Challenges of debt sustainability during ... - World Bank

Challenges of Debt Sustainability during PoliticalTransition in North Africa Countries

Mthuli Ncube & Taoufik Rajhi

African Development Bank

April 6-7, 2014

MULTILATERAL DEVELOPMENT BANKS’ MEETING ON DEBT ISSUESThe World Bank, Washington, DC

F 5P-100 (IFC Building, 2121 Pennsylvania Avenue, NW)

1

Challenges of Debt Sustainability duringPolitical Transition

Introduction

Challenges of Debt during transition

Debt Sustainability Risks

Case Study: Tunisia & Morocco

2

Linking Political Transition and Debt Sustainability?

• Recession/ Negative Output Gap • Social uprising/ Wage & Regional Development Demands• Social & Subsidies Expenses increases• Fiscal Revenue Collection Decreases• Increase of fiscal deficit• Security concerns/Capital Flight/Decrease of Tourism• Depreciation of currency• Increase of inflation• Result: increase fo external and internal borrowing to cover fiscal

deficit

3

North Africa Countries in Transition (NACT): An Overview

Population

(Millions)

Population

Growth

Rate (%)

GDP per capita

(Thousands of US $ )

GDP Real Growth

(%)

Unemployment

rate

(In %)

2012 2000-

2012

2010 2013 2000-

2010

2011-

2013

2000-

2010

2011-

2013

Algeria 37.5 1.7 4480.7 5448.4 3.9 3.1 17.9 10.5

Egypt 82.5 2.2 2779.7 3179.0 5.0 2.0 9.9 12.2

Libya 6.0 1.3 12357.8 13580.

5

4.6 21.2*

Mauritania 3.6 2.7 1017.4 1091.6 3.7 5.5

Morocco 32.5 1.1 2849.9 2951.3 4.6 3.8 10.7 8.9

Sudan 33.5 0.9 1635.3 1880.9 7.3 -2.1 15.8 11.4

Tunisia 10.8 1.0 4212.2 4214.8 4.4 0.8 13.8 17.9

Source: WEO 2014, IMF

TUNISIA: starting 17 Decembre 2010 and ends on January 2011

EGYPT: begins on 25 January 2011 and ends on 11 February 2011

LIBYA: begins on 15 February 2011 and ends on 20 October 2011

MOROCCO smoothlytransition during 2011

4

I- Challenges of Debt during transition

5

NACs trends are comparable on LT but still stillbelow advanced countries levels

0

100

200

300

Gene

ral g

over

nmen

t gro

ss de

bt

2000 2005 2010 2015year

Algeria Egypt

Libya Mauritania

Morocco Sudan

Tunisia

Percent of GDP

General government gross debt

6

NACTs Debt during democratic transition is not so higher thanbefore transition but the trends are upward

Current Account

Balance

(% of GDP)

General Government

Structural Balance

(% of GDP)

Primary Balance

(% GDP)

General Government

Gross Debt

(% of GDP)

2000-2010 2011-2013 2000-2010 2011-2013 2000-2010 2011-2013 2000-2010 2011-2013

Algeria 14.5 5.5 6.1 -2.5 32.4 9.6

Egypt 0.9 -2.8 -8.1 -10.9 -4.2 -5.5 87.1 81.6

Libya 25.4 13.9 16.7 7.0 12.2 0.0

Mauritania -15.6 -21.9 -1.8 1.4 167.4 86.2

Morocco 0.1 -8.4 -3.6 -6.5 0.1 -4.1 60.1 58.8

Sudan -5.3 -7.1 106.1 85.3

Tunisia -3.0 -8.0 -3.0 -2.7 0.5 -3.1 54.1 44.4

Source : WEO 2014, IMF

7

Differences emerged between NACTs

Net Oil importers has increased debt

ratios( Egypt Tunisia Morocco) due to

counter-cycle policies

40

60

80

100

Gen

era

l go

vern

men

t gro

ss d

eb

t

2000 2005 2010 2015year

Egypt Morocco

Tunisia

Percent of GDP


Net Oil exporters reduced drastically

debt ratios ( Libya, Algeria) through

fiscal surplus

0

100

200

300

Gen

era

l go

vern

men

t gro

ss d

eb

t

2000 2005 2010 2015year

Algeria Libya

Mauritania Sudan

Percent of GDP


8

Recession Gap: growth goes down and negativeoutput gaps are increasing

-20

24

68

Gro

ss d

om

estic p

rodu

ct con

sta

nt p

rice

s

2000 2005 2010 2015year

Egypt Morocco

Tunisia

Percent of Change

Gross domestic product constant prices

-1-.

50

.51

lNG

DP

_R

_G

AP

1980 1990 2000 2010 2020year

Egypt Morocco

Tunisia

GDP percent

Output GAP

9

Libya case is different

Shrank of growth

-50

05

01

00

1980 1990 2000 2010

Percent of change

Libya Gross domestic product constant prices

Gro

ss d

om

estic p

rodu

ct con

sta

nt p

rice

s

yearGraphs by Country

Deep Recession (Negative output gap)

-30

-20

-10

01

0

1980 1990 2000 2010

GDP percent

Libya Output GAP

lNG

DP

_R

_G

AP

yearGraphs by Country

10

Increases and persistance of high level of unemployment and inflation (still manageable)

05

10

15

Infla

tion

avera

ge

co

nsu

mer

pri

ces

2000 2005 2010 2015year

Egypt Morocco

Tunisia

Percent change

Inflation average consumer prices

81

01

21

41

61

8

Une

mplo

ym

ent ra

te

2000 2005 2010 2015year

Egypt Morocco

Tunisia

percent

Unemployment rate

11

Greater deterioation of fiscal space and Currentaccount balance

-10

-50

5

Curr

ent a

ccou

nt b

ala

nce

2000 2005 2010 2015year

Egypt Morocco

Tunisia

GDP percent

General government structural balance

-15

-10

-50

Gen

era

l go

vern

men

t str

uctu

ral b

ala

nce

2000 2005 2010 2015year

Egypt Morocco

Tunisia

GDP percent

Current account balance

12

Increase of expenses and decrease of Revenue Collection

22

24

26

28

30

32

Gen

era

l go

vern

men

t re

ve

nu

e

2000 2005 2010 2015year

Egypt Morocco

Tunisia

Percent of GDP

General government revenue

25

30

35

40

Gen

era

l go

vern

men

t to

tal exp

en

ditu

re

2000 2005 2010 2015year

Egypt Morocco

Tunisia

Percent of GDP

General government total expenditure

13

Correlation of subisidies & Public deficit since the transition as government worry about subisidies

reforms(minus public deficit is represented )

MoroccoTunisia

14

2,1 2,32,7

4,6

1,8

3,6

6,16,6

4,0

1,7

-0,5 -0,4

2,2

4,7

6,0

7,3

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

2005 2006 2007 2008 2009 2010 2011 2012

Subsidies (% GDP) Public Deficit ( % GDP)

2,6

3,6

2,4 2,4

4,4

5,15,3

2,7

1

3

1,1

3,5

5,1

6,8

0

1

2

3

4

5

6

7

8

2007 2008 2009 2010 2011 2012 2013

Subsidies (% GDP) Public Deficit ( % GDP)

Key points

Primary

Balance

(% of GDP)

Real Interest

Rate

(%)

Real Exchange

Rate Index

2005=100

Nominal

depreciation

(% Change)

2000

-

2010

2011-

2013

2000-

2010

2011-

2013

2000-

2010

2011-

2013

2000-

2010

2011-

2013

Algeria 6.1 -3.4 0.3 -3.1 106.8 104.6 4.3 4.3

Egypt -4.2 -4.9 4.6 -0.5 1.6 1.8

Libya 16.7 9.7 -4.4 0.0 0.2

Mauritania -1.8 2.0 14.0 12.0 5.5 5.6

Morocco 0.1 -4.7 11.7 102.5 94.8 2.2 2.1

Tunisia 0.5 -2.5 103.8 91.3 0.3 0.4

Total 3.9 -0.6 4.8 2.8 104.4 96.9 2.1 2.2

Sudan 0.9 0.9

Public debt in NACTsincrease rapidly due to recession gap followingArab uprising.

Increasing expenses due to non reforming Energysubsidies and salaries wages bill reduced the fiscal space

This reflected intoincreased borrowing to fund budget deficit

15

Role of sovereign credit ratings: Too much Too late

• Three countries ( Egypt, Tunisia & Morocco) have credit ratings

• Ratings are overall declining with downgrade outlook

• Bad credit ratings complicate sovereign bonds issusance and decourage FDI

• 2 keys factors for Bad credit ratings: 1) Political instability and 2) fiscal stance ( debt and fiscal balance)

• Too much, Too late

16

Downgrading rating

S&P MOODY's Fitch

Tunisia Egypt Morocco Tunisia Egypt Morocco Tunisia Egypt Morocco

2003 BBB BB+ BB Baa2 Ba1 Ba1 BBB BB+ NR

2004 BBB BB+ BB Baa2 Ba1 Ba1 BBB BB+ NR

2005 BBB BB+ BB+ Baa2 Ba1 Ba1 BBB BB+ NR

2006 BBB BB+ BB+ Baa2 Ba1 Ba1 BBB BB+ NR

2007 BBB BB+ BB+ Baa2 Ba1 Ba1 BBB BB+ BBB-



2010 BBB BB+ BBB- Baa2 Ba1 Ba1 BBB BB+ BBB-

2011 BBB- B+ BBB- Baa3 B2 Ba1 BBB- BB- BBB-

2012 BB B BBB- Baa3 B2 Ba1 BB+ B+ BBB-

2013 BB B- BBB- Baa3 B3 Ba1 BB+ B BBB-

2014 B- BBB- Baa3 Caa1 Ba1 BB- B- BBB-17

Increase of Spread from Bloomberg Benchmark

Government International Bonds Spread ( Egypt (2010-2020, Morocco -2017, Tunisia(2005-2020)

0

200

400

600

800

1000

1200

1400

1600

Spread_Egypt Spread_morocco Spread_tunisia

Government International Bonds Yields

( Egypt (2010-2040, Morocco 2010-2020, Tunisia (1997-2027)

0

100

200

300

400

500

600

700

800

900

23

/04

/20

10

23

/07

/20

10

23

/10

/20

10

23

/01

/20

11

23

/04

/20

11

23

/07

/20

11

23

/10

/20

11

23

/01

/20

12

23

/04

/20

12

23

/07

/20

12

23

/10

/20

12

23

/01

/20

13

23

/04

/20

13

23

/07

/20

13

23

/10

/20

13

23

/01

/20

14

Spread_Egypt Spread_morocco Spread_tunisia

18

Decrease of Yield Bonds

Government International Bonds Yields ( Egypt (2010-2020, Morocco -2017, Tunisia(2005-2020)

0

2

4

6

8

10

12

23/04/2010 23/04/2011 23/04/2012 23/04/2013

Yield_egypt Yield_morocco Yield_tunisia

Government International Bonds Yields( Egypt (2010-2040, Morocco 2010-2020, Tunisia (1997-2027)

0

2

4

6

8

10

12

23/04/2010 23/04/2011 23/04/2012 23/04/2013

Yield_egypt Yield_morocco Yield_tunisia

19

II- DEBT SUSTAINABILITY RISKS The goal of fiscal sustainability analysis is to form a view about

drivers of Debt to GDP ratio and how the outstanding net stock of a government’s debt is likely to evolve over time.

A mixture between Backward and Forward Looking Approach. Three ways of Sustainability Analysis are conducted

1) The first calculates the Debt-Stabilizing Primary Surplus, 2) the second establish the Historical Drivers of Debt before the

transition.3) The Third is a Forward Approach Based on Monte Carlo

Simulation for 2014-2019

20

1- Debt-stabilizing primary surplus,

21

Debt basic equation

22

Let’s begin with basic equation of Debt𝑫𝒕 = 𝟏 + 𝒓𝒕−𝟏 𝑫𝒕−𝟏 − 𝑷𝑩𝒕

Where 𝑫𝒕 is level of Debt, 𝒓𝒕−𝟏 is interest rate and 𝑷𝑩𝒕 Primary Balance level. Dividing by GDP we obtain:

Dt /GDPt = (1+r) Dt−1 /GDPt – PBt / GDPt

Given that GDPt = (1+g) * GDPt-1 where g= nominal growth rate, we get:

Dt /GDPt = (1+r) / (1+g) Dt−1 /GDPt−1 – PBt / GDPt

With d=D/GDP and pb=PB / GDP

dt = (1+r) / (1+g) ∗ dt−1 – pbt

Or

pbt = (1+r) / (1+g) ∗ dt−1 – dt

for debt to be stable dt = dt-1. Thus,

pbt = (1+r) / (1+g) ∗ dt−1 – dt−1 =(r-g) / (1+g) * dt-1 = (r-g) dt-1

Changes in the Debt-to-GDP ratio

23

what is the extent of the primary balance that the government needs to

generate in order to maintain or decrease its debt ratio?

pbt = r − g dt−1

The equation shows that the primary balance hinges on the difference

between the interest rate and the nominal growth rate of GDP.

The primary balance is regarded as a target for policy intervention to

secure fiscal sustainability. Government should on average run a

sufficiently large primary surplus to ensure that it has a positive or zero

net wealth.

Primary balance required to maintain netpublic debt at 45 percent of GDP in Tunisia

Pb=-3.1 Real growth rate (%)

d=45% 3 3,5 4 4,5 5 5,5 6

Re

al in

tere

st r

ate

(%

)

2 -0,5% -0,7% -0,9% -1,1% -1,4% -1,6% -1,8%

3 0,0% -0,2% -0,5% -0,7% -0,9% -1,1% -1,4%

4 0,5% 0,2% 0,0% -0,2% -0,5% -0,7% -0,9%

5 0,9% 0,7% 0,5% 0,2% 0,0% -0,2% -0,5%

6 1,4% 1,1% 0,9% 0,7% 0,5% 0,2% 0,0%

7 1,8% 1,6% 1,4% 1,1% 0,9% 0,7% 0,5%

8 2,3% 2,0% 1,8% 1,6% 1,4% 1,1% 0,9%

24

Primary balance required to maintain netpublic debt at 58 percent of GDP in Morocco

Pb=-4,1% Real growth rate (%)d=58%

3 3,5 4 4,5 5 5,5 6

Re

al in

tere

st r

ate

(%

)

2 -0,6% -0,9% -1,2% -1,5% -1,7% -2,0% -2,3%

3 0,0% -0,3% -0,6% -0,9% -1,2% -1,5% -1,7%

4 0,6% 0,3% 0,0% -0,3% -0,6% -0,9% -1,2%

5 1,2% 0,9% 0,6% 0,3% 0,0% -0,3% -0,6%

6 1,7% 1,5% 1,2% 0,9% 0,6% 0,3% 0,0%

7 2,3% 2,0% 1,7% 1,5% 1,2% 0,9% 0,6%

8 2,9% 2,6% 2,3% 2,0% 1,7% 1,5% 1,2%25

Keys points• Fiscal consolidation will require significant effort over the medium

term.

• While countries are at various levels of Debt to Gdp ratio and various stages of fiscal adjustment policy, these illustrative scenarios can shed light on the scale of the challenge: if public debt ratios were to remain at their current levels, the primary balances would be positive and reach in some case more than 1 percent of GDP.

• Restoring debt to sustainable levels (assumed here, for purposes of illustration, at around the 2013 level ) over the medium term will require raising the economic growth to 5 to 6% on average while keeping zero primary balance.

26

2- Debt Drivers

27

DEBT DYNAMIC in OPEN ECONOMY

28

𝑑𝑡 =(1 + 𝑖𝑡 + 𝜀𝑡𝛼𝑓 1 + 𝑖𝑡

𝑓

(1 + 𝜋𝑡)(1 + 𝑔𝑡)𝑑𝑡−1 − 𝑝𝑏𝑡 + 𝜇𝑡

𝑤𝑖𝑡ℎ 𝑖𝑡 = 𝑖𝑡−1𝑑 1 − 𝛼𝑡−1 + 𝑖𝑡

𝑓𝛼𝑡−1 is the weighted average of domestic and foreign interest rates and 𝛼𝑡−1 is

the share of debt denominated in foreign currency. To determine the factors contributing to the variation in the

debt ratio, simply subtract 𝑑𝑡−1 on both sides to get :

∆𝑑𝑡=𝑖𝑡 − 𝜋𝑡 1 + 𝑔𝑡 + 𝜀𝑡𝛼𝑓 1 + 𝑖𝑡

𝑓

(1 + 𝜋𝑡)(1 + 𝑔𝑡)𝑑𝑡−1 − 𝑝𝑏𝑡 + 𝜇𝑡

1. The Real Interest Rate change : 𝑖𝑡

(1+𝜋𝑡)(1+𝑔𝑡)𝑑𝑡−1

2. Change Real Growth Rate : − 𝜋𝑡 1+𝑔𝑡

(1+𝜋𝑡)(1+𝑔𝑡)𝑑𝑡−1

3. Change of the Exchange Rate (appreciation/depreciation) : 𝜀𝑡𝛼𝑓 1+𝑖𝑡

𝑓

(1+𝜋𝑡)(1+𝑔𝑡)𝑑𝑡−1

Different Historical debt dynamic decreases beforethe Transition

Growth and Exhange depreciation

-3

-2,5

-2

-1,5

-1

-0,5

0

0,5

1

1,5

2

-2,1

-0,1

-0,7

-2,6

0

2

-0,7

Morocco 2002-2010

Growth and Privatisation

-3,0

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

-1,9

0,8

1,5

-1,5

0,2

1,7

-2,7

Tunisia 2008-2010

29

Primary balance and Exchange Depreciation are the main drivers of Debt to GDP increases (Tunisia)

30

-8

-6

-4

-2

0

2

4

6

8

2011 2012 2013

1,73,4 4,1

40 0,7

0,8

-1,5 -1,1-1,3

-3,2-2,3

Primary deficit Exchange rate depreciation Change in gross public sector debt

Real GDP Growth Other debt creating flow Real Interest rate

Residual

Primary balance and Real Interest Rates are the main drivers of Debt to GDP increases ( Morocco)

31

-5

0

5

10

15

2011 2012 2013

4,4 4,9 2,9

3,095,77

1,6

-2,4 -1,4 -2,6

Primary deficit Exchange rate depreciation

Change in gross public sector debt Real GDP Growth

Other debt creating flow Real Interest rate

Residual

3- Monte Carlo simulation: Tunisia & MoroccoN=10000, T:2014-2019Simulate (foreign interest rate, exchange rate,

domestic interest rate, inflation rate, Real growth, primary balance…) in the future 2014-2019

Build the Debt to Gdp ratiousing Covariance-Variance MatrixNo correlationCholesky decomposition

32

Shocks & Risks

• Growth shocks : decrease of 0.25*std(g)

• Primary Balance Shocks: decrease of 0.5*std(pb)

• Depreciation Shocks: increase of max(dep)-mean(dep)

• Foreign Interest Rate Shocks: + 200 points bases

• Domestic Interest Rate Shocks :+ 200 points bases

33

Debt to GDP Ratio with Cholesky decomposition(Tunisia)

34

0

10

20

30

40

50

60

70

2000200120022003200420052006200720082009201020112012201320142015201620172018

Without correlation Cholesky Decomposition

Fan Chart Debt to GDP Ratio for Tunisia withCholesky decomposition

35

0

10

20

30

40

50

60

70

80

2012 2013 2014 2015 2016 2017 2018 2019

10th-25th 25th-50th 50th-75th 75th-90th Baseline

Increasing Risk of hight Debt to GDP ratio if historial scenario held ( Tunisia)

No correlation Cholesky Decomposition

36

0

20

40

60

80

2014 2015 2016 2017 2018 2019

Debt/Gdp>48%

Debt/Gdp>50%

Debt/Gdp>55%

Log. (Debt/Gdp>50%)

0

20

40

60

80

2014 2015 2016 2017 2018 2019

Debt/Gdp>48%

Debt/Gdp>50%

Debt/Gdp>55%

Log. (Debt/Gdp>50%)

Impact of macroeconomic shocks on Debt to GDP profil ( Tunisia)

37

35

40

45

50

55

60

65

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Cholesky Decomposition Growth shokcs Primary Balance

Depreciation Foreign Interest Rate Domestique Interest Rate

Hight Risks following macroeconomic shocks( Tunisia)

Growth and primary balances are important

38

0

10

20

30

40

50

60

70

80

2014 2015 2016 2017 2018 2019

Probability of Debt/Gdp>48%

Hisorical scenario Growth shock

Primary balance deterioration Depreciation shock

Foreign Interest Rate Domestique Interest Rate

Log. (Primary balance deterioration) Log. (Foreign Interest Rate)

0

10

20

30

40

50

60

70

2014 2015 2016 2017 2018 2019





Log. (Growth shock) Log. (Primary balance deterioration)

Debt to GDP Ratio with Cholesky decomposition ( Morocco)

39

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Without correlation Benchmark (cholesky)

Impact of macroeconomic shocks on Debt to GDP ratio profil ( Morocco)

40

40,0

45,0

50,0

55,0

60,0

65,0

70,0

75,0

80,0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Benchmark (cholesky) Growth shoks Primary Balance

Depreciation Foreign Interest Rate Domestique Interest Rate

Fan Chart of Debt to GDP Ratio for Tunisia withCholesky decomposition (Morocco)

41

0

10

20

30

40

50

60

70

80

90

2012 2013 2014 2015 2016 2017 2018 2019

10th-25th 25th-50th 50th-75th 75th-90th Baseline

Increasing Risk of hight Debt ratio if historial scenario held ( Morocco)

No correlation Cholesky Decomposition

42

0,0

20,0

40,0

60,0

2014 2015 2016 2017 2018 2019

Debt/Gdp>65.7%

Debt/Gdp>67.7%

Debt/Gdp>72.7%

Log. (Debt/Gdp>67.7%)

0,0

20,0

40,0

60,0

2014 2015 2016 2017 2018 2019

Debt/Gdp>65.7%

Debt/Gdp>67.7%

Debt/Gdp>72.7%

Log. (Debt/Gdp>67.7%)

High Risks following macroeconomic shocks(Morocco)

Growth and primary balances are important

43

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

2014 2015 2016 2017 2018 2019





Log. (Primary balance deterioration) Log. (Domestique Interest Rate)

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

2014 2015 2016 2017 2018 2019


Hisorical scenario Primary balance deterioration

Depreciation shock Foreign Interest Rate

Domestique Interest Rate Log. (Primary balance deterioration)

Log. (Domestique Interest Rate)

Results

• By damaging growth and increasing social expenses, the Arab Spring has put public debt sustainability once again high on the North Africa Countries in Transition’s (NACTs) policy agenda.

• Applying a backward and forward sustainability analysis based on ‘stabilizing primary balance approach’ and Monte Carlo simulations is interesting for understanding debt vulnerabilities

• Forward Debt Sustainability Analysis shows the Moroccan and Tunisian debt levels to be resilient to various shocks, and vulnerabilities linked to the profile of the debt appear moderate.

• However, under primary balance shocks, gross financing needs for Tunisia and Morocco would increase highlighting some risks despite the relatively moderate level of debt.

44

• The main driver of sustainability is growth outlook, and fiscal consolidation.

• This underscoring the importance of economic recovery and even accelerating growth.

• Fiscal consolidation as well as utilizing the borrowing space for growth enhancing will need to play a greater role in maintaining debt sustainability in the future.

45

Conclusion

1. Restoring debt to sustainable levels over the medium term will require raising the primary fiscal balance and Growth1. Fiscal consolidation will require structural reforms over the

medium term. 2. For countries with low fiscal or external buffers, delays in

Consolidation could heighten concerns about Debt sustainability.3. Current account deficits and financing needs are substantial in

many NACTs. How Much?

4. Role of MFIs in supporting NACT’s. Where to borrow? How to borrow?

46

Thanks

47

Documents

Challenges of debt sustainability during ... - World Bank