2014 FINANDEBT CONFERENCE, TOULON Debt Sustainability Assessment in Tunisia and Egypt Bassem Kamar & Damyana Bakardzhieva Professors at International University of Monaco Researchers at INSEEC Research Lab 1 Introduction Debt sustainability assessment (DSA) – definition and variables Critical analysis of IMF methodology Author’s scenarios Results and conclusions Bassem Kamar www.gefic.mc 2 DSA Framework Definition • Debt sustainability = a situation, in which a borrower is expected to be able to continue servicing its debt without an unrealistically large future correction to the balance of income and expenditure Bassem Kamar www.gefic.mc 3 DSA Framework Debt dynamic is a function of : • Real GDP, • GDP deflator, • Real domestic interest rate * Domestic currencydenominated debt • Foreign currency-denominated debt * foreign interest rate * changes in the exchange rate • Primary Budget Deficit Bassem Kamar www.gefic.mc 4 DSA Framework The IMF template is based on the staff assumptions for each of these variables In addition, standardized sensitivity analysis are introduced as shocks like ½ standard deviation for the average of the five previous years’ growth, interest rates, budget deficit, and 30% depreciation. Finally, a combined shocks scenario is also presented. This template is designed to facilitate the IMF’s staff work and make the results harmonized across countries and clear for policymakers. Bassem Kamar www.gefic.mc 5 IMF’s overly optimistic projections Bassem Kamar www.gefic.mc 6 And the Mediterranean Region? Bassem Kamar www.gefic.mc 7 Our Value Added Formulating 3 different scenarios • Realistic • Optimistic • Pessimistic Forecasting (assumption) all variables according to each scenario • Growth, Inflation, revenue, expenditure, interest rates, and exchange rate. • All assumptions are interrelated and consistent with each others 8 Steps of our analysis 1) Replicate the IMF 2010 Article IV report DSA template 2) Update the template with more recent data (WEO 2011 or WEO 2013 if available). 3) Formulate 3 different scenarios and adjust all variables accordingly (one at a time with each new change containing the changes in all previous variables). 9 Our three scenarios in the context of the ongoing political transition A realistic scenario that would take stance of the plausible evolution of the economic situation in each country. An optimistic scenario, in which the new (postrevolutionary) governments succeed in improving the economic situation significantly. A pessimistic scenario, in which growth will decline for an extended period of time due to prolonged instability. Bassem Kamar www.gefic.mc 10 The case of Egypt Step 1: Reproducing IMF’s template Baseline : Article IV and WEO 2010 data 120 35 Gross financing need under baseline (right scale) 110 Baseline 30 100 25 90 80 20 70 15 61 60 10 50 40 5 2014-15 2013-14 2012-13 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 Bassem Kamar 2005-06 2004-05 Source: IMF Article IV consultation 2010 Source: Authors’ calculations www.gefic.mc 11 The case of Egypt Step 2: Baseline update Baseline with RGDP, Deflator, Revenue and Expenditure from WEO 2013 120 112 , 8 Adding expenditures from WEO 2013 110 112 , 8 98 , 8 100 98 , 8 87 , 1 90 RGDP WEO 2013 87 , 1 80 76 , 6 76 , 6 70 78 , 1 75 , 9 76 , 9 2 75 73 , 4 74 , 6 74 , 0 72 , 4 74 , 6 73 , 2 77 , 8 RGDP, Deflator, Revenue and Expenditure from , 8 71 WEO 2013 75 , 1 75 , 7 74 , 0 74 , 8 72 , 5 69 , 2 60 68 , 7 61 RGDP WEO 2013 Baseline WEO 2010 51 , 3 RGDP, Deflator and Revenue from WEO 2013 60 , 6 Adding revenue from WEO 2013 50 40 2004 - 05 2005 - 06 2006 - 07 2007 - 08 2008 - 09 2009 - 10 2010 - 11 Bassem Kamar 2011 - 12 2012 - 13 www.gefic.mc 2013 - 14 2014 - 15 12 The case of Egypt Step 2: Final baseline update Baseline with RGDP, Deflator, Revenue, Expenditure and Exchange rate from WEO 2013 120 110 112,8 Adding Exchange Rate from IFS 2013 100 90 80 98,8 87,1 80,5 70 76,6 75,9 74,4 80,1 76,2 61 60 50 77,2 RGDP, Deflator, Revenue , Expenditure and Exchange Ratefrom 73,8 WEO 2013 Baseline WEO 2010 40 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Bassem Kamar www.gefic.mc 13 The case of Egypt Step 3: Realistic Scenario Real GDP growth rate assumptions we expect that the economy will perform only as well as it did in 2012 (i.e. a growth rate of 1.96% versus the projected 3.03% in WEO2013). Next, we project slow recovery and add an extra one percent of GDP growth each year – 3% for 2014 and 4% for 2015. The debt/GDP ratio reaches 77.1%. GDP deflator assumptions We believe that the WEO2013 data is acceptable as realistic. Government revenues assumptions We adjusted the forecasts by assuming that 2013 will be identical to 2012 and that afterwards revenues will start picking up slowly to reach 23.5% of GDP in 2014 and 25% in 2015; the same level it had in 2010 before the revolution. Accordingly, the debt to GDP ratio keeps on rising to 83.2%. Bassem Kamar www.gefic.mc 14 The case of Egypt Step 3: Realistic Scenario Government total expenditures assumptions Since expenditures rose by 10.1% in 2011 and by 17.3% in 2012, we expect them to grow at a slower pace of 15.7% in 2013 (the average growth between 2003 and 2010), slowing even further to 14.7% in 2014 and 13.7% in 2015. The effect on the debt/GDP ratio is a further increase to 84.9% in 2015. Interest rate assumptions We replicated the evolution of interest rates on Treasuries between 2010 and 2013, and then assumed rates will remain constant until 2015. The debt/GDP ratio continues rising to reach 89.5% in 2015. Exchange rate assumptions The exchange rate has been under serious pressure since the revolution and the depletion of the official reserves, pushing the central bank to allow the Pound to depreciate continuously. Our final realistic scenario forecast for the debt to GDP ratio is 91.1% in 2015 presented in the figure on the next slide. Bassem Kamar www.gefic.mc 15 The case of Egypt Step 3: Realistic Scenario Realistic Scenario 120 112,8 110 112,8 Realistic Scenario 98,8 100 90 80 98,8 87,8 87,1 60 91,1 83,3 87,1 76,6 75,9 76,6 75,9 74,4 74,4 Realistic Scenario 76,9 80,5 70 89,9 80,1 76,2 77,2 Baseline WEO 2010 Baseline WEO 2013 73,8 Baseline WEO 2013 61 50 40 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Bassem Kamar www.gefic.mc 16 The case of Egypt Step 3: Optimistic Scenario Optimistic Scenario 120 112,8 112,8 110 112,8 98,8 100 98,8 90 80 98,8 Realistic Scenario Optimistic Scenario 83,3 87,1 87,1 76,6 75,9 76,6 70 60 89,9 87,8 87,1 76,6 74,4 75,9 75,9 76,9 80,5 74,4 74,4 85,8 83,3 76,9 91,1 80,1 76,2 84,9 77,2 Baseline WEO 2010 Baseline WEO 2013 Realistic Scenario 82,1 Optimistic Scenario 73,8 Baseline WEO 2013 61 Baseline WEO 2010 50 40 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Bassem Kamar www.gefic.mc 17 The case of Egypt Step 3: Pessimistic Scenario Interest rates will rise due to increased risk perceived by investors. Pessimistic Interest Rates 120 Interest rates increase by 1% point annually 112,8 112,8 110112,8 100 104,8 Interest rates +1% annually 102,3 Interest rates +1% in 2013 98,8 98,8 100,0 Pessimistic Growth, Revenue and Expenditure 98,8 89,3 90 87,1 89,3 87,1 83,3 87,1 80 83,3 76,6 76,6 76,6 76,9 75,9 75,9 74,4 83,3 76,9 74,4 76,9 Pessimistic Growth, Revenue and Expenditure 75,9 74,4 70 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Bassem Kamar www.gefic.mc 18 The case of Egypt Step 3: Pessimistic Scenario Pessimistic Exchange Rate Depreciation 120 33 % deprecition in 2013 and more in 2014 112,8 112,8112,8 110 30 % deprecition in 2013 102,4 100 15 % deprecition in 2013 98,8 98,898,8 99,5 94,1 97,1 96,0 33 % deprecition in 2013 and 110,3 more in 2014 107,5 30 % deprecition in 2013 105,1 15 % deprecition in 2013 104,0 Pessimistic Growth, Revenue, Expenditure an Interest Rate 92,9 90 80 90,5 89,3 87,1 87,187,1 83,3 83,383,3 76,9 76,6 75,9 74,4 76,976,9 76,676,6 75,975,9 74,474,4 Pessimistic Growth, Revenue, Expenditure, and Interest Rate 70 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 The pessimistic outcome for the Egyptian debt to GDP ratio indicates it will go above 105% by 2015 regardless of the exact depreciation rate. Bassem Kamar www.gefic.mc 19 The case of Egypt Summary of Scenarios Summary of All Scenarios 120 112,8 Pessimistic Scenario 110 Realistic Scenario 98,8 Optimistic Scenario 100 90 87,1 83,3 102,4 94,1 80 75,9 74,4 76,9 80,5 91,1 Realistic Scenario 84,9 82,1 Optimistic Scenario 80,1 77,2 76,2 70 89,9 87,8 85,8 76,6 110,3 Pessimistic Scenario 73,8 Baseline using WEO 2013 data Baseline using WEO 2013 data 60 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Bassem Kamar www.gefic.mc 20 The case of Egypt Summary of Scenarios After carefully analyzing all stress tests for the Egyptian debt sustainability framework, we can conclude that the situation in Egypt is very worrisome. Egypt’s debt goes beyond the 80% threshold even in the most optimistic scenario. Our analysis also clearly shows that each scenario, even the most optimistic one still looks quite pessimistic compared to the latest available IMF forecasts. This is an important policy lesson for the country’s authorities, requiring their particular attention. Unless they understand clearly the possible threats, the sources of these threats and the need to properly manage the respective macroeconomic variables at the origin of the threats, the debt to GDP ratio can go way out of control very quickly. Bassem Kamar www.gefic.mc 21 The case of Tunisia Step 1: Reproducing the template % of IMF 2010 Baseline scenario 55 7 Gross financing need under baseline 6 50 Baseline 5 45 39,8 40 3 35 2005 Source: IMF Article IV consultation 2010 Bassem Kamar 4 2007 2009 2011 2013 2 2015 Source: Authors’ calculations www.gefic.mc 22 The case of Tunisia Step 2: Baseline update Bassem Kamar www.gefic.mc 23 The case of Tunisia Step 3: Realistic Scenario % of GDP Realistic scenario 65 + Exchange rate 60 + Interest rate 57,7 55,2 52,6 50,3 47,9 55 + Budget Deficit 52,4 50 + Growth 48,7 45,9 45 43,3 42,8 43,4 40 35 2005 WEO 2011 2006 2007 2008 2009 Bassem Kamar 2010 2011 www.gefic.mc 2012 2013 2014 2015 24 The case of Tunisia Step 3: Optimistic Scenario % of GDP Optimistic Scenario 55 WEO 2011 ______ 52,4 + Growth 50 48,7 + Interest Rate __ __ __ 47,9 45,9 45 43,3 + Exchange Rate - - - - - 42,8 44,6 44,2 43,9 + Budget Deficit __ . . __ . . __ 40 35 2005 ....... 2006 2007 2008 2009 Bassem Kamar 2010 2011 www.gefic.mc 2012 2013 2014 2015 25 The case of Tunisia Step 3: Pessimistic Scenario Bassem Kamar www.gefic.mc 26 The case of Tunisia Step 3: Pessimistic Scenario Effects of different interest rates (1) Bassem Kamar www.gefic.mc 27 The case of Tunisia Step 3: Pessimistic Scenario Effects of different interest rates (2) Bassem Kamar www.gefic.mc 28 The case of Tunisia Step 3: Pessimistic Scenario Effects of different depreciation levels So Bassem Kamar www.gefic.mc One-time 30% depreciation 7% annual depreciation One-time 25% depreciation One-time 20% depreciation 5% annual depreciation Realistic + 100 basis points 82.2% 81.5% 80.9% 79.5% 79.1% 76.1% WEO 2011 47.9% 29 The case of Tunisia Summary of Scenarios Bassem Kamar www.gefic.mc 30 The case of Tunisia Conclusion - The four Tunisian scenarios we presented the baseline scenario using the WEO 2011 data, our realistic, optimistic and pessimistic scenarios - all reflect some possibilities for the debt level to increase in the coming years. - Though some indicators are worrisome, they are nowhere nearly as striking as the results we presented for Egypt, with the IMF baseline being even less optimistic than our own optimistic scenario. Bassem Kamar www.gefic.mc 31 General conclusions - Political instability has significant implications on debt sustainability. - Both governments should be extremely careful with the evolution of their country’s debt given the background of debt crises in the world, and since financing deficits and refinancing debt is becoming more and more difficult and costly. Bassem Kamar www.gefic.mc 32 Policy Recommendations - Adopt a pessimistic approach to forecasting revenue to be on the safe side and make their expenditure plans based on careful revenue assumptions. - For Egypt, allow the pound to float. This will increase the debt ratio, but will avoid accumulating more foreign debt, and ultimately devaluing the pound while having an even higher debt. Bassem Kamar www.gefic.mc 33 Policy Recommendations - Avoid any unnecessary (in the economic, not the political or social senses) current expenditures. - Try to minimize and rationalize all areas of spending, like subsidies and purchases of goods and services. - Use mainly capital expenditure in infrastructure projects to stimulate growth and use “Public-Private Partnerships”. Bassem Kamar www.gefic.mc 34 MERCI / THANK YOU Bassem Kamar [email protected] [email protected] 35
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