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Gabon: Staff Report for the 2015 Article IV Consultation—Debt Sustainability Analysis

Author(s):
International Monetary Fund. African Dept.
Published Date:
March 2016
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Public Debt Sustainability Analysis

1. Public debt level and structure. Gabon’s public debt stood at CFAF 3,177 billion (US$5.4 billion) by end-September 2015. It has rapidly increased this decade as the government sought funds to finance the PSGE, to build the infrastructure needed for the soccer African Cup of Nations in 2012 (jointly with Equatorial Guinea), and more recently, to make up for lower revenues following the oil price shock. Thus, from approximately 16.7 percent of GDP in 2008, total public debt reached 32.6 in 2014 and is projected to have increased further to 43 percent in 2015. The increase in the debt ratio from 2014 to 2015 was largely due to the issuance of a US$500 million Eurobond in June, the Euro-CFAF depreciation, and the considerable decline in nominal GDP resulting from the collapse in oil prices. About two-thirds of the increase in the debt-to-GDP ratio since 2014 is due to the depreciation of the CFA and the decline in the oil GDP deflator. Gabon’s government debt is mostly external (external debt accounted for 85 percent of total public debt in 2014) and medium-to-long term. It is worth noting that while the CEMAC regional group sets a public debt ceiling at 70 percent of GDP (deemed too high in recent CEMAC regional surveillance staff reports), Gabon sets a more conservative ceiling of 35 percent of GDP, which was surpassed in 2015.

2. Baseline scenario. The proposed baseline scenario reflects projections made in the macroeconomic framework described in Tables 1 to 6 of the staff report. Staff’s baseline scenario assumes that non-oil revenue base would be widened over time with the elimination of overly generous tax exemptions; wages and salaries would remain constant in real terms; and capital spending would grow at a rate lower than non-oil GDP growth. International oil and other commodity prices, as well as exchange rates reflect World Economic Outlook projections through 2021. The public DSA shows that the macroeconomic framework presented in this staff report would result in debt levels that reach 50 percent of GDP in 2016 and decrease only from 2020.

Table 1.Gabon: Public Debt Stock by Components in 2013–15(CFAF billion)
20132014Sep-15
External Debt2,039.02,454.12,912.9
Bilateral461.8573.3746.4
of which: Paris Club47.440.236.7
Multilateral262.1350.8359.2
Commercial496.4602.7535.9
International Financial Markets818.7927.21,271.5
Domestic Debt244.2176.9264.8
Banking76.444.544.5
Moratory83.856.448.7
Regional Financial Markets69.562.6159.7
Other14.513.411.9
Total Public Debt2,283.22,631.03,177.7
Source: Gabonese authorities.
Source: Gabonese authorities.

3. Shocks. A historical scenario, in which the fiscal balance is much higher than in the baseline, translates into a reduction in public debt levels over the projection period (see Figure 1). On the other hand, a 1 percentage point decline in real GDP growth in the projection period (a supply shock) combined with a reduction in government revenues by 2 percentage points of GDP would lead to a sharp increase in public debt up to 85 percent of GDP by 2021. A contingency liability shock would have a smaller impact on the debt-to-GDP ratio, but would still bring it above CEMAC’s 70 percent ceiling.22

Figure 1.Gabon: Public DSA - Composition of Public Debt and Alternative Scenarios

Source: IMF staff.

Table 2.Gabon: Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario(in percent of GDP unless otherwise indicated)
1/ Public sector is defined as central government.2/ Based on available data.3/ Long-term bond spread over German bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r - π(1+g) - g + ae(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; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ 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.Source: IMF staff.
1/ Public sector is defined as central government.2/ Based on available data.3/ Long-term bond spread over German bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r - π(1+g) - g + ae(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; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ 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.Source: IMF staff.

Figure 2.Gabon: Public DSA Risk Assessment

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.

4/ Long-term bond spread over German bonds, an average over the last 3 months, 14-Oct-15 through 12-Jan-16.

5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

Source: IMF staff.

External Debt Sustainability Analysis

4. External debt level and structure. After a considerable restructuring and consequent reduction in the late 2000s, Gabon’s external debt went up from US$2.1 billion in 2009 to about US$4.3 billion in 2013 (equivalent to 24.8 percent of 2013 GDP). Such an increase is partly the result of the issuance of a US$1.5 billion Eurobond in 2013 (US$ 610 million of which was used for partial repayment of a US$1 billion Eurobond issued in 2007) and later US$500 million in 2015. By end-2014, debt to multilateral institutions accounted for 14 percent of total external debt, bilateral debt for 23 percent, debt to commercial institutions and debt placed in financial markets accounted for the remaining 63 percent.

5. Baseline scenario. The baseline scenario is the same as in the public debt sustainability analysis, reflecting projections made in the macroeconomic framework described in Tables 1 to 6 of the staff report. With respect to external debt, the macroeconomic framework assumes that the international bond for US$1 billion that was issued in 2007 is rolled over. Under this scenario, the external debt sustainability framework projects that the external debt-to-GDP ratio should surpass 40 percent from 2016, and gradually decline only from 2020.

6. Shocks. Alternative scenarios include a historical scenario in which main variables are assumed to be the same as in the past ten years, and others that incorporate a 0.25 standard deviation applied to real interest rate, growth rate, and the current account balance. While the historical scenario, in which financial needs are much lower than in the baseline, lead to a drastic reduction in external debt, other shocks to the baseline lead to a dramatic debt escalation. Most notably, shocks to the non-interest rate current account and the real exchange rate lead to an increase in external debt by 2021 up to 56 and 62 percent of GDP, respectively.

Table 3.Gabon: External Debt Sustainability Framework, 2011-2021(In percent of GDP, unless otherwise indicated)
ActualProjections
20112012201320142015201620172018201920202021Debt-stabilizing

non-interest

current account 6/
Baseline: External debt13.616.624.225.334.541.441.242.142.341.540.4−5.7
Change in external debt−2.33.07.61.19.26.8−0.20.90.1−0.7−1.2
Identified external debt-creating flows (4+8+9)−22.7−18.2−16.7−14.64.32.80.7−0.8−1.7−2.6−3.4
Current account deficit, excluding interest payments−16.1−17.0−13.4−9.30.77.35.43.72.61.81.0
Deficit in balance of goods and services−30.8−27.9−23.3−15.2−5.01.6−0.3−2.0−2.9−3.5−4.1
Exports61.264.460.353.743.030.530.931.231.331.230.9
Imports30.536.537.138.538.032.130.629.228.427.726.9
Net non-debt creating capital inflows (negative)−4.0−3.6−4.4−5.6−4.3−5.1−5.0−4.8−4.5−4.6−4.7
Automatic debt dynamics 1/−2.62.41.10.28.00.50.30.40.20.20.3
Contribution from nominal interest rate0.80.91.51.01.21.72.02.12.12.22.2
Contribution from real GDP growth−0.90.0−0.9−1.0−1.3−1.2−1.7−1.8−1.9−1.9−1.9
Contribution from price and exchange rate changes 2/−2.51.60.50.28.1
Residual, incl. change in gross foreign assets (2-3) 3/20.421.224.315.84.94.1−0.91.71.81.92.2
External debt-to-exports ratio (in percent)22.225.840.147.280.4135.9133.5135.0135.1133.0130.5
Gross external financing need (in billions of US dollars) 4/−2.5−2.4−1.1−1.10.71.51.61.21.11.21.2
in percent of GDP−13.8−13.9−6.4−6.24.610-Year10-Year11.210.67.36.56.45.9
Scenario with key variables at their historical averages 5/41.425.010.9−3.0−17.0−30.6−4.6
Key Macroeconomic Assumptions Underlying BaselineHistorical

Average
Standard

Deviation
Real GDP growth (in percent)7.10.05.64.34.03.63.43.24.54.74.95.04.9
GDP deflator in US dollars (change in percent)18.4−10.3−3.0−0.8−24.31.816.2−8.85.43.93.93.53.3
Nominal external interest rate (in percent)6.15.79.24.53.75.81.64.75.25.75.55.65.6
Growth of exports (US dollar terms, in percent)31.2−0.7−4.1−7.9−37.04.527.3−33.311.610.09.28.57.3
Growth of imports (US dollar terms, in percent)30.913.24.07.6−22.49.315.0−20.65.13.86.16.14.9
Current account balance, excluding interest payments16.117.013.49.3−0.713.16.7−7.3−5.4−3.7−2.6−1.8−1.0
Net non-debt creating capital inflows4.03.64.45.64.34.61.05.15.04.84.54.64.7

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

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g + r+gr) times previous period debt stock r increases with an appreciating domestic currency (e > 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 - r(1+g) + ea(1+r)]/(1+g + r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g + r+gr) times previous period debt stock r increases with an appreciating domestic currency (e > 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 3.Gabon: 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.

22This scenario assumes a one-time increase in non-interest expenditures equivalent to 10 percent of banking sector assets leads to a real GDP growth shock (see above): growth is reduced by 1 standard deviation for 2 consecutive years; revenue-to-GDP ratio remains the same as in the baseline; deterioration in primary balance lead to higher interest rate; decline in growth leads to lower inflation.

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