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Namibia: Staff Report for the 2011 Article IV Consultation–Debt Sustainability analysis

Author(s):
International Monetary Fund
Published Date:
February 2012
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DEBT SUSTAINABILITY ANALYSIS

1. Namibia’s public debt for FY2010/11 is estimated at about N$13.5 billion (16.2 percent of GDP). About 24 percent of the debt is owed to bilateral, multilateral and private foreign creditors while the rest is domestic debt. Before its recent rise, public debt had fallen from 26 percent of GDP in 2005/6 to 15.5 percent in 2009/10, with domestic debt declining from 22.2 percent of GDP to 11.5 percent over the same period. However, the current expansionary stance of fiscal policy is projected to increase debt sharply, bringing overall public debt to 35.3 percent of GDP in FY2016/17. Further upside risks stem from a potential future decline in SACU revenues.

2. Table 2 shows two scenarios:

  • The first scenario shows the fiscal outcome if real GDP growth, real interest rates, and the primary balance remain at their historical 10-year averages. In this case, the public debt to GDP would only reach 19.8 percent of GDP by 2016, reflecting the relatively more benign historical levels of the key variables, including the prudent fiscal stance over the last decade.
  • The second scenario shows the fiscal outcome if government’s policies in 2010 remain unchanged, with the primary deficit standing at 3.6 percent of GDP throughout the medium term. In this case, public debt rises sharply to 59 percent of GDP, thereby breaching the authorities’ indicative limit of 35 percent of GDP.
Table 2.Namibia: Public Sector Debt Sustainability Framework, 2006-2016(In percent of GDP, unless otherwise indicated)
ActualProjections
20062007200820092010201120122013201420152016Debt-stabilizing primary balance 9/
1Baseline: Public sector debt 1/21.013.08.811.415.221.825.627.429.431.934.71.2
o/w foreign-currency denominated4.64.94.84.25.24.94.64.75.46.26.9
2Change in public sector debt-6.1-8.0-4.22.73.86.63.81.82.02.52.8
3Identified debt-creating flows (4+7+12)-5.7-7.2-3.0-0.14.07.03.72.32.51.81.6
4Primary deficit-4.4-6.4-4.2-0.43.66.43.11.72.01.10.8
5Revenue and grants29.531.831.231.528.930.332.833.732.932.732.7
6Primary (noninterest) expenditure25.125.427.031.232.536.735.935.434.933.833.5
7Automatic debt dynamics 2/-1.3-0.91.20.30.30.60.60.60.60.70.9
8Contribution from interest rate/growth differential 3/-1.7-0.8-0.41.20.40.60.60.60.60.70.9
9Of which contribution from real interest rate0.00.20.01.21.11.11.41.61.71.92.2
10Of which contribution from real GDP growth-1.6-1.0-0.40.0-0.7-0.5-0.8-1.0-1.1-1.2-1.3
11Contribution from exchange rate depreciation 4/0.4-0.11.6-1.0-0.1
12Other identified debt-creating flows0.00.00.00.00.00.00.00.00.00.00.0
13Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
14Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
15Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
16Residual, including asset changes (2-3) 5/-0.5-0.8-1.22.8-0.2-0.40.1-0.5-0.50.71.2
Public sector debt-to-revenue ratio 1/71.240.828.136.252.672.077.981.289.297.3106.0
Gross financing need 6/9.56.35.89.812.415.615.916.617.517.818.9
in billions of U.S. dollars0.80.60.50.91.41.92.12.32.62.83.1
Scenario with key variables at their historical averages 7/21.821.320.319.219.219.80.1
Scenario with no policy change (constant primary balance) in 2011-201621.828.635.241.850.059.02.0
Key Macroeconomic and Fiscal Assumptions Underlying Baseline
Real GDP growth (in percent)7.15.43.4-0.46.63.64.24.44.44.44.4
Average nominal interest rate on public debt (in percent) 8/9.910.614.018.411.813.113.112.612.312.212.3
Average real interest rate (nominal rate minus change in GDP deflator, in p0.61.50.314.210.88.17.47.06.97.27.6
Nominal appreciation (increase in US dollar value of local currency, in perc-9.32.3-26.826.13.5
Inflation rate (GDP deflator, in percent)9.39.013.74.21.05.05.75.55.45.04.7
Growth of real primary spending (deflated by GDP deflator, in percent)3.56.79.715.011.316.82.02.83.01.23.3
Primary deficit-4.4-6.4-4.2-0.43.66.43.11.72.01.10.8

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(r – π(1+g) – g + αε(1 +r)]/(1 +g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r – π (1 +g) and the real growth contribution as –g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Derived as [(r – π(1+g) – g + αε(1 +r)]/(1 +g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r – π (1 +g) and the real growth contribution as –g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

3. The bounds tests reveal the vulnerability of the fiscal position to exogenous shocks (Figure 1). The most benign shock is that stemming from a negative growth shock (decline from 4.3 percent to 2.6 percent) which could result in a 12 percentage point increase in the debt to GDP ratio. Public debt is also highly sensitive to shocks to the primary balance and contingent liabilities.

Figure 1.Namibia: Public Debt Sustainability: Bound Tests 1/2/

(Public debt in percent of GDP)

Sources: International Monetary Fund, country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.

4/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

4. Namibia’s external debt is projected to increase somewhat by 2016, yet remain at a moderate level. In 2011, external debt is estimated to have increased by 3 percentage points to 23 percent of GDP, largely reflecting the substantial deterioration in the external position as well as the recent issuance of the Eurobond by the government (US$500 million). The debt ratio is set to remain on an upward trajectory over the medium-term and reach 25 percent of GDP in 2016 as the current account deficits—although moderating—are projected to persist. In this regard, the impact of the current account deficits on the external debt’s trajectory is projected to remain modest, as a large share of the projected imports are related to foreign direct investment in the mineral sector.

5. The rising external debt ratio increases the vulnerability of the economy to external shocks, although risks remain manageable. Stress tests suggest that Namibia’s external debt is mostly sensitive to a persistent non-interest current account shock, which would increase the external debt ratio to 44 percent of GDP. This scenario, which could be interpreted as a sharp drop in external demand for Namibia’s mineral exports in the event of a protracted global slowdown, should be seen as the upper bound estimates, particularly given that a standard DSA scenario does not capture the likely impact of such a shock on relative prices. A one-off depreciation of 30 percent, as well as a scenario that combines a relatively moderate shock to both current account balance and GDP growth, are also estimated to sharply increase the debt ratio to around 40 percent of GDP by 2016. In contrast, a separate shock to GDP growth and interest rates is projected to have a relatively moderate impact on the external debt’s trajectory.

Table 3.Namibia: External Debt Sustainability Framework, 2006-2016(In percent of GDP, unless otherwise indicated)
ActualProjections
20062007200820092010201120122013201420152016Debt-stabilizing non-interest current account 6/
Baseline: External debt28.125.722.724.620.523.223.523.824.324.825.3-2.9
Change in external debt2.7-2.5-3.01.9-4.12.70.20.40.50.50.5
Identified external debt-creating flows (4+8+9)-7.2-3.40.6-1.3-2.83.91.91.1-0.1-0.3-0.4
Current account deficit, excluding interest payments-25.0-21.4-13.2-8.3-0.12.91.40.9-0.2-0.52.1
Deficit in balance of goods and services-2.41.08.212.910.114.111.811.510.48.97.4
Exports39.939.942.242.144.644.742.843.143.344.044.9
Imports37.540.850.455.054.858.854.654.653.752.952.2
Net non-debt creating capital inflows (negative)8.98.43.50.8-1.2-1.6-1.8-2.0-2.2-2.2-2.2
Automatic debt dynamics 1/8.99.710.46.2-1.52.62.22.22.32.5-0.4
Contribution from nominal interest rate11.212.310.46.43.43.33.13.13.33.50.7
Contribution from real GDP growth-1.6-1.4-0.90.1-1.3-0.7-0.9-1.0-1.0-1.0-1.0
Contribution from price and exchange rate changes 2/-0.7-1.30.8-0.4-3.5
Residual, incl. change in gross foreign assets (2-3) 3/9.90.9-3.63.2-1.3-1.2-1.6-0.70.60.80.9
External debt-to-exports ratio (in percent)70.664.453.858.345.952.054.955.356.256.556.4
Gross external financing need (in billions of US dollars) 4/0.41.01.30.70.91.41.21.21.11.20.7
in percent of GDP4.811.615.08.18.410-Year10-Year11.19.38.77.67.44.2
Scenario with key variables at their historical averages 5/23.219.715.812.17.72.26.2
Key Macroeconomic Assumptions Underlying BaselineHistorical AverageStandard Deviation
Real GDP growth (in percent)7.15.43.4-0.46.64.73.53.64.24.44.44.44.4
GDP deflator in US dollars (change in percent)2.74.8-3.11.616.87.015.27.43.51.11.41.31.1
Nominal external interest rate (in percent)48.248.340.728.717.138.59.717.814.514.114.415.12.9
Growth of exports (US dollar terms, in percent)28.410.46.01.031.913.416.211.43.36.46.47.37.7
Growth of imports (US dollar terms, in percent)10.720.423.610.523.914.612.619.50.15.64.14.24.2
Current account balance, excluding interest payments25.021.413.28.30.113.86.8-2.9-1.4-0.90.20.5-2.1
Net non-debt creating capital inflows-8.9-8.4-3.5-0.81.2-5.74.21.61.82.02.22.22.2

Derived as [r - g - ρ(1 +g) + εα (1+r)]/(1 +g+p+gp) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [–ρ(1 +g) + εα(1+r)]/(1+g+p+gp) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r - g - ρ(1 +g) + εα (1+r)]/(1 +g+p+gp) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [–ρ(1 +g) + εα(1+r)]/(1+g+p+gp) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure 2.Namibia: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2010.

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