term and the strong diplomatic tie between São Tomé and Príncipe and Angola could be a potential mitigating factor.

13. Overall, the DSA highlights the importance of continuing to reform the loss-making enterprise EMAE and progressing with other structural reforms to ensure debt sustainability. To mitigate fiscal risks, the country needs to continue with policies including deepening and prioritizing EMAE reforms, continuing fiscal consolidation and revenue mobilization, eschewing non-concessional loans, improving the business environment to attract non-debt flows, strengthening macroeconomic policies to support the exchange rate peg, and promoting tourism and private sector-led growth. In addition, non-concessional loans should be eschewed. To balance debt sustainability concerns while address the country’s large investment needs, contracting of new concessional loans should be limited to 3 percent of GDP, and external debt disbursements should not exceed 2 percent of GDP. These parameters can be adjusted according to debt developments and relaxed as debt vulnerability decreases. To further aid in debt sustainability, the financing of large projects in the near- and medium-terms should be through non-debt generating means, including through grants.

Figure 3.
Figure 3.

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

Citation: IMF Staff Country Reports 2020, 232; 10.5089/9781513552118.002.A003

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LICDSAs 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, 232; 10.5089/9781513552118.002.A003

Table 1.

São Tomé and Príncipe: 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) + εα (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, ε-norninal 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 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.

São Tomé and Príncipe: 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-ta-GDP ratio under the public D5A 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.

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 tra nsfers 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 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 2.685, which is based on the October 2019 WEO and the 2018 CPIA, 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

São Tomé and Príncipe has requested participation in the DSSI from all its official bilateral creditors. As of July 13, 2020, none of the creditors had yet formally responded to this request. The DSA baseline assumes the application of DSSI terms to eligible debt from G20/Paris Club creditors and other bilateral creditors that may associate with the Paris Club Memorandum of Understanding. Pending confirmation, DSSI terms are not applied to eligible debt from other bilateral creditors (Equatorial Guinea and Angola).

4

The country’s debt stocks are zero for some new elements covered under the revised DSA framework, including the social security fund and central bank debt borrowed on behalf of the government. There is no other government guaranteed debt that is excluded from this DSA.

5

Consistent with the previous DSA, pre-HIPC initiative arrears (13.5 percent of GDP) are excluded, on the assumption of debt forgiveness. One pre-HIPC PPP debt of 11.2 percent of GDP is excluded, consistent with the treatment of other pre-HIPC debt. Details about this loan are presented in Text Table 4.

6

ENCO registers domestically in São Tomé and Príncipe, with 77.6 percent of its shares owned by Sonangol (an Angolan SOE) and 16.0 percent owned by São Tomé and Príncipe’s government. The government’s arrears to ENCO were regularized in 2016, and EMAE’s arrears of $111 million as of end-2019 were regularized in August 2019.

7

As the DSA uses the residency-based assumption on debt, the dollar-denominated EMAE arrears are classified as domestic since ENCO, majority-owned by an Angolan SOE, registers domestically.

8

The World Bank is providing additional support through a $2.5 million emergency response project focused on strengthening the health system, accelerating disbursement of existing projects (including on social protection), and increasing in the expected budget support grant in 2020 (from $5 million to $10 million). Budget support grants from the World Bank and African Development Bank in 2020 are expected to amount to around $20 million.

9

The size of the Sonangol shock (51.4 percent of GDP) is calibrated to capture the maximum amount of liabilities that would be assumed by the government should the contingency materialize. The payment terms are assumed to have a grant element of about 37 percent, broadly consistent with the concessionality of PPG external debt.

Democratic Republic of São Tomé and Príncipe: First Review Under the Extended Credit Facility and Request for Augmentation of Access, Rephasing of Access, and Financing Assurances Review-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 Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2020–2030

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

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

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    São Tomé and Príncipe: Realism Tools