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STAFF GUIDANCE NOTE ON THE SOVEREIGN RISK AND DEBT SUSTAINABILITY FRAMEWORK FOR MARKET ACCESS COUNTRIES
August 2022
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Title page
STAFF GUIDANCE NOTE ON THE SOVEREIGN RISK AND DEBT SUSTAINABILITY FRAMEWORK FOR MARKET ACCESS COUNTRIES
July 19, 2022
EXECUTIVE SUMMARY
This note provides operational guidance for the use of the Sovereign Risk and Debt Sustainability Framework (SRDSF), which replaces the Debt Sustainability Framework for Market Access Countries. The SRDSF introduces improvements in organization, methodology, transparency, and communication when analyzing public debt issues in countries that mainly finance themselves with market-based debt. After its phased adoption beginning [June 2022], it will become the Fund’s principal tool for assessing public debt sustainability.
The SRDSF supports the Fund’s surveillance and lending functions. In surveillance, the framework acts as an early warning system gauging debt-related risks. When risks are detected, the framework can help identify policy recommendations to prevent potential stress from materializing. When a member is already experiencing debt-related stresses that lead to a request for a Fund-supported program, the SRDSF helps assess public debt sustainability, a requirement for all IMF lending. Where public debt is found to be unsustainable, the framework provides a methodology for setting targets to guide debt restructurings undertaken in the context of Fund-supported programs.
The SRDSF is based on several tools that analyze debt risks at various time horizons. A core subset of the framework is applicable to all countries and informs the assessments undertaken at the near- and medium-term horizons. Additional specialized analyses help gauge broader risks at the medium and long-term horizons. These tools are supported by enhanced debt disclosures, indicators of the public debt profile, and forecast realism tools.
Informed judgment is an integral component of assessments undertaken with the SRDSF. Models cannot capture every circumstance. Thus, assessments should reflect additional considerations when relevant, including as indicated in this note.
Approved By
Jeromin Zettelmeyer
Prepared by a staff team of the Strategy, Policy, and Review department, led by Manrique Saenz, coordinated by Geoffrey Keim, and consisting of Narcissa Balta, Atif Chaudry, Zhuo Chen, Charis Christofides, Chuku Chuku, Sandesh Dhungana, Gon Huertas, Plamen Iossifov, Maximilien Kaffo, Erik Klok, Daniela Marchettini, Sanan Mirzayev, Yahia Said, Jasmin Sin, Modeste Some, Daniel Wales and Igor Zuccardi, with overall guidance provided by Craig Beaumont and Martin Cerisola. Administrative assistance was provided by Claudia Isern and Mariana Reyes Valbuena.
Contents
SECTION I. INTRODUCTION
SECTION II. OVERVIEW
SECTION III. DEBT COVERAGE AND DISCLOSURE, STRUCTURE, AND BASELINE SCENARIO
A. Debt Coverage and Disclosure
B. Debt Structure
C. Baseline Scenario for Public Debt and GFNs
SECTION IV. REALISM TOOLS
SECTION V. NEAR-TERM RISK ASSESSMENT
A. Logit Model to Predict Sovereign Stress Events
SECTION VI. MEDIUM-TERM RISK ASSESSMENT
A. Debt Fanchart Module
B. Gross Financing Needs Module
C. Triggered Stress Tests
D. Medium-Term Index and Final Medium-Term Assessment
SECTION VII. LONG- TERM RISK ASSESSMENT
A. Common Considerations
B. Demographics Module (Social Security, Pension, and Healthcare Expenditures)
C. Natural Resources Module
D. Large Debt Amortizations Module
E. Climate Change Module
SECTION VIM. BOTTOM-LINE ASSESSMENTS ON RISKS OF SOVEREIGN STRESS AND DEBT SUSTAINABILITY
A. Overall Risk of Sovereign Stress Assessments
B. Debt Sustainability Assessments
SECTION IX. DSA REQUIREMENTS AND PUBLICATION
References
BOXES
1. Debts of Government-Controlled Nonmarket Entities
2. Assessing Risks from Central Bank’s FX Swaps
3. Debt Dynamics and Drivers in the SRDSF
4. Measurement of Gross Financing Needs
FIGURES
1. Debt Concepts: Sovereign Stress, Unsustainable Debt, and Non-Stabilizing Debt
2. The Sovereign Risk and Debt Sustainability Framework
3. Missed Crises, False Alarms, and Threshold Calibration
4. Summary of SRDSF Results
5. Standard Reporting on Debt Coverage and Disclosures
6. Public Sector Perimeters
7. Sample Standardized Reporting on Debt Structure
8. Standard Reporting on the Baseline Scenario
9. Realism Tools Based on Information from Past Projections
10. Realism Tool for Debt Drivers Decomposition
11. Realism Tool for Distribution of Debt-to-GDP Ratio Reductions
12. Fiscal Adjustments Realism Tool
13. REER Gap Realism Tool
14. Real GDP Growth Realism Tool
15. Fiscal Multiplier Realism Tool
16. Financing Terms Realism Tool
17. SWF Assets to GDP and Public Debt
18. First Steps of the Debt Fanchart Algorithm
19. Realism Diagnostic in the Debt Fanchart Algorithm
20. Final Baseline-Centered Fanchart
21. Process for Resolving Fanchart Realism Flag
22. Output from the Triggered Stress Test Analysis
23. Standardized Reporting on the Medium-Term Risk Analysis
24. Indicators for the Long-Term Amortization Module
25. Metric tons (Mt) CO2 Emissions from Fuel Combustion per Unit of Output, 2015
26. Average Mt CO2 Emissions per Unit of Output vs. Investment Needs
27. Weighted Average of CO2 Emission (Mt) per Unit of Output, 2015
28. Investment Cost Per 100 Mt of CO2 Emissions: EU9 vs EU7 by Main Aggregate Sector
29. Investment Cost per Year for a 10-year Horizon
30. Debt Sustainability Framework
31. Large One-Year Increases in Public Debt in MACs
TABLES
1. Sovereign Stress Logit Model: Summary of Explanatory Variables
2. Criteria for Determining the Existence of Sovereign Stress
3. Examples for Debtholder Share Settings When Holders Are Clear
4. Generalized Stress Scenario: Default Calibration
5. Quantitative Triggers of the Banking Crisis Stress Test
6. Calibration of Fiscal Cost in Banking Crisis Stress Scenario
7. Calibration of the Contingent Liabilities Stress Test
8. Regional Estimates of Public Adaptation Investment Needs
9. Standard Elements of Fund SRDSAs and Application of the Transparency Policy
ANNEXES
I. Comparison of the SRDSF and MAC DSA
II. Model SRDSA Prepared by Fund Staff
III. Summary Directions to Run the SRDSF
IV. Technical Notes on Risk Indexes and Threshold Derivations