Debt and Creditworthiness Study

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https://hdl.handle.net/10986/7795

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Enhancing Debt Transparency by Strengthening Public Debt Transaction Disclosure Practices
(Washington, DC: World Bank, 2022-05-02) World Bank
Improving debt transparency is critical for promoting debt sustainability and creditworthiness assessments, increasing the accuracy of public debt information, and protecting the interests of a diverse range of stakeholders. The importance of debt transparency, the costs associated with the lack of it, and its benefits, are extensively discussed in recent World Bank literature. One of the key factors that limits debt transparency as it relates to public disclosure and the sharing of public debt-related information, is transaction-level confidentiality and disclosure practices. Challenges to disclosure have become more evident during recent debt distress among borrowing countries, and the COVID-19 pandemic. The discussion in this paper reveals issues that arise from confidentiality and disclosure practices among lenders and borrowers; and highlights how these issues cause information asymmetries and undermine the interests of stakeholders. The paper concludes by proposing concrete and actionable recommendations for the World Bank, IMF and sovereigns.
Debt Transparency in Developing Economies
(World Bank, Washington, DC, 2021-10-01) Rivetti, Diego
Analyzing public debt in low-income developing countries (LIDCs) is like solving a puzzle with many missing pieces. Forty percent of LIDCs have not published any sovereign debt data in the last two years. Public debt data disclosed in different publications show discrepancies of up to 30 percent of GDP across sources, and relative to the records of relevant authorities. Over 15 LIDCs have outstanding collateralized debt but no details of the collateralization are provided in official statistics. Restructuring of bilateral and commercial debt is often handled privately. All these problems have different origins and implications. Yet, they all amount to a lack of transparency. The international community has become acutely aware of the importance of debt transparency after recent cases of "hidden debt" The "Tuna Bond" case in Mozambique highlighted the dangers of inadequate debt transparency. In 2016 two large previously unreported loans totaling 1.15 billion US Dollars —equal to about 9 percent of the country’s GDP—were revealed. As a result, donor support was frozen, the economy plunged, and the government was forced to make deep cuts in public spending. The biggest losers were poor Mozambiquans. Nontransparent public debt can quickly alter the lives of millions of ordinary citizens. This report is the first comprehensive assessment of debt transparency in LIDCs. It presents a complete picture of the current challenges and the pending policy agenda for all stakeholders. It draws upon new databases and surveys to take stock of key gaps in debt reporting, borrowing practices and legal frameworks, offering a detailed and timely view on the current state of debt transparency in LIDCs. It also synthesizes recent studies and policy discussions on debt transparency and offers practical policy recommendations required to further improve debt transparency in LIDCs.
The Federated States of Micronesia - Joint World Bank-IMF Debt Sustainability Analysis
(World Bank, Washington, DC, 2019-09-30) World Bank; International Monetary Fund
The Federated States of Micronesia (FSM) remains at high risk of debt distress under the Debt Sustainability Framework (DSF). Unless the compact agreement with the United States or parts of it are renewed, the FSM will face a fiscal cliff when the U.S. Compact grants amounting to 20 percent of gross domestic product (GDP) are expected to expire in FY2023. Under the baseline scenario without fiscal adjustments, the fiscal cliff would put debt on an upward trajectory starting in FY2024, with the external debt-to-GDP ratio reaching 30 percent in FY2029 and 57 percent in FY2039, and the public debt-to-GDP ratio reaching 43 percent in FY2029 and 67 percent in FY2039. As a result, the DSF thresholds on the present value of external debt-to-GDP and public debt-to-GDP ratios are projected to be breached within a 20-year horizon. While mechanical application of the DSF based on a 10-year forecast horizon would imply a moderate risk rating, the envisaged breach of the thresholds within a 20-year forecast horizon would warrant an assessment of high risk of external and overall debt distress. Lowering the risk of debt distress would require a fiscal adjustment and steadfast structural reforms to promote private sector growth. The FSM’s vulnerability to climate change and weather-related natural disasters constitutes a major risk and calls for strategies to strengthen climate change resilience
The Democratic Republic of the Congo - Joint World Bank-IMF Debt Sustainability Analysis
(World Bank, Washington, DC, 2019-09) World Bank; International Monetary Fund
According to the updated Low-Income Country Debt Sustainability Framework (LIC DSF), the Democratic Republic of the Congo (DRC)’s debt-carrying capacity was assessed as weak. DRC remains at a moderate risk of external and overall debt distress, with limited space to absorb shocks. The debt coverage has been improved since the last DSA, especially on domestic debt. The external nominal debt ratios are lower than at the time of the 2015 debt sustainability analysis (DSA), however the country shows vulnerability in debt repayment capacity, even under the baseline, due to weak revenue mobilization. Most external debt thresholds are breached under the stress tests, highlighting the country’s vulnerability to external shocks. Given limited buffers, prudent borrowing policies are essential by prioritizing concessional loans and strengthening debt management policies
Guyana - Joint World Bank-IMF Debt Sustainability Analysis
(World Bank, Washington, DC, 2019-09) World Bank; International Monetary Fund
The risk of external and overall debt distress for Guyana remains moderate, but debt dynamics will improve significantly with the start of oil production in 2020. All external debt indicators remain below the relevant indicative vulnerability thresholds under the baseline scenario, which incorporates the average long-term effects of oil on economic growth, fiscal balance, and current account position. The PV of external debt-to-GDP is projected to decline to 3 percent over the long-term as the need for external borrowing is offset by the accumulation of external assets. Stress tests indicate the susceptibility of Guyana’s external public debt in a very extreme shock which combines simultaneous shocks to real GDP growth, primary balance, exports, other flows (current transfers and FDI), and nominal exchange rate depreciation, as well as second order effects arising from interactions among these shocks. The combined effects of these shocks and their second order effects cause temporary but significant breaches in the external debt thresholds, prompting a moderate risk rating. Nonetheless, Guyana has substantial space to absorb these shocks, reflecting the current low level of external debt. Guyana’s medium- and long-term outlook is very favorable given the incoming oil production and revenues, which will eventually underpin fiscal surpluses and a reduction in external indebtedness. The authorities reiterated their commitment in preserving fiscal discipline.
Mali - Joint World Bank-IMF Debt Sustainability Analysis
(World Bank, Washington, DC, 2019-09) World Bank; International Monetary Fund
Mali remains at moderate risk of external debt distress. This rating is unchanged from the previous analysis and consistent with the May 2018 Staff Report (IMF Country Report/18/141). All the projected external debt burden indicators remain below their thresholds under the baseline. However, the ratio of the external debt service to exports exceeds its threshold in the case of an extreme shock to exports under a customized scenario that incorporates 2 percentage points of GDP larger fiscal deficits over 2019 to 2023 than the baseline.1 The baseline scenario assumes improved fiscal policies and achievement of the WAEMU fiscal deficit convergence criteria by 2019. As illustrated in the customized scenario, continued shortfall in domestic revenue mobilization and a deterioration in security conditions will result in a weakened fiscal position and increase the likelihood of debt distress. Mali’s main challenge continues to be ensuring macroeconomic stability while protecting social and investment spending and providing for growing security spending and large development needs. To maintain debt at moderate risk rating, it is essential that the authorities continue their efforts to mobilize domestic revenue and implement reforms. Debt management capacity should be strengthened while deepening structural reforms to diversify the exports base.
Guinea - Joint World Bank-IMF Debt Sustainability Analysis Update: August 2019
(World Bank, Washington, DC, 2019-08) World Bank; International Monetary Fund
Guinea is at moderate risk of external debt distress with some space to absorb shocks. All external debt burden indicators under the baseline scenario lie below their policy-dependent thresholds. Stress tests suggest that debt vulnerabilities will increase if adverse shocks materialize. Under the most extreme stress tests, all solvency and liquidity indicators breach their thresholds for prolonged periods. The overall risk of public debt distress is also assessed to be moderate, with the application of judgement regarding a brief and marginal breach for the PV of total public debt to GDP ratio over 2019-20, reflecting the one-off impact of the recapitalization of the central bank. Guinea’s external and public debt position at end-2018 improved compared to the December 2018 DSA, owing to upward revisions of growth estimates in 2016–17, lower-than-anticipated external loan disbursements in 2018, and a stable exchange rate in 2018. A prudent external borrowing strategy aimed at maximizing the concessionally of new debt, limiting non-concessional loans to programmed amounts and strengthening debt management will be key to preserving medium-term debt sustainability.
Zambia - Joint World Bank-IMF Debt Sustainability Analysis
(World Bank, Washington, DC, 2019-08) World Bank; International Monetary Fund
An updated debt sustainability analysis (DSA) is prepared using the revised Low-income Countries Debt Sustainability Framework (LIC DSF) to assess Zambia’s current debt situation. Debt burden indicators have deteriorated considerably since the October 2017 DSA mainly on account of large fiscal deficits as the authorities made use of available financing to boost infrastructure spending, weaker growth and exchange rate, and a worsened external environment (terms of trade and financial conditions). Rising debt service costs (both externally and domestically) and a large pipeline of contracted and to-be-disbursed loans place Zambia’s public debt on an unsustainable path under current policies while budget expenditure arrears have risen. Zambia’s debt-carrying capacity has also weakened with its FX reserves’ import coverage declining from 4.7 months in 2015 to 1.7 months in May 2019. All four external debt burden indicators breach their indicative thresholds, three of them by large margins and throughout the medium-term under the baseline scenario. Total public debt is projected to increase somewhatin the near-term as, under unchanged policies, fiscal deficits remain large, before gradually declining as large debt-financed public projects are completed and forced fiscal adjustment occurs given financing constraints. As a frontier market, Zambia’s high gross financing needs (peaking at 19 percent of GDP over the next three years), combined with wide EMBI spreads (1,575 basis points on June 11, 2019) and high domestic borrowing costs, expose it to significant market-financing risks. Despite the challenging fiscal situation, Zambia has remained current on all its debt obligations both domestic and external, and has not experienced a debt distress event. The authorities remain committed to prioritizing debt service payments and have identified resources to continue meeting debt obligations in the near-term. However, staff assess the risk of external and overall public debt distress for Zambia as very high at this juncture, and that a large upfront and sustained fiscal adjustment is essential to begin reducing debt vulnerabilities.
Lao People's Democratic Republic - Joint World Bank-IMF Debt Sustainability Analysis
(World Bank, Washington, DC, 2019-08) World Bank; International Monetary Fund
Lao P.D.R.’s risks of external and overall debt distress continue to be assessed as high. Under the revised low-income country debt sustainability framework (LIC DSF), its debt carrying capacity has deteriorated and most external and total public debt indicators breach their respective indicative thresholds and benchmarks under the baseline scenarios. External debt indicators are most vulnerable to shocks to exports and depreciation of the currency. Public and external debt indicators are most sensitive to the contingent liabilities shock, while recent natural disasters underscore the need for strengthening buffers. The low level of reserves adds to these vulnerabilities. Factors, such as the large share of electricity export earnings under long-term intergovernmental power purchase agreements, and a strong and growing electricity exports market help mitigate risks, keeping the debt outlook sustainable. Market access is being maintained, around 65 percent of external debt is concessional, and the stock of expenditure arrears is declining. Rebuilding fiscal space, adopting clear guidelines for sovereign debt issuance and guarantees, assessing risks from contingent liabilities, and improving debt management are immediate priorities. Assessing and targeting infrastructure projects with high growth and social returns and financing these with concessional financing would benefit debt sustainability. Strengthening the business environment and governance, would improve the investment outlook, help diversify and make growth more inclusive. Increasing the export base, continuing to maximize the proportion of concessional loans and improving primary deficits would help to keep the debt burden contained.
Somalia - Joint World Bank-IMF Debt Sustainability Analysis
(World Bank, Washington, DC, 2019-08) World Bank; International Monetary Fund
This report presents the first official debt sustainability analysis undertaken for Somalia. Based on both external and public debt indicators, Somalia is in debt distress. Total public debt is very high, at dollar 4.8 billion, or 101 percent of GDP at end-2018—nearly all of which is external (100 percent of GDP). The finding that Somalia is in debt distress reflects the high external arrears on debt relative to GDP, which now represent 96 percent of the debt stock. While Somalia has no capacity to access new financing, its debt burden will continue to increase as late interest on arrears continues to accumulate. Under broadly steady state assumptions, Somalia’s total public debt is expected to increase to around 128 percent of GDP by 2039. Key risks that affect the outlook include external financing, security, and climate, further highlighting the unsustainability of Somalia’s current debt burden. Consequently, in the absence of debt relief, Somalia will remain in debt distress.