Linking Fiscal and Debt Management Policies – The Role of Debt Sustainability Analysis

Seán Nolan International Monetary Fund

December 3, 2014

Deb Sustainability Analyses

The Tool Box

Handling Debt Portfolio Risks Handling Macro-Fiscal Shocks

Handling Contingent Liabilities Role in Fund –Supported programs

I. Debt Sustainability Analysis The Tool Box

DSAs: Origins and Lessons

LIC DSF was introduced in 2005: most recent review in 2012,

joint Bank-Fund product MAC DSA was introduced in 2002, major refinements in 2011

MAC DSA 2011 review identified several areas for

improvement, including: Realism of baseline assumptions Risks associated with the debt profile Analysis of macro-fiscal risks (including contingent

liabilities)

Previously, for MACs the focus was mainly on debt trajectories

What’s missing • Debt profile risks • Contingent liability risks • ……

Revised DSA for MACs

Public debt vulnerabilities are associated not only with the

level of debt, but with its profile Debt portfolio characteristics—maturity, currency

composition, and the creditor base—have received much attention in the analysis of public debt distress

The Fund’s MAC DSA brings these (and other) elements together in its new risk-based approach to public debt sustainability

The DSA assesses risks from the debt profile by comparing a set of indicators to early warning benchmarks

Public DSAs and Debt Profile

Revised DSA for MACs MAC DSA: Debt Profile Benchmarks

example Upper early warningLower early warning(Indicators vis-à-vis risk assessment benchmarks, in 2013)

Debt Profile Vulnerabilities

20

6013%

1 2

200

600273 bp

1 2

5

15

51%

1 2

0.5

1

-1.3%

1 2

Bond spread External Financing Requirement

Annual Change in Short-Term Public

Debt

Public Debt in Foreign Currency

(in basis points) 4/ (in percent of GDP) 5/ (in percent of total) (in percent of total)

15

45 29%

1 2

Public Debt Held by Non-Residents

(in percent of total)

Revised DSA for MACs MAC DSA: Key Outputs

Example Public DSA Risk Assessment

Real Interest Rate Shock

External Financing

Requirements

Real GDP Growth Shock

Heat Map

Evolution of Predictive Densities of Gross Nominal Public Debt(in percent of GDP)

Debt profile 3/

Gross financing needs 2/

Debt level 1/ Real GDP Growth Shock

Primary Balance Shock

Change in the Share of Short-

Term Debt

Foreign Currency

Debt

Public Debt Held by Non-

Residents

Primary Balance Shock

Real Interest Rate Shock

Exchange Rate Shock

Contingent Liability Shock

Exchange Rate Shock

Contingent Liability shock

Market Perception

0

20

40

60

80

100

120

140

160

2012 2013 2014 2015 2016 2017 2018 2019

10th-25th 25th-75th 75th-90thPercentiles:Baseline

Symmetric Distribution

0

20

40

60

80

100

120

140

160

2012 2013 2014 2015 2016 2017 2018 2019

Restricted (Asymmetric) Distribution

no restriction on the growth rate shockno restriction on the interest rate shock0 is the max positive pb shock (percent GDP)no restriction on the exchange rate shock

Restrictions on upside shocks:

Revised DSA for MACs LIC External DSA

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2023. In figure b. it corresponds to a One-time depreciation shock; in c. to a Exports shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a Exports shock

0

5

10

15

20

25

30

35

40

2013 2018 2023 2028 2033

Baseline Most extreme shock 1/ Threshold Historical scenario

f.Debt service-to-revenue ratio

-15

-5

5

15

25

35

45

-3

-2

-1

0

1

2

3

4

5

6

7

2013 2018 2023 2028 2033

Rate of Debt Accumulation Grant-equivalent financing (% of GDP) Grant element of new borrowing (% right scale)

a. Debt Accumulation

0

10

20

30

40

50

60

70

2013 2018 2023 2028 2033

b.PV of debt-to GDP ratio

0

50

100

150

200

250

2013 2018 2023 2028 2033

c.PV of debt-to-exports ratio

0

50

100

150

200

250

300

2013 2018 2023 2028 2033

d.PV of debt-to-revenue ratio

0

5

10

15

20

25

30

35

40

2013 2018 2023 2028 2033

e.Debt service-to-exports ratio

Revised DSA for MACs

For most LICs, debt portfolio management is “passive” as debt

managers have less influence over the design of the debt portfolio composition than in MACs

But changing financing landscape and more market access is

highlighting the relevance of debt portfolio risks Improving public debt management capacity in LICs remains a

priority The Joint IMF/WB Debt Management Facility (DMF II) will make

important contributions in this regard

DSA for LICs: Times are a changing for some

II. Contingent Liability Risks

Revised DSA for MACs

Risks from contingent liabilities should inform both fiscal and

debt management policies and strategies Analysis of the risks posed by CLs has become important for

the assessment of public debt sustainability Assessment of banking sector CL is now an integral part of the

MAC DSA But depending on country circumstances, other types of

contingent liability risks may be also relevant

Contingent Liability (CL) Risks in DSAs

Revised DSA for MACs Contingent Liability (CL) Risks in MAC DSAs

Revised DSA for MACs

In LICs large public investments needs cannot all be financed

by public debt without jeopardizing debt sustainability Public private partnership (PPP) arrangements offer burden

sharing with the private sector, but also exposes public sector to fiscal risks

Contingent Liability (CL) Risks in LICs

III. DSAs in Fund-Supported Programs

Revised DSA for MACs

In Fund programs debt conditionality is generally expected

when a country has significant debt vulnerabilities For countries using the LIC DSF, debt vulnerabilities is

informed by the assessed risk of external debt distress or, where relevant, by the assessed overall risk of debt distress

For countries using the MAC DSA debt vulnerabilities is assessed by the set of standard indicators in the MAC DSA

DSAs in Fund-Supported Programs

Useful Links on IMF’s Website

Guidance Note on DSA for Market-Access Countries:

http://www.imf.org/external/np/pp/eng/2013/050913.pdf Guidance Note on the Joint Bank-Fund Debt Sustainability

Framework for Low-Income Countries: http://www.imf.org/external/np/pp/eng/2013/110513.pdf

IMF’s online DSAx course: http://www.imf.org/external/mmedia/view.aspx?vid=3335115563001

https://www.edx.org/course/debt-sustainability-analysis-imfx-dsax#.VH3WC4UhAyp

Thank you