INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL MONETARY FUND GUINEA Joint World Bank-IMF Debt Sustainability Analysis Update August 2019 Prepared jointly by the staffs of the International Development Association (IDA) and the International Monetary Fund (IMF) Approved by Marcello Estevão (IDA) and Abebe Aemro Selassie (IMF) Guinea: Joint Bank-Fund Debt Sustainability Analysis1 Risk of external debt distress Moderate Overall risk of debt distress Moderate Granularity in the risk rating Some space to absorb shocks Application of judgement Yes: The overall risk of debt distress is assessed to be moderate against a mechanical rating of high risk of debt distress 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 concessionality of new debt, limiting non-concessional loans to programmed amounts and strengthening debt management will be key to preserving medium-term debt sustainability. 1The Debt Sustainability Analysis (DSA) update was prepared jointly with the World Bank and in collaboration with the Guinean authorities. This DSA updates the DSA analysis in the staff report, No. 18/234 and has been prepared following the revised Debt Sustainability Framework (DSF) for LICs and Guidance Note (2017) in effect as of July 1, 2018. Guinea’s debt carrying capacity is classified as weak based on the Composite Indicator (CI) under the revised LIC DSF. Thresholds for debt burden indicators are also those established in the revised 2017 DSF. COVERAGE OF PUBLIC DEBT 1. The definition of public debt used in this DSA covers central government debt, central government-guaranteed debt, and central bank debt contracted on behalf of the government (Table 1).2 Audited and validated arrears to suppliers over the period 1982–2013, as well as domestic arrears accumulated in 2018 (for domestic arrears stock of 3.1 percent of GDP at end-2018) have been included in the baseline. While other elements of public sector debt, such as non-guaranteed debt of state- owned enterprises and social security funds, are not included due to data constraints, a contingent liability stress test is performed to enhance the robustness of the DSA (Table 1). Staff continues to work with the authorities to broaden the coverage of public debt and improve capacity to address debt data weaknesses. The definition of public and publicly guaranteed debt (PPG) used in the DSA includes the loan for the Souapiti dam (US$1.2 billion, about 10 percent of 2018 GDP) signed on September 4, 2018.3 Furthermore, to depict the potential full impact on the debt profile, the government is assumed to be responsible for servicing the loan in the DSA.4 Table 1. Guinea: Coverage of Public Sector Debt and Design of the Contingent Liability Stress Test Subsectors of the public sector Sub-sectors covered 1 Central government X 2 State and local government 3 Other elements in the general government 4 o/w: Social security fund 5 o/w: Extra budgetary funds (EBFs) 6 Guarantees (to other entities in the public and private sector, including to SOEs) X 7 Central bank (borrowed on behalf of the government) X 8 Non-guaranteed SOE debt 1 The country's coverage of public debt The central government, central bank, government-guaranteed debt Default Used for the analysis Reasons for deviations from the default settings 2 Other elements of the general government not captured in 1. 0 percent of GDP 0 3 SoE's debt (guaranteed and not guaranteed by the government) 1/ 2 percent of GDP 2 4 PPP 35 percent of PPP stock 1.33 5 Financial market (the default value of 5 percent of GDP is the minimum value) 5 percent of GDP 5 Total (2+3+4+5) (in percent of GDP) 8.3 1/ The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country's public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE's debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%. 2The definition of PPG external debt excludes French claims under C2D debt-for-development swaps, which were cancelled in the context of the HIPC debt relief. The C2D mechanism implies a payment of the debt service to the creditor from Guinea, which is later returned to the government in the form of grants to finance development projects. The payments with respect to C2D are included in debt service of the fiscal baseline. See Country Report No.15/39 for a detailed discussion. Information on non-residents’ holding of local currency debt is not available. This could give rise to an underestimation of external debt on a residency basis. 3The grant element of the Souapiti loan is estimated to be 29 percent. The loan will be transferred to a Special Purpose Vehicle (SPV) jointly owned by the Guinean government (51 percent) and China International Water & Electricity Corporation (49 percent), which will be managing and operating the dam on a commercial basis and will be responsible for servicing it. 4The Souapiti loan is not included in the public investment of the central government as it will be carried out by an SPV that is not considered as part of the central government. 2 RECENT DEBT DEVELOPMENTS 2. The stock of Guinea’s overall public debt as a share of GDP declined in 2018 as both external and domestic positions strengthened, supported by robust economic growth. Total public debt stood at US$4.5 billion (37.6 percent of GDP) at end-2018 compared with US$4.1 billion (39.6 percent of GDP) in 2017. External public debt as a percent of GDP declined for the second consecutive year to 19.1 percent of GDP in 2018 from 19.4 in 2017. The stock of external debt increased moderately to US$2.3 billion at end-2018 compared to US$2 billion in 2017, reflecting lower-than-anticipated loan disbursements. Domestic debt as a percent of GDP also declined to 18.6 percent of GDP in 2018 from 20.2 percent of GDP in 2017. The domestic debt stock increased to US$2.2 billion in 2018 from US$2.1 billion in 2017, owing mainly to an increase in the issuance of treasury bills and a net accumulation of domestic arrears. Table 2. Guinea: Structure of External Public and Publicly Guaranteed Debt (Nominal values) end-2017 end-2018 end-2017 end-2018 Percent of Percent of USD (millions) USD (millions) Total GDP Total 2026.9 2287.4 100.0 19.1 Total incl. C2D 2118.4 2355.4 103.0 19.6 Multilateral creditors 869.5 1116.1 48.8 9.3 IMF 277.2 322.3 14.1 2.7 World Bank 240.4 341.4 14.9 2.8 Other Multilateral creditors 351.9 452.4 19.8 3.8 Official Bilateral Creditors 1095.6 1110.6 48.6 9.3 Paris Club (excl. C2D) 43.0 37.9 1.7 0.3 Non-Paris Club 1052.6 1072.7 46.9 8.9 Commercial Creditors 61.6 60.8 2.7 0.5 Memo Arrears 150.1 149.3 6.5 1.2 Sources: Guinean authorities; and IMF Staff calculations. Notes: Arrears at end-2018 are due to Non-Paris Club official bilateral creditors (US$88.5 million) and commercial creditors (US$60.8 million). The Guinean authorities have started discussions with creditors in order to reach a resolution on the normalization of these arrears. UNDERLYING MACROECONOMIC ASSUMPTIONS 3. Key assumptions are consistent with the macroeconomic framework outlined in the Policy Note for the Third Review under a Three-Year Extended Credit Facility. Changes to the assumptions compared to the December 2018 DSA are as follows: • Real GDP growth was revised upwards to 10.8 percent in 2016 (from 10 percent) on the back of stronger mining activity and to 10 percent in 2017 (from 9.9 percent). Real GDP growth is estimated at 5.8 percent in 2018, driven by strong performance in mining and 3 construction and good agriculture performance. The growth momentum is expected to continue with real growth at 6 percent over 2019–20. Over the long run (2022–39), real growth is projected to remain at about 5 percent, reflecting the increased productive capacity of the economy and its further diversification. Risks to the growth outlook are tilted to the downside, stemming from socio-political tensions in the run-up to elections and delays in projects and reform implementation. Upside potential could arise from mining production capacity coming on stream faster than currently expected. • Inflation is expected to remain moderate at around 8.9 percent in 2019 and gradually decrease to 7.8 percent over the medium term, reflecting a prudent monetary policy stance. • Fiscal balance.5 The primary fiscal balance recorded a deficit of 0.3 percent of GDP in 2018 (versus a projected 1 percent in the 2018 DSA) and it is expected to record a deficit of 1.8 percent of GDP in 2019, reflecting the increase in electricity subsidies due to structural changes in the sector and an average deficit of 1.2 percent of GDP over 2020– 24. This reflects expected revenue mobilization efforts and the containment of non-priority current expenditure, including the gradual phasing out of electricity subsidies. Additional tax revenues of about 1.7 percent of GDP are expected to be mobilized over 2019 –20, supported by tax policy and administration measures, and stronger mining revenues resulting from measures to reduce leakages from transfer pricing. Continued revenue mobilization effort is expected to gradually increase tax revenue by 1.4 percent of GDP over 2021–29. In parallel, capital expenditures are expected to rise with the scale up in public infrastructure investment under the authorities’ National Economic and Social Development Plan (PDNES) from 5 percent of GDP in 2018 to 7.4 percent in 2024. In view of development needs, capital expenditures are expected to remain high at 7.6 percent of GDP, on average, over 2025–29. Grants stood at 1.4 percent of GDP in 2018 and are expected to remain at 1.1 percent of GDP on average over the period 2019– 21, also reflecting the continued mobilization of donors’ support following the 2017 Consultative Group for Guinea. • The current account is expected to record a deficit of about 19 percent of GDP in 2019–20 and to average 12 percent of GDP over 2021–24, reflecting high imports for mining and public infrastructure projects, including the Souapiti dam, financed by FDI and external borrowing. These investments will boost exports, resulting in a gradual narrowing of the current account deficit over the medium term. • External financing mix and terms. The authorities plan to continue mobilizing external financing to scale-up public investments in infrastructure to support economic diversification and high growth. New external borrowing is expected to pick up 5While it is the primary fiscal balance that drives public debt, the basic fiscal balance is the main fiscal anchor under the ECF program. The basic fiscal balance is defined as government revenue excluding grants minus expenditures, excluding interest payments on external debt and externally financed capital expenditure. This measure of fiscal balance aims to capture actual fiscal efforts. The basic fiscal surplus is projected to improve from 0.8 percent of GDP in 2018 to an average of 0.8 percent of GDP during 2019–24. 4 significantly in the near term, from 4.0 percent of GDP in 2018 to 12.1 percent in 2019 and average 6.8 percent of GDP over 2019–21. The pick-up in debt accumulation in the short term reflects the one-off impact of the borrowing to finance the construction of the Souapiti dam signed in September 2018 (Table 4). In addition to the Souapiti loan to be disbursed over 2019–21, the DSA also incorporates, the non-concessional borrowing of US$658 million (5 percent of 2018 GDP) to finance priority projects to be disbursed over 2019–21.6 Out of this envelope, US$598 million were signed with Eximbank China and ICBC in September 2018 to finance the rehabilitation of the RN1 national road and the Conakry urban road network. In addition, US$60 million (0.4 percent of 2019 GDP) in non-concessional budget support from Qatar was signed in November 2018 and disbursed in April 2019. External borrowing is expected to continue to be sustained in the long run to finance infrastructure development, averaging at about 3 percent of GDP over 2021-29 and 2.3 percent of GDP over 2030–39. This would include anticipated World Bank budget support of US$100 million in 2019 and US$40 million in 2020, as well as project loans of US$325 million over the period 2020-24, including the World Bank enclave loan of $200 million for the agricultural sector. Due to the mostly non-concessional nature of borrowing in the near term, however, the average grant element of new borrowing is expected to decline sharply to about 31 in 2019 (36.3 in 2018) due to the expected large disbursement from the Souapiti loan and to average 30.4 percent in the long run, reflecting that the use of non-concessional financing is expected to gradually increase over time. • Domestic borrowing. Net government domestic financing is expected to be negative throughout 2019–24 (-1.1 percent of GDP in 2019, -0.7 percent of GDP in 2020 and averaging -0.5 percent of GDP for 2021-24), as the government is expected to gradually repay past borrowings from the BCRG, domestic arrears accumulated during 2017 –18, and the validated 1982–2013 arrears to the private sector in line with the clearance strategy approved in December 2017. This will be supported by revenue mobilization and containing current non-priority spending. Net domestic borrowing is expected to turn positive in the long term. • Realism of assumptions. Growth projections at about 6 percent in 2019–20 are predicated on conservative assumptions, notably against the background of weak historical growth outturns in Guinea, reflecting adverse conditions such as the Ebola crisis, commodity price shocks and earlier periods of social unrest. In this context, the investment-growth nexus remains conservative (Figure 6, bottom panel). The scaling of-up of public investment is expected to support growth. While higher-than-projected primary fiscal deficits were historically the largest contributor to unexpected debt accumulation for the past five years (Figure 5), the current ECF arrangement supports a fiscal adjustment that is feasible 6For the Souapiti loan, US$980 million, US$155 million and US$41 million are expected to be disbursed in 2019, 2020 and 2021, respectively. For the US$598 million envelope of non-concessional loans signed in September 2018, US$109 million is expected to be disbursed in 2019, US$208 million in 2020, and the remaining amount in 2021. 5 for Guinea, taking into account the country’s fragility and capacity constraints (Figure 6, top panel). COUNTRY CLASSIFICATION 4. The Composite Indicator for Guinea is 2.51 based on the April 2019 WEO vintage and the 2018 update for the CPIA index, which classifies Guinea at weak debt-carrying capacity. Two tailored stress tests are triggered to account for Guinea’s specific economic features. A contingent liabilities stress test captures a combined shock from SOEs’ external debt default, PPPs’ distress and/or cancellations, and financial market vulnerabilities, all of which amount to 8.3 percent of GDP (Table 1).7 A commodity prices stress test is also applied as mining exports constitute more than 80 percent of total exports for Guinea. Furthermore, two fully customized scenarios—a weak policy scenario, and higher non-concessional loans—have also been performed to assess Guinea’s country-specific risks and capacity to absorb shocks. Table 3. Guinea: Calculation of CI index Components Coefficients (A) 10-year average CI Score components Contribution of values (B) (A*B) = (C) components CPIA 0.385 3.128 1.20 48% Real growth rate (in percent) 2.719 6.189 0.17 7% Import coverage of reserves (in percent) 4.052 19.764 0.80 32% Import coverage of reserves^2 (in percent) -3.990 3.906 -0.16 -6% Remittances (in percent) 2.022 0.359 0.01 0% World economic growth (in percent) 13.520 3.559 0.48 19% CI Score 2.51 100% CI rating Weak MODEL SIGNALS AND RISK RATING External Debt 7The contingent liability stress test has two components: (i) a minimum starting value of 5 percent of GDP representing the average cost to the government of a financial crisis in a LIC since 1980; and (ii) a tailored value, reflecting additional potential shocks from SOE’s debt and PPP that are not included in the definition of public debt. A tailored PPP shock is used, and the size of the PPP shock is estimated to be 3.8 percent of GDP based on the 2018 PIMA report, larger than the default value of 1.37 percent from the World Banks’ PPP database. Local governments in Guinea have limited debt exposure, and the stock of non -guaranteed SOE’s debt is also likely to be a small. Overall, a contingent liability shock of 8.3 percent of GDP should adequately capture risks arising from debt not covered under the baseline. 6 5. Guinea stands at moderate risk of external debt distress, with some space to absorb shocks (Table 4, Table 7, Figure 1, and Figure 7). Under the baseline scenario, all external debt ratios remain below their policy dependent thresholds. Based on the mechanical rating of the moderate risk tool, Guinea is assessed to have some space to absorb shocks. The external debt position has improved slightly compared to the December 2018 DSA, due to upward revisions in estimated growth in 2016–17, lower- than-anticipated external loan disbursements in 2018, and a stable exchange rate in 2018. The PV of external debt-to-GDP is expected to peak at 23.3 percent in 2026 (slightly above the 2020 peak of 22.8 percent of GDP in the December 2018 DSA) and then to decline. Liquidity ratios are also expected to remain well below policy dependent thresholds and decline slightly compared with the December 2018 DSA. Under the historical scenario and most extreme stress tests, all indicators breach their thresholds.8 However, some of these tests are based on historical growth and export averages, which reflect exceptionally adverse economic conditions for Guinea, including the Ebola crisis and commodity price shocks during 2014–15 and earlier periods of civil unrest. Under two more plausible country-specific scenarios—(i) a weak policy implementation scenario; and (ii) higher non-concessional loans—all indicators scenario.9 Total Public Debt 6. Guinea’s overall risk of debt distress is assessed to be moderate, with the application of staff judgement. As in the December 2018 DSA, under the baseline scenario the PV of total public debt- to-GDP breaches the benchmark for two years (2019 and 2020) (Table 5 and Figure 3). The PV of total public debt-to-GDP ratio peaks in 2019 at 37.2 percent of GDP (vis-à-vis the benchmark of 35 percent of GDP and 37 percent of GDP in the December 2018 DSA). This reflects the one-off impact of the recapitalization of the BCRG in 2018, a key reform to enhance Central Bank independence. This adds to the anticipated disbursement of the loan for the Souapiti dam (US$1.2 billion signed on September 4, 2018) and of non-concessional loans for priority infrastructure development that increase PPG external debt in the short run. Staff applied judgment to assign a moderate risk rating as: (i) the magnitude of the breach is marginal, and the length is temporary (just two years); and (ii) the recapitalization will only affect one debt burden indicator—the PV of overall public debt to GDP. Notably, the recapitalization will not add to the debt service burden in the near term as it was conducted by issuing 30-year bonds for the overall recapitalization needs, additional securities are expected to be issued in lieu of interest payments, and no payment is expected to be made until 2046. The PV of the total debt-to-GDP ratio exceeds the benchmark in the medium term under the most extreme shock. Space for additional borrowing is limited, notably in the near term. Delays in repaying domestic arrears or debt owed to the 8The most extreme stress test is an export shock that sets export growth to its historical average minus one standard deviation in the second and third years of the projection period for the PV of debt-exports and debt service-to-exports, while for the PV of debt- to-GDP and debt service-to-revenue, the most extreme shocks are a combination of all shocks and a non-debt creating flow shock, respectively. 9The weak policy scenario assumes real GDP growth is 1 percentage point below the baseline over 2019 –38, reflecting slower reform implementation, and the basic fiscal balance is 0.5 percent of GDP in 2019 –20, reflecting slower revenue collection. The higher non-concessional loans scenario assumes an additional non-concessional borrowing of U$260 million, corresponding to projected cost of the envisaged Lissan-Foni electricity transmission project to be disbursed during 2019 –22, on top of the programmed envelope of US$650 million in non-concessional loans. 7 BCRG, higher-than-anticipated government borrowing from the BCRG, or new audits of domestic arrears could worsen the dynamics of total public debt. 7. The authorities broadly agreed with the conclusions of the DSA. They underscored their commitment to maintaining a sustainable level of debt that does not exceed a moderate risk of debt distress. They also concurred with the importance of maximizing concessional borrowing where possible but noted that financing under these terms is not available in the scale needed to finance their large infrastructure needs. The authorities are committed to continuing to implement their strategy to gradually clear domestic arrears to the private sector and strengthening debt management. 8 Table 4. Guinea: External Debt Sustainability Framework, Baseline Scenario, 2016–39 (Percent of GDP, unless otherwise indicated) 9 Table 5. Guinea: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–39 (Percent of GDP, unless otherwise indicated) Actual Projections Average 6/ 2016 2017 2018 2019 2020 2021 2022 2023 2024 2029 2039 Historical Projections Public sector debt 1/ 42.5 39.6 37.6 45.0 44.5 43.0 41.6 40.5 39.6 35.2 24.8 44.5 40.0 Definition of external/domestic Currency- of which: external debt 21.8 19.4 19.1 29.6 31.3 31.5 31.5 31.5 31.5 29.6 21.5 28.2 31.0 debt based of which: local-currency denominated Change in public sector debt -1.1 -2.9 -2.0 7.3 -0.4 -1.5 -1.4 -1.0 -0.9 -1.1 -1.1 Is there a material difference Identified debt-creating flows -3.4 -5.9 -4.4 -1.3 -2.0 -1.7 -1.2 -1.0 -0.9 -0.9 -0.9 -2.8 -1.1 No between the two criteria? Primary deficit -0.9 1.2 0.3 1.8 1.3 1.2 1.2 1.1 1.0 0.6 -0.1 2.4 1.1 Revenue and grants 15.7 15.2 14.4 15.6 15.3 15.9 16.2 16.4 16.3 16.4 16.9 14.6 16.1 of which: grants 0.9 1.5 1.1 0.9 0.9 1.1 1.0 1.0 0.9 0.5 0.4 Public sector debt 1/ Primary (noninterest) expenditure 14.8 16.4 14.6 17.4 16.7 17.0 17.4 17.5 17.4 17.0 16.8 17.0 17.2 Automatic debt dynamics -2.5 -7.0 -4.6 -3.1 -3.3 -2.9 -2.4 -2.1 -1.9 -1.5 -0.8 of which: local-currency denominated Contribution from interest rate/growth differential -4.5 -5.1 -3.5 -3.1 -3.3 -3.0 -2.5 -2.2 -2.0 -1.5 -0.8 of which: foreign-currency denominated of which: contribution from average real interest rate -0.2 -1.2 -1.3 -1.0 -0.8 -0.5 -0.3 -0.2 -0.1 0.2 0.4 of which: contribution from real GDP growth -4.3 -3.9 -2.2 -2.1 -2.5 -2.5 -2.2 -2.0 -1.9 -1.7 -1.2 50 Contribution from real exchange rate depreciation 2.0 -1.9 -1.1 ... ... ... ... ... ... ... ... 45 Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -2.8 0.0 40 Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 35 30 Recognition of contingent liabilities (e.g., bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 25 Debt relief (HIPC and other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 20 Other debt creating or reducing flow (please specify) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 15 Residual 2.3 3.0 2.4 8.6 1.6 0.3 -0.2 0.0 0.1 -0.3 -0.2 0.7 0.9 10 5 Sustainability indicators 0 PV of public debt-to-GDP ratio 2/ ... ... 33.0 37.2 36.5 34.9 33.5 32.5 31.7 28.4 20.4 2019 2021 2023 2025 2027 2029 PV of public debt-to-revenue and grants ratio … … 230.2 237.7 237.6 220.4 207.3 198.1 194.4 173.2 120.4 Debt service-to-revenue and grants ratio 3/ 11.9 6.1 12.2 16.9 14.7 17.9 16.9 15.9 15.6 16.0 15.3 Gross financing need 4/ -0.2 1.2 2.0 4.6 3.8 4.2 3.9 3.7 3.6 3.2 2.5 of which: held by residents of which: held by non-residents Key macroeconomic and fiscal assumptions 1 Real GDP growth (in percent) 10.8 10.0 5.8 5.9 6.0 6.0 5.3 5.0 5.0 5.0 5.0 5.2 5.3 Average nominal interest rate on external debt (in percent) 1.5 1.1 1.8 1.1 1.4 1.4 1.5 1.6 1.6 1.6 1.8 1.2 1.5 1 Average real interest rate on domestic debt (in percent) -1.4 -5.7 -6.5 -4.8 -4.2 -1.7 -0.7 0.2 1.1 5.5 14.1 -0.5 0.8 Real exchange rate depreciation (in percent, + indicates depreciation) 10.3 -9.9 -6.3 … ... ... ... ... ... ... ... 0.3 ... 1 n.a. Inflation rate (GDP deflator, in percent) 5.7 10.4 10.0 8.8 8.1 8.1 7.9 7.8 7.8 8.0 8.0 7.5 8.1 0 Growth of real primary spending (deflated by GDP deflator, in percent) -21.1 22.1 -5.6 26.4 1.4 8.1 7.5 5.8 4.0 4.8 4.6 14.3 6.9 Primary deficit that stabilizes the debt-to-GDP ratio 5/ 0.2 4.1 2.2 -5.5 1.8 2.7 2.6 2.2 1.9 1.8 1.0 2.2 1.3 0 PV of contingent liabilities (not included in public sector debt) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 2019 2021 2023 2025 2027 2029 Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt: The central government, central bank, government-guaranteed debt. Definition of external debt is Currency-based. 2/ The underlying PV of external debt-to-GDP ratio under the public DSA 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. 10 Figure 2. Guinea: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2019–29 PV of debt-to GDP ratio PV of debt-to-exports ratio 70 250 60 PV of debt-to GDP ratio PV of debt-to-exports ratio 70 250 200 50 60 200 150 40 50 30 150 40 100 20 30 100 50 10 20 Most extreme shock is Combination Most extreme shock is Exports 0 50 0 10 2019 2021 Most extreme 2023 2025 shock is Combination 2027 2029 2019 2021 2023 2025 2027 2029 Most extreme shock is Exports 0 0 2019 Debt service-to-exports 2021 2023 2025 ratio2027 2029 2019 Debt service-to-revenue 2025 ratio 2027 2021 2023 2029 16 25 14 Debt service-to-exports ratio Debt service-to-revenue ratio 16 25 20 12 14 10 20 15 12 8 10 15 10 6 8 4 10 6 5 2 4 Most extreme shock is Exports Most extreme shock is Combination 0 5 0 2 2021 2019 extreme 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Most shock is Exports Most extreme shock is Combination 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Baseline Historical scenario Most extreme shock 1/ Threshold Baseline Historical scenario Most extreme shock 1/ Threshold Baseline Historical scenario Most extreme shock 1/ Threshold Customization of Default Settings Borrowing Assumptions for Stress Tests* Size Interactions Default User defined Customization of Default Settings Borrowing Assumptions for Stress Tests* Shares of marginal debt Size Interactions Default User defined No No External PPG MLT debt 100% Shares of marginal debt Tailored Tests Terms of marginal debt No No External PPG MLT debt 100% Combined CLs No Avg. nominal interest rate on new borrowing in USD 1.7% 1.7% NaturalTests Tailored Disasters n.a. n.a. Terms of marginal USD Discount rate debt 5.0% 5.0% Combined Commodity CLs Prices 2/ No No No Avg. maturityinterest Avg. nominal on new borrowing in USD rateperiod) (incl. grace 1.7% 20 1.7% 20 Natural Disasters Market Financing n.a. n.a. n.a. n.a. Avg. Discount USD rate grace period 5.0% 6 5.0% 6 Commodity Prices 2/ No No Avg. maturity (incl. grace period) 20 20 Note: "Yes" indicates any change to the size or * Note: All the additional financing needs generated by the shocks under the stress tests Market Financing n.a. n.a. Avg. grace period 6 6 interactions of the default settings for the stress are assumed to be covered by PPG external MLT debt in the external DSA. Default terms Note: indicates that "Yes" indicates tests. "n.a." any change the size to test the stress doesor not * ofNote: All the marginal additional debt are based financing needs10-year generated on baseline by the shocks under the stress tests projections. interactions apply. of the default settings for the stress are assumed to be covered by PPG external MLT debt in the external DSA. Default terms tests. "n.a." indicates that the stress test does not of marginal debt are based on baseline 10-year projections. apply. 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. Stress tests with one-off breaches are also presented (if Sources: Country authorities; and staff estimates and projections. 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 1/ The most exterme shockextreme stress even after test is the test disregarding the that yields one-off the highest breach, ratio only that in ortest stress before 2029. (with Stressbreach) a one-off tests with one-off would breaches are also presented (if be presented. any), 2/ Thewhile these one-off magnitude breaches of shocks arethe used for deemed away price commodity for mechanical signals. shock stress When test are a stress based test on the with a one-off commodity breach prices happens outlook to be bythe prepared themost IMF research shock exterme even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented. department. 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. 11 Figure 3. Guinea: Indicators of Public Debt Under Alternative Scenarios, 2019–29 PV of Debt-to-GDP Ratio 60 50 40 30 20 Most extreme shock is Non-debt flows 10 0 2019 2021 2023 2025 2027 2029 PV of Debt-to-Revenue Ratio Debt Service-to-Revenue Ratio 400 30 350 25 300 20 250 200 15 150 10 100 Most extreme shock is Non-debt flows 5 Most extreme shock is Non-debt flows 50 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Baseline Most extreme shock 1/ Public debt benchmark Historical scenario Borrowing Assumptions for Stress Tests* Default User defined Shares of marginal debt External PPG medium and long-term 92% 92% Domestic medium and long-term 1% 1% Domestic short-term 7% 7% Terms of marginal debt External MLT debt Avg. nominal interest rate on new borrowing in USD 1.7% 1.7% Avg. maturity (incl. grace period) 20 20 Avg. grace period 6 6 Domestic MLT debt Avg. real interest rate on new borrowing 2.6% 2.6% Avg. maturity (incl. grace period) 2 2 Avg. grace period 1 1 Domestic short-term debt Avg. real interest rate 0% 0.0% * Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections. 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. 12 Figure 4. Guinea: Indicators of Public and Publicly Guaranteed External Debt Under Country Specific Alternative Scenarios, 2019–291/ PV of debt-to GDP ratio PV of debt-to-exports ratio 35 160 30 140 120 25 100 20 80 15 60 10 40 5 20 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Debt service-to-exports ratio Debt service-to-revenue ratio 12 16 14 10 12 8 10 6 8 6 4 4 2 2 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Baseline Weak policy Higher non-concessional borrowing Threshold 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. Stress tests with one-off breaches are also presented (if any), 1/ The while weak these policy one-off scenario breaches assumes are deemed real away GDP for growthsignals. mechanical is 1 percentage point When a stress testbelow with a the baseline one-off breachover 2019 happens –38, to reflecting be the slower most exterme shock reform implementation, and the basic fiscal balance is 0.5 percent of GDP in 2019 – 20, reflecting even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented. slower revenue collection. The 2/higher non-concessional The magnitude loans of shocks used scenario for the assumes commodity price an additional shock non-concessional stress test borrowing are based on the commodity of U$260 prices million, outlook preparedcorresponding to by the IMF research projected department. cost of the envisaged Lissan-Foni electricity transmission project to be disbursed during 2019 –22, on top of the programmed envelope of US$650 million in non-concessional loans. 13 Table 6. Guinea: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–29 (Percent) Projections 1/ 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 PV of debt-to GDP ratio Baseline 21 23 23 23 23 23 23 23 23 23 22 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2039 2/ 21 25 29 33 36 40 44 48 52 55 58 A2. Weak Policy 21 23 23 23 24 24 24 25 25 24 24 A3. Higher non-concessional borrowing 21 23 24 24 24 24 24 24 24 23 23 B. Bound Tests B1. Real GDP growth 21 24 26 26 26 26 26 27 26 26 25 B2. Primary balance 21 25 28 28 28 28 28 28 27 27 26 B3. Exports 21 29 38 38 38 37 37 37 36 34 33 B4. Other flows 3/ 21 32 41 40 40 40 39 39 38 36 34 B5. Depreciation 21 28 26 26 26 26 27 27 27 26 26 B6. Combination of B1-B5 21 35 41 41 40 40 40 40 38 36 35 C. Tailored Tests C1. Combined contingent liabilities 21 28 28 28 28 28 28 28 27 27 26 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 21 24 26 26 26 26 26 26 25 25 24 C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 21.3 Threshold 30 30 30 30 30 30 30 30 30 30 30 PV of debt-to-exports ratio Baseline 66 67 70 71 73 76 76 78 77 76 75 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2039 2/ 66 74 89 102 116 133 145 161 173 184 195 A2. Weak Policy 66 68 71 73 76 80 80 83 83 82 82 A3. Higher non-concessional borrowing 66 69 74 75 77 80 80 81 80 78 77 B. Bound Tests B1. Real GDP growth 66 67 70 71 73 76 76 78 77 76 75 B2. Primary balance 66 74 85 87 89 92 91 93 92 90 88 B3. Exports 66 107 172 174 178 183 180 182 179 171 163 B4. Other flows 3/ 66 97 125 126 128 132 129 131 127 121 115 B5. Depreciation 66 67 63 64 66 69 69 71 71 70 70 B6. Combination of B1-B5 66 109 113 136 139 143 141 143 138 132 126 C. Tailored Tests C1. Combined contingent liabilities 66 82 85 87 89 92 91 93 92 91 89 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 66 75 82 83 85 87 86 87 86 84 82 C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 140 140 140 140 140 140 140 140 140 140 140 Debt service-to-exports ratio Baseline 2 3 4 5 5 5 5 5 6 6 6 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2039 2/ 2 3 4 5 6 6 6 7 9 10 11 A2. Weak Policy 2 3 4 5 5 5 5 5 6 7 7 A3. Higher non-concessional borrowing 2 3 4 5 5 5 5 5 6 6 7 B. Bound Tests B1. Real GDP growth 2 3 4 5 5 5 5 5 6 6 6 B2. Primary balance 2 3 4 5 5 5 5 5 7 7 7 B3. Exports 2 4 7 9 9 9 9 9 12 15 15 B4. Other flows 3/ 2 3 5 6 6 6 6 6 9 11 11 B5. Depreciation 2 3 4 5 5 5 5 5 6 5 6 B6. Combination of B1-B5 2 3 6 7 7 7 7 7 11 12 12 C. Tailored Tests C1. Combined contingent liabilities 2 3 4 5 5 5 5 5 6 6 6 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 2 3 4 5 5 5 5 5 7 7 7 C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 10 10 10 10 10 10 10 10 10 10 10 Debt service-to-revenue ratio Baseline 4 7 9 10 9 10 9 9 11 11 11 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2039 2/ 4 7 10 11 11 12 12 12 16 18 20 A2. Weak Policy 4 9 12 10 10 10 10 10 12 12 13 A3. Higher non-concessional borrowing 4 7 9 10 10 10 10 10 12 12 12 B. Bound Tests 4 9 12 10 10 10 10 10 12 12 13 B1. Real GDP growth 4 7 10 11 11 11 11 10 13 13 13 B2. Primary balance 4 7 9 11 10 10 10 10 13 14 14 B3. Exports 4 7 10 13 12 12 12 11 16 19 19 B4. Other flows 3/ 4 7 11 13 12 12 12 11 17 20 20 B5. Depreciation 4 8 11 12 12 12 12 11 14 13 13 B6. Combination of B1-B5 4 7 12 13 13 13 12 12 19 21 20 C. Tailored Tests C1. Combined contingent liabilities 4 7 10 11 10 10 10 10 12 12 12 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 4 7 10 12 11 11 10 10 12 13 13 C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 14 14 14 14 14 14 14 14 14 14 14 Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the threshold. 2/ 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. 3/ Includes official and private transfers and FDI. 14 Table 7. Guinea: Sensitivity Analysis for Key Indicators of Public Debt, 2019–29 (Percent) Projections 1/ 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 PV of Debt-to-GDP Ratio Baseline 37 36 35 34 33 32 31 31 30 29 28 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2039 2/ 37 38 37 37 37 37 37 37 38 38 38 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A B. Bound Tests B1. Real GDP growth 37 40 42 42 42 42 43 43 44 44 45 B2. Primary balance 37 39 41 39 38 37 36 35 35 34 33 B3. Exports 37 42 49 47 45 44 43 42 41 39 37 B4. Other flows 3/ 37 47 54 52 50 49 48 47 45 43 41 B5. Depreciation 37 39 37 34 32 30 29 28 26 25 23 B6. Combination of B1-B5 37 39 38 34 33 32 32 31 31 30 29 C. Tailored Tests C1. Combined contingent liabilities 37 42 41 39 38 37 36 35 35 34 33 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 37 39 40 41 42 43 44 45 46 46 46 C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Public debt benchmark 35 35 35 35 35 35 35 35 35 35 35 PV of Debt-to-Revenue Ratio Baseline 238 238 220 207 198 194 192 189 185 179 173 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2039 2/ 238 246 236 228 223 224 228 229 231 231 232 0 17 10 12 11 11 11 10 12 13 13 13 B. Bound Tests B1. Real GDP growth 238 257 262 255 253 257 263 267 270 270 271 B2. Primary balance 238 256 256 241 230 225 223 218 213 206 199 B3. Exports 238 273 306 289 276 271 268 262 253 240 228 B4. Other flows 3/ 238 304 338 319 305 299 296 289 278 262 247 B5. Depreciation 238 258 233 213 197 187 180 171 162 152 143 B6. Combination of B1-B5 238 251 240 211 201 197 195 191 189 183 177 C. Tailored Tests C1. Combined contingent liabilities 238 276 256 241 230 226 223 218 213 207 200 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 238 273 271 273 271 275 278 277 279 280 281 C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Debt Service-to-Revenue Ratio Baseline 17 15 18 17 16 16 15 14 16 16 16 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2039 2/ 17 15 18 18 17 16 16 15 17 18 18 0 17 10 12 11 11 11 10 12 13 13 13 B. Bound Tests B1. Real GDP growth 17 16 21 20 19 19 19 18 20 21 22 B2. Primary balance 17 15 20 20 17 16 16 15 17 19 19 B3. Exports 17 15 19 19 18 17 17 16 19 23 22 B4. Other flows 3/ 17 15 19 19 18 18 17 16 22 25 24 B5. Depreciation 17 15 19 18 17 17 16 15 17 17 17 B6. Combination of B1-B5 17 14 18 17 16 16 15 14 18 18 18 C. Tailored Tests C1. Combined contingent liabilities 17 15 22 18 17 16 16 15 17 17 17 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 17 16 21 21 20 20 19 18 20 21 22 C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the benchmark. 2/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP. 3/ Includes official and private transfers and FDI. 15 Figure 5. Guinea: Drivers of Debt Dynamics—Baseline Scenario External Debt Gross Nominal PPG External Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Current DSA 50 80 Curren t accou nt + FDI 20 Previous DSA proj . 70 DSA-2014 Inte rquartile 30 15 Nominal interest rate rang e ( 25-75) 60 10 50 10 Real GDP growth Chang e in PP G 40 5 deb t 3/ -10 30 Price and exchange rate 0 20 -30 Median Residual -5 10 -50 -10 0 Contribution of Chang e in PP G d ebt 5-year 5-year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 unexpected Distribution across LICs 2/ 3/ historical projected -15 changes change change Public debt Gross Nominal Public Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Current DSA Residual 30 20 Previous DSA proj. Inte rquartile DSA-2014 80 rang e ( 25- Other debt creating 20 15 75) 70 flows 60 Real Exch ange rate 10 10 dep reciatio n 50 5 Chang e in Real GDP growth 0 deb t 40 30 Real interest rate 0 -10 20 -5 10 Primary deficit -20 Median 0 5-year 5-year -10 Change in debt Contribution of 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Distribution across LICs 2/ historical projected unexpected -15 changes change change 1/ 1/ Difference between Difference betw eenanticipated anticipatedand andactual contributions actual on debt contributions ratios. on debt ratios. 2/ 2/ 3/ Distribution Distribution Given across LICs across the relatively low for LICs forwhich LICLIC w hich private DSAs external were DSAs debt wproduced. ere for produced. average low -income countries, a ppt change in PPG external debt should be largely explained by the drivers of the the relatively 3/ Givendebt external dynamics 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. equation. 16 Figure 6. Guinea: Realism Tools 3-Year Adjustment in Primary Balance Fiscal Adjustment and Possible Growth Paths 1/ (Percentage points of GDP) 12 1 14 Distribution 1/ 3-year PB adjustment 10 12 greater than 2.5 In percentage points of GDP Projected 3-yr adjustment percentage points of GDP 10 8 0 in approx. top quartile In percent 8 6 6 4 -1 4 2 2 0 -2 0 2013 2014 2015 2016 2017 2018 2019 2020 More 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 -4.5 -4.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 Baseline Multiplier = 0.2 Multiplier = 0.4 Multiplier = 0.6 Multiplier = 0.8 1/ Data cover Fund-supported programs for LICs (excluding 1/ Bars refer to annual projected fiscal adjustment (right-hand side emergency financing) approved since 1990. The size of 3-year scale) and lines show possible real GDP growth paths under different adjustment from program inception is found on the horizontal axis; the fiscal multipliers (left-hand side scale). percent of sample is found on the vertical axis. Public and Private Investment Rates Contribution to Real GDP growth (Percent of GDP) (Percent, 5-year average) 25 8 7 20 6 5 15 4 10 3 2 5 1 0 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Historical Projected (2018 DSA) Projected (2019 DSA) Gov. Invest. - Prev. DSA Gov. Invest. - Current DSA Contribution of other factors Priv. Invest. - Prev. DSA Priv. Invest. - Current DSA Contribution of government capital 17 Figure 7. Guinea: Qualification of the Moderate Category, 2019–291 PV of debt-to GDP ratio PV of debt-to-exports ratio 35 160 30 140 Threshold 120 25 (1-X)*Threshold 100 20 (1-Y)*Threshold 80 15 60 10 40 5 20 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Debt service-to-exports ratio Debt service-to-revenue ratio 12 16 10 14 12 8 10 6 8 4 6 4 2 2 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Threshold Baseline Limited space Some space Substantial space Sources: Country authorities; and staff estimates and projections. 1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent. 18