79691 INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL MONETARY FUND REPUBLIC OF MOZAMBIQUE Joint Bank-Fund Debt Sustainability Analysis - 2013 Update Prepared by the staffs of the International Development Association and the International Monetary Fund Approved by Marcelo Giugale and Jeffrey D. Lewis (IDA) and David Robinson and Vivek Arora (IMF) June 10, 2013 This debt sustainability analysis (DSA) updates the joint IMF/IDA DSA from May 2012. Mozambique moves from low to moderate risk of debt distress as the result of (i) a lower discount rate, (ii) a significant increase in debt contracted in the last two years related to an ambitious public investment program aimed at narrowing the infrastructure gap, and facilitating the development of natural resources , and (iii) large movements in the underlying balance of payments with the onset of coal exports and significant commercial investments in natural gas exploration and liquefaction. Staffs agree with the authorities on the importance of the public investment program for development. The increased risks to debt sustainability, however, should be contained by moderating public external borrowing compared to its current accelerated pace. The DSA highlights that further improvements in debt management and investment planning capacity are important for continued debt sustainability, notably in the case of commercial borrowing. 1 As public debt is largely external, the evolution of total public debt indicators mirrors that of public external debt. Private external debt is expected to increase rapidly in importance, mainly driven by investment in the natural gas sector, and to comprise the majority of external debt by the end of this decade. 1 The DSA presented in this document is based on the standard low-income countries (LIC) DSA framework. See “Debt Sustainability in Low-Income Countries: Further Considerations on an Operational Framework, Policy Implications” (IDA/SECM2004/0629, 9/10/04and IMF/SM/05/109). Under the Country Policy and Institutional Assessment (CPIA), Mozambique is rated as a medium performer, albeit close to the threshold of 3.75 for strong performers, with an average rating of 3.71 during 2009–11; the DSA uses the indicative threshold for medium performers. 2 I. UNDERLYING DSA ASSUMPTIONS 1. This DSA is consistent with the macroeconomic framework outlined in the Staff Report for the Sixth Review under the PSI (Box 1). Compared to the previous DSA,2 the main changes in this DSA are as follows: a. The medium-term macroeconomic framework has been revised (Text Table 1). In particular, economic growth slows in 2013 as a result of widespread flooding early in the year that damaged agricultural output and transport infrastructure. Growth is projected to bounce back quickly and accelerate over the medium term as agriculture recovers, extractive industries boom, and infrastructure investments materialize. The fiscal deficit was lower in 2012, among other factors because of windfall capital gain tax revenues received. Significant revisions have been made to the balance of payments that result in larger current account deficits and larger FDI inflows—both historically and in the projections. The bulk of the revision is related to megaprojects, particularly the inclusion of imports of goods and services related to exploration in the natural gas sector; the counterpart of these imports is a large increase in recorded inward FDI. Text Table 1: Evolution of Selected Macroeconomic Indicators between DSA Updates 2011 2012 2013 2014 2015 Est. Projections Real GDP growth (%) Previous DSA 7.1 6.7 7.2 7.8 7.8 Current DSA 7.3 7.4 7.0 8.5 8.5 Nominal GDP (US$ million) Previous DSA 12.8 14.2 15.5 17.3 19.4 Current DSA 12.6 14.2 14.7 16.0 17.9 Overall fiscal deficit (% of GDP) Previous DSA 5.2 6.4 6.6 6.6 6.6 Current DSA 5.3 4.2 6.7 7.2 6.7 Current account deficit (% of GDP) Previous DSA 13.1 12.7 12.4 11.9 11.3 Current DSA 24.3 36.5 39.9 41.3 41.4 FDI (% of GDP) Previous DSA 16.4 11.2 10.2 10.1 9.7 Current DSA 20.7 36.6 32.2 25.8 20.8 Use of NCB ceiling (% of GDP) 1/ Previous DSA 1.5 2.5 3.2 3.4 0.0 Current DSA 0.6 0.8 2.4 2.5 1.6 Disbursements under PTL (% of GDP) 2/ Previous DSA 1.8 0.9 0.9 0.5 0.0 Current DSA 1.0 0.4 0.2 0.3 0.2 Grant financing (% of GDP) 3/ Previous DSA 9.2 8.7 8.1 8.0 8.0 Current DSA 9.2 6.6 7.5 7.6 7.4 1/ The disbursement pace is not faster as in the previous DSA, because implementation of some projects has been slower than previously expected and the large prospective new loan for the Moamba Major Dam is currently expected to start disbursing only in 2015. 2/ Portuguese credit line. 3/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new disbursements). 2 See IDA/SecM2012-0441 and IMF Country Report No. EBS/12/64, Supplement 1. 3 Box 1. Macroeconomic Assumptions 2013–33 The medium-term assumptions in the baseline scenario for 2013-33 are consistent with the medium-term macroeconomic framework underlying the Staff Report for the Sixth Review under the Policy Support Instrument. Non-LNG Real GDP growth is projected to be around 8 percent on average in the next few years and 7½ percent in the longer term. Growth will slow down in 2013 due to the impact of floods, but is expected to accelerate over the medium term, supported by recovery in agricultural production, expansion in coal mining, and infrastructure investments in the pipeline, including to support coal exports and LNG manufacturing. Growth is sustained in the long term by strong population/labor force growth, continued infrastructure investment, and related productivity gains. Risks to growth include public investment not achieving expected payoffs and thus limiting productivity gains, and the possibility of Dutch disease effects. The government is aware of the risks, and is taking steps to strengthen project evaluation and selection, and is considering options such as fiscal rules and sovereign wealth funds to mitigate the risk of excessive real exchange rate appreciation. LNG sector. LNG plants are assumed to be under construction during 2014–22. The projection assumes a moderate-sized plant consisting of four LNG manufacturing units (“trains”). One train is assumed to start production in 2020, followed by a second train in 2021, and the third and the fourth train will start production in 2023. Total investment is projected at $40 billion. The sector’s contribution to GDP is expected to be small during the construction period due to a high import content. Annual LNG output will reach 20 million tons in 2023, contributing more than 20 percent of nominal GDP by then. Consumer price inflation is projected to rise to 5–6 percent in 2013, owing to rising food prices and an increase in public transport fares in late 2012 and also reduced domestic food supply as a result of the floods. As per the Central Bank medium term target, inflation is assumed to stabilize at around 5½ percent over the forecast period beginning from 2014. Growth of exports is projected to stabilize at around 5 percent a year in the longer term as coal and LNG exports stabilize. In the shorter term export growth rates show sharp changes as a result of coal and LNG operations. In particular the growth rate of exports would almost double in 2020-23 due to LNG exports coming on line. Imports are projected to increase sharply in 2014 during the LNG plant construction phase and their growth would stabilize at around 9 percent a year in the long term. The non-interest external current account deficit is projected to rise to over 40 percent of GDP in the medium term largely driven by LNG-related imports. The deficit will be primarily financed through FDI and private external borrowing. It would then stabilize at around 8 percent of GDP in the long term as coal exports increase with transport capacity and as LNG exports start. The non-interest primary fiscal deficit is projected to widen in 2013 and 2014, reflecting high public investment in the pipeline to mitigate the infrastructure gap. The fiscal balance would improve in the medium to long term as public investment tapers off to more sustainable levels and non-interest spending falls in percent of GDP terms. The fiscal balance is expected to improve further from 2020 onwards once LNG revenue commences. 4 b. The natural gas sector. The baseline scenario in this DSA has incorporated the emerging gas sector in Mozambique. The basis for the development of the sector is one of the largest worldwide discoveries of gas. These developments result in: (i) higher foreign direct investment and private external borrowing for exploration (since 2010) and the construction of a 4-train gas liquefaction (LNG) plant (2014-2022); (ii) increased imports of goods and services related to LNG; and (iii) increased GDP and exports from 2020 onwards when the LNG plant becomes operational. Under baseline assumptions, the LNG sector will contribute 20 percent of GDP and half of exports by 2023. LNG-related fiscal revenue will be small in the beginning owing to cost recovery provisions. Revenue will gradually increase over the medium to long term. c. The coal mining sector. Coal production is expected to expand rapidly over the medium term to 20 million tons (6 percent of GDP) in 2017 from about 5 million tons (2 percent of GDP) in 2012. Most of the coal produced will be for exports—high quality coking coal— while the abundant lower-value thermal coal is not currently marketed due to transport capacity constraints. Coal-related investments in mines, railways, ports, and a coal-fired power plant are conservatively expected to amount to $5 billion during 2013–17, financed by FDI inflows. Adverse world coal price movements constitute a risk to these expansion plans, which could result in delayed implementation or scaling back. d. The related substantial BOP revisions show much larger changes in variables, especially FDI, and thus larger volatility than assumed in the last DSA. The related standard shocks in the DSA template produce larger deviations from the baseline scenario, and thus make breaches of the sustainability thresholds more likely and more prolonged than in the last DSA. e. A revised public investment and external borrowing profile. Thus far, disbursements, particularly of nonconcessional loans, have been lower than expected in the previous DSA, mainly because of a somewhat slower start of projects. Disbursement are projected to increase in 2013–16, in line with the recent increase in the non-concessional borrowing ceiling to $1.6 bil-lion under the current IMF-supported program and the proposed non- concessional borrowing ceiling under the successor program, but also through a notable increase in bilateral concessional loans (Text Table 2). Following the acceleration of external borrowing through end-2013, the authorities plan to moderate the pace of new borrowing over the medium term (Text Figure 1). Starting at the end of this decade, new public sector borrowing is expected to decline gradually relative to GDP in light of the coming on stream of natural resource-related revenue from the coal and natural gas sectors. Nominal disbursements, however, are projected to continue increasing throughout the projection period. Other large potential future investment projects, e.g. in railroads, the LNG and power sectors, are deemed commercially viable by the authorities and would be expected to be undertaken largely by the private sector, without substantial need for government financing or guarantees. However, these projects could constitute a risk for the public debt trajectory if significant government financing became necessary. Another risk is that pressures may emerge and make it difficult to slow the future pace of public loan contracting, particularly in light of the country’s vast infrastructure needs. Finally, project costs could be underestimated, as was the case for the Nacala airport. 5 Text Table 2. Non-concessional Loans Contracted and in the Pipeline Loan amount Before Between After Signed on (US$ millions) 5th rev. 5th and 6th rev. 6th rev. Total non-concessional loans 2,073 1,387 45 641 Brazil Nacala Airport Apr 28, 2011 80 80 Study on Dam Moamba Major Nov 22, 2012 9 9 Nacala Airport (Augmentation) Expect to sign by mid-2013 45 45 Public Transport Maputo-Matola Expect to sign by end-2013 135 135 Nacala Industrial Free Trade Zone Expect to sign by end-2013 40 40 Dam Moamba Major Expect to sign by end-2013 466 466 China Maputo Airport Dec 16, 2010 67 67 Ring Road * Feb 17, 2012 300 300 Katembe Bridge/Ponta D'Ouro Road July 18, 2012 682 682 India Maputo Power Supply * Sep 20, 2012 250 250 Large concessional loans in the pipeline 946 946 China Road Beira-Machipanda Expect to sign by mid-2013 433 433 India Road Tica-Buzi-Nova Sofala Expect to sign by mid-2013 150 150 400-1000 Basic Houses Expect to sign by mid-2013 47 47 Agua Rural III Expect to sign by mid-2013 20 20 KFW Mavuzi-Chicamba Rehabilitation Expect to sign by mid-2013 24 24 Korea Nampula - Nametil Road Expect to sign by end-2013 182 182 Maputo Sanitary Landfills Expect to sign by mid-2013 25 25 250 Buses in Maputo and Matola Expect to sign by mid-2013 30 30 Japan Chókwè City Dike Expect to sign by end-2013 19 19 Dam Macarretane Rehabilitation Expect to sign by end-2013 16 16 * 34 percent grant element. Text Figure 1. Public Sector External Debt Disbursement Path Commercial loans, contracted 2014 onwards Concessional bilateral loans, contracted 2014 onwards Loans contracted before end-2013 Multilateral loans 1800 10 (In Millions of U.S. dollars) (In percent of GDP) 1600 9 1400 8 7 1200 6 1000 5 800 4 600 3 400 2 200 1 0 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2011 2012 2013 2014 2015 2016 2017 2018 2019 6 f. A revised grant element in financing terms for future borrowing. This DSA assumes that the grant element for new borrowing will experience a pronounced decline during the next two decades, contrary to the previous DSA that assumed a roughly constant 30-percent grant element. This reflects revised assumptions on the long-run availability of donor financing with government relying increasingly on commercial borrowing. g. The reduction of the DSA discount rate from 4 percent a year ago to 3 percent in this DSA yields a higher present value of debt/borrowing in this DSA compared to the previous one. II. EXTERNAL DEBT SUSTAINABILITY ANALYSIS 2. External debt is projected to rise rapidly during this decade, reflecting mainly private sector investment in the natural gas sector. External debt (both public and private) is expected to peak at about 128 percent of GDP in 2019, at which time private sector debt will constitute about two thirds of total external debt. With investment in the coal sector projected to be financed through foreign direct investment, this increase in private external debt is mostly driven by investments in the natural gas sector. Public sector debt is also expected to peak in 2018 at 45 percent of GDP (in PV terms) on the back of infrastructure investment. The significant buildup of private sector external debt needs to be monitored by the authorities to contain vulnerabilities. However, with renowned global companies leading investments in the natural resource sector, the risk for government contingent liabilities or other vulnerabilities beyond those specific to the natural resource operations is currently considered to be low.3 3. All baseline public external debt indicators remain below their respective thresholds but now come closer to the thresholds than previously (Figure 1).4 While the indicators remain contained throughout the projection period, they are significantly higher than at the time of the last DSA, especially the PV of debt relative to GDP. It now peaks around 39 percent (in 2018), relative to a 28½ percent peak in the previous DSA. The beginning of LNG production, however, and the ensuing surge in GDP would drop the ratio safely back down to below 33 percent in the next decade (Table 1). The increase of debt ratios is partly due to the lowering of the discount rate from 4 to 3 percent, which contributed to about one third (3 percentage points) of the increase in the PV of debt to GDP ratio. PV of debt to GDP ratio would be about 6 percentage points lower throughout the DSA period if the discount rate were at the longer-term historical average benchmark rate of about 5 percent instead of the 3 percent assumed in this DSA (Figure 1 and Table 2). 3 Likewise, the risk of BOP pressures emerging as a direct result of mega project-related investment activity is considered to be low. Care will have to be taken in the long term, however, once revenues from these ventures materialize, as these may be volatile reflecting world commodity prices and in relation to imports. Moreover, large natural resource exports then also hold competitiveness risks emerging from a possible exchange rate appreciation, which will have to be carefully managed. 4 Compared to the DSA of Country Report 12/148 (May 2012). 7 4. External debt ratios remain vulnerable to FDI and exchange rate shocks. The threshold for the PV of debt to GDP ratio is breached under stress tests for a sustained period.5 A sharp reduction in non-debt creating FDI in 2014-2015 would push the PV Debt/GDP ratio well above the 40 percent threshold during the second half of this decade, with a peak at more than 80 percent (Figure 1). Apart from the FDI shock, a sharp depreciation of the metical in 2014 also leads to breaches of this threshold (Table 2). Both shocks lead to a significant overshooting of the threshold for a sustained period: 13 years for the FDI shock and 19 years for the depreciation shock.6 The impact of these two shocks is now much larger than in the previous DSA given revisions to historical BOP data to account for FDI- financed natural gas exploration.7 The PV of debt will also breach two other thresholds: 150 percent of exports, and 250 percent of revenue under the FDI shock scenario.8 The thresholds for the PV of debt to export ratio is breached by a number of indicators, particularly a shock to non-debt creating flows. In many countries with large natural resource sectors, price volatility adds another source of risks to external debt sustainability. Given the long-term nature of the contracts that usually govern LNG development – including buying prices – the risk of significant volatility for external debt sustainability seems relatively small. 5. Ensuring that LNG production materilizes is crucial for Mozambique’s debt sustainability. The LNG sector will contribute significantly to GDP, exports and government revenue. A gradual public investment scaling-up under the baseline scenario anticipating some LNG revenue would be appropriate given Mozambique’s infrastructure investment needs. If, however, LNG production or revenue is much lower than expected, the debt ratios would be higher over the medium to long term.9 III. PUBLIC SECTOR DEBT SUSTAINABILITY 6. The evolution of public debt indicators (including domestic debt) mirrors that of the external indicators because of the predominance of external debt (Table 3 and Figure 2). The medium-term increase in public debt reflects the temporary surge in public investment financed in part by external borrowing on non-concessional terms. Under the baseline scenario, the PV of public debt 5 The scenario in which variables are at their historical levels has been omitted given that it generates negative debt as a result of the large changes in variables in the baseline arising from LNG activities. 6 The charts in Figure 1 display the stress test with the most adverse outcome in 2023. 7 The BOP data revisions in 2010-2012 to account for natural gas exploration lead to a higher increase in FDI compared to previous years. As a result, the DSA’s stress scenario for non-debt creating capital flows now assumes that these flows are subject to higher volatility than in the previous DSA. 8 These breaches, however, should not be overemphasized as a fall in FDI would likely be linked to lower imports rather than higher borrowing as implicitly assumed in the standard shock scenario. 9 See Staff Report for the 2013 Article IV Consultation, Appendix V “Natural Gas, Public Investment and Debt Sustainability” for discussions on public investment scaling up and risks to the debt sustainability from adverse LNG production and price shocks. 8 emains below 50 percent of GDP throughout, therefore remaining well contained below indicative benchmarks that research has linked to increased probability of debt distress.10 7. The public DSA illustrates that it is essential for debt sustainability to moderate the pace of new borrowing as is planned by the authorities. In other words, the fiscal primary balance will need to be reduced in the medium and long run. For illustrative purposes, the “Fix Primary Balance” scenario11 shows the impact if the primary balance were fixed at values of its peak years 2013-15, i.e. if such a slowing in new borrowing would not take place.12 Debt ratios would continue to rise throughout the projection period, quickly elevating risks to debt sustainability, no matter which assumptions are made on LNG production. IV. CONCLUSIONS 8. In staffs view, while the standard DSA shocks indicate that Mozambique would be in the moderate risk of debt distress category, the public investment program should continue to move forward but with a more moderate pace of public borrowing. Even against the background of a temporarily accelerated borrowing pace for infrastructure projects, the baseline debt trajectories remain below their respective thresholds throughout. Importantly, debt service indicators remain substantially below their thresholds, including under stress tests, and reflect conservative assumptions regarding the grant element for future borrowing.13 The breaches under the stress tests are temporary, would be reversed by the coming on stream of LNG production, and seem manageable against the backdrop of the authorities’ strong track record of prudent economic management. 9. This analysis highlights three important points for debt sustainability. First, it will be important to continue to improve debt management and investment planning capacity to ensure that the increasing share of non-concessional resources in the stock of debt is well managed and that the most deserving public investment projects are selected and yield their desired payoff. Second, it will be important for the authorities after 2013 to moderate the pace of new borrowing to maintain debt sustainability, in line with their commitments. Third, it is becoming more important—including from a debt sustainability perspective—to ensure that LNG production materializes in order to lock in the beneficial effects on GDP and fiscal revenue. 10 At Mozambique’s CPIA rating, the indicative public debt benchmark signaling higher risk of debt distress lies between 56 and 74 percent for the PV of debt-to-GDP ratio. See IMF, 2012, “Revisiting the Debt Sustainability Framework for Low-Income Countries.” 11 See Figure 2 and Table 4 (lines A2). 12 To provide this illustration, the “Fix Primary Balance” scenario was adapted for this analysis from the standard of fixing the primary balance at 2012, instead fixing the primary balance at its 2013-15 average value in percent of GDP. This change was implemented, because the 2012 primary balance is low compared to those in the near future for two reasons: (i) because of windfall revenues in 2012, and (ii) because major investment projects are only starting. 13 Moreover, these indicators do not account for other buffers, such as comfortable levels of international reserves relative to non-mega project imports. 9 Figure 1. Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2013-2033 1/ a. Debt Accumulation b.PV of debt-to GDP ratio 8 20 90 Rate of Debt 7 Accumulation 80 Grant-equivalent 15 6 financing (% of GDP) 70 Grant element of new borrowing (% right scale) 10 60 5 50 4 5 40 3 0 30 2 20 -5 1 10 0 -10 0 2013 2018 2023 2028 2033 2013 2018 2023 2028 2033 c.PV of debt-to-exports ratio d.PV of debt-to-revenue ratio 300 350 300 250 250 200 200 150 150 100 100 50 50 0 0 2013 2018 2023 2028 2033 2013 2018 2023 2028 2033 e.Debt service-to-exports ratio f.Debt service-to-revenue ratio 25 25 20 20 15 15 10 10 5 5 0 0 2013 2018 2023 2028 2033 2013 2018 2023 2028 2033 Baseline Most extreme shock 1/ Threshold 5% discount rate Sources: Country authorities and IMF staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in 2023. In each case it corresponds to a Combination shock. Table 1.Mozambique: External Debt Sustainability Framework, Baseline Scenario, 2010-2033 1/ (Percent of GDP, unless otherwise indicated) Actual 6/ 6/ Projections Historical Standard Average Deviation 2013-2018 2019-2033 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Average 2023 2033 Average External debt (nominal) 1/ 63.8 48.3 50.7 54.9 64.8 78.0 89.9 109.0 122.5 127.6 106.9 99.2 76.6 55.4 of which: public and publicly guaranteed (PPG) 40.2 32.6 36.3 41.7 44.7 45.9 47.4 47.7 47.1 45.8 39.3 36.9 33.1 30.0 Change in external debt -1.9 -15.6 2.5 4.2 9.8 13.3 11.9 19.0 13.5 5.1 -20.7 -7.7 -17.1 -0.7 Identified net debt-creating flows 0.5 -11.7 -5.8 4.3 11.3 13.5 13.4 22.6 14.7 7.1 -14.3 -10.8 -17.0 0.1 Non-interest current account deficit 10.0 22.8 35.4 14.2 8.9 38.4 39.7 39.3 36.7 44.0 34.2 26.3 15.7 7.1 4.0 8.7 8.1 Deficit in balance of goods and services 17.7 29.7 41.5 43.5 43.3 42.2 37.4 42.2 31.8 24.0 9.3 2.0 -10.5 4.0 Exports 31.2 30.7 29.8 32.7 35.7 39.0 39.4 40.1 43.4 41.4 44.5 48.7 53.7 44.1 Imports 48.9 60.4 71.4 76.3 79.0 81.2 76.8 82.4 75.2 65.4 53.7 50.7 43.2 48.1 Net current transfers (negative = inflow) -6.9 -6.9 -5.3 -6.6 1.2 -3.8 -3.6 -3.0 -2.6 -2.2 -1.9 -1.6 -1.2 -1.0 -0.7 -0.3 -0.7 of which: official -6.3 -6.3 -5.0 -3.5 -3.4 -2.9 -2.4 -2.0 -1.7 -1.4 -1.0 -0.8 -0.5 -0.1 Other current account flows (negative = net inflow) -0.7 0.0 -0.8 -1.4 0.0 0.1 1.9 4.1 4.4 3.9 7.7 6.1 15.2 5.0 Net FDI (negative = inflow) -14.0 -20.7 -36.6 -10.7 10.8 -32.2 -25.8 -23.1 -20.8 -18.9 -17.0 -15.1 -11.8 -10.1 -8.0 -6.3 -8.3 Endogenous debt dynamics 2/ 4.5 -13.9 -4.6 -1.9 -2.6 -2.7 -2.5 -2.6 -2.5 -4.2 -18.2 -7.9 -13.1 -2.4 Contribution from nominal interest rate 1.7 1.5 1.0 1.6 1.7 2.2 3.1 3.9 5.3 6.3 6.0 4.8 3.2 1.0 Contribution from real GDP growth -4.9 -3.5 -3.2 -3.4 -4.3 -4.9 -5.6 -6.4 -7.8 -10.5 -24.2 -12.7 -16.3 -3.4 Contribution from price and exchange rate changes 7.7 -11.8 -2.5 … … … … … … … … … … … Residual (3-4) 3/ -2.4 -3.9 8.3 -0.2 -1.5 -0.2 -1.5 -3.6 -1.1 -2.0 -6.5 3.1 0.0 -0.8 of which: exceptional financing -4.3 -5.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 PV of external debt 4/ ... ... 41.4 45.0 54.9 68.7 81.0 100.6 114.9 120.7 101.5 94.5 73.1 53.7 In percent of exports ... ... 138.9 137.6 154.0 175.9 205.4 250.6 264.4 291.6 228.1 194.2 136.1 121.9 PV of PPG external debt ... ... 27.0 31.8 34.9 36.6 38.4 39.3 39.4 39.0 33.8 32.2 29.5 28.4 In percent of exports ... ... 90.6 97.1 97.9 93.7 97.5 97.9 90.8 94.1 76.1 66.2 54.9 64.4 In percent of government revenues ... ... 110.7 121.6 138.9 142.2 146.3 146.4 146.0 146.5 127.5 122.7 105.7 84.9 Debt service-to-exports ratio (in percent) 34.4 19.4 11.0 14.7 14.3 13.4 15.4 15.1 16.9 20.1 28.4 21.6 14.0 5.6 PPG debt service-to-exports ratio (in percent) 1.9 2.0 0.0 3.4 3.8 4.1 4.4 4.7 4.5 4.8 3.7 3.4 3.1 5.4 PPG debt service-to-revenue ratio (in percent) 2.9 2.8 0.0 4.3 5.3 6.2 6.7 7.0 7.2 7.4 6.2 6.3 5.9 7.1 Total gross financing need (Billions of U.S. dollars) 0.6 1.0 0.3 1.6 3.0 3.8 4.4 7.0 6.1 5.6 6.1 3.3 2.1 6.4 10 Non-interest current account deficit that stabilizes debt ratio 11.9 38.4 32.9 34.2 29.9 26.0 24.8 25.0 20.7 21.2 36.4 14.8 21.1 9.4 Key macroeconomic assumptions Real GDP growth (in percent) 7.1 7.3 7.4 7.4 0.8 7.0 8.5 8.5 8.0 8.0 8.0 9.7 24.4 13.9 8.0 21.6 6.6 8.9 GDP deflator in US dollar terms (change in percent) -10.5 22.7 5.5 5.6 9.7 -3.7 0.4 3.5 3.5 3.4 3.5 3.5 3.5 2.9 1.8 2.4 2.4 2.6 Effective interest rate (percent) 5/ 2.4 3.0 2.4 3.1 1.0 3.2 3.4 3.8 4.4 4.8 5.4 5.9 6.1 5.3 4.2 4.2 1.9 3.5 Growth of exports of G&S (US dollar terms, in percent) 8.0 29.7 9.9 14.8 14.3 13.0 18.8 22.9 12.9 13.7 20.9 8.2 38.3 28.3 17.0 38.4 6.7 12.2 Growth of imports of G&S (US dollar terms, in percent) 3.9 62.8 33.8 18.6 19.1 10.1 12.8 15.5 5.7 19.7 2.1 -1.3 5.7 10.6 11.0 13.7 8.9 8.4 Grant element of new public sector borrowing (in percent) ... ... ... ... ... 18.3 15.3 12.9 10.5 8.8 5.6 4.0 3.0 2.1 11.9 0.0 -5.8 -1.3 Government revenues (excluding grants, in percent of GDP) 20.5 22.2 24.4 26.1 25.1 25.7 26.3 26.9 27.0 26.6 26.5 26.2 27.9 33.5 30.4 Aid flows (in Billions of US dollars) 7/ 0.9 1.0 0.8 1.1 1.1 1.0 1.0 0.9 0.8 0.8 0.7 0.7 0.6 0.3 of which: Grants 0.9 1.0 0.8 0.7 0.8 0.7 0.7 0.6 0.6 0.5 0.5 0.5 0.4 0.2 of which: Concessional loans 0.0 0.0 0.0 0.4 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.1 Grant-equivalent financing (in percent of GDP) 8/ ... ... ... 6.4 6.0 4.9 4.0 3.3 2.6 2.1 1.5 1.2 0.7 0.0 0.6 Grant-equivalent financing (in percent of external financing) 8/ ... ... ... 51.9 47.1 43.6 39.1 36.7 34.0 29.4 26.2 23.1 16.4 -1.0 11.7 Memorandum items: Nominal GDP (Billions of US dollars) 9.5 12.6 14.2 14.7 16.0 17.9 20.1 22.4 25.0 28.4 36.6 42.9 57.1 129.6 Nominal dollar GDP growth -4.2 31.7 13.3 3.0 9.0 12.3 11.8 11.7 11.7 13.5 28.7 17.3 9.9 24.6 9.2 11.8 PV of PPG external debt (in Billions of US dollars) 3.7 4.5 5.5 6.5 7.6 8.7 9.8 11.0 12.3 13.6 16.6 36.3 (PVt-PVt-1)/GDPt-1 (in percent) 5.8 6.8 6.4 6.2 5.4 4.7 4.7 4.6 3.7 5.9 3.4 2.0 2.9 Gross workers' remittances (Billions of US dollars) … … … … … … … … … … … … … … PV of PPG external debt (in percent of GDP + remittances) ... ... 27.0 31.8 34.9 36.6 38.4 39.3 39.4 39.0 33.8 32.2 29.5 28.4 PV of PPG external debt (in percent of exports + remittances) ... ... 90.6 97.1 97.9 93.7 97.5 97.9 90.8 94.1 76.1 66.2 54.9 64.4 Debt service of PPG external debt (in percent of exports + remittanc ... ... 0.0 3.4 3.8 4.1 4.4 4.7 4.5 4.8 3.7 3.4 3.1 5.4 Sources: Country authorities; and staff estimates and projections. 0 1/ Includes both public and private sector external debt. 2/ Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Assumes that PV of private sector debt is equivalent to its face value. 5/ Current-year interest payments divided by previous period debt stock. 6/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. 7/ Defined as grants, concessional loans, and debt relief. 8/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 11 Table 2.Mozambique: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2013-2033 (In percent) Projections 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2033 PV of debt-to GDP ratio Baseline 32 35 37 38 39 39 39 34 32 33 29 28 A. Alternative Scenarios A1. 5 percent discount rate 1/ 26 28 30 31 32 33 32 28 27 28 25 25 A2. New public sector loans on less favorable terms in 2013-2033 2/ 32 37 40 44 46 47 47 41 40 42 37 40 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 32 35 38 39 40 40 40 35 33 34 30 29 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 32 40 54 54 54 53 51 43 40 40 35 29 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 32 36 41 43 44 44 43 38 36 37 33 31 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 32 59 81 79 77 74 70 59 53 52 44 31 B5. Combination of B1-B4 using one-half standard deviation shocks 32 57 85 83 81 78 74 62 56 55 47 33 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 32 49 52 54 55 56 55 48 45 46 41 40 PV of debt-to-exports ratio Baseline 97 98 94 97 98 91 94 76 66 69 55 64 A. Alternative Scenarios A1. 5 percent discount rate 1/ 73 72 78 81 75 75 76 61 53 55 45 51 A2. New public sector loans on less favorable terms in 2013-2033 2/ 97 103 103 111 114 108 113 93 82 86 70 92 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 97 96 93 96 97 90 93 75 65 67 54 63 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 97 133 200 199 194 176 178 141 120 121 94 96 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 97 96 93 96 97 90 93 75 65 67 54 63 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 97 166 207 200 191 170 169 132 109 108 82 70 B5. Combination of B1-B4 using one-half standard deviation shocks 97 175 261 253 241 215 214 167 138 137 104 89 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 97 96 93 96 97 90 93 75 65 67 54 63 12 Table 2.Mozambique: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2013-2033 (In percent) Projections 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2033 0 0 Debt service-to-exports ratio Baseline 3 4 4 4 5 5 5 4 3 4 3 5 A. Alternative Scenarios A1. 5 percent discount rate 1/ 3 4 4 4 5 5 5 4 3 4 3 5 A2. New public sector loans on less favorable terms in 2013-2033 2/ 3 4 4 4 5 4 5 4 4 5 4 8 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 3 4 4 4 5 5 5 4 3 4 3 5 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 3 4 6 8 8 8 8 6 6 8 6 9 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 3 4 4 4 5 5 5 4 3 4 3 5 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 3 4 6 8 8 7 7 5 6 8 6 7 B5. Combination of B1-B4 using one-half standard deviation shocks 3 4 7 10 10 9 9 7 8 10 7 9 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 3 4 4 4 5 5 5 4 3 4 3 5 Debt service-to-revenue ratio Baseline 4 5 6 7 7 7 7 6 6 7 6 7 A. Alternative Scenarios A1. 5 percent discount rate 1/ 4 5 6 7 7 7 7 6 6 7 6 7 A2. New public sector loans on less favorable terms in 2013-2033 2/ 4 5 6 7 7 7 7 6 7 8 7 10 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2014-2015 4 5 6 7 7 7 8 6 6 7 6 7 B2. Export value growth at historical average minus one standard deviation in 2014-2015 3/ 4 5 7 9 9 9 9 7 8 9 8 8 B3. US dollar GDP deflator at historical average minus one standard deviation in 2014-2015 4 6 7 8 8 8 8 7 7 8 7 8 B4. Net non-debt creating flows at historical average minus one standard deviation in 2014-2015 4/ 4 5 9 12 11 11 11 9 11 14 11 9 B5. Combination of B1-B4 using one-half standard deviation shocks 4 5 9 12 12 12 12 10 12 14 12 10 B6. One-time 30 percent nominal depreciation relative to the baseline in 2014 5/ 4 8 9 10 10 10 11 9 9 9 8 10 Memorandum item: Grant element assumed on residual financing (i.e., financing required above baseline) 6/ -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 -4 Sources: Country authorities; and staff estimates and projections. 1/ A discount rate of 5 percent is applied to the calcualtions of NPV of debt (discount rate is 3 percent in the baseline.) 2/ Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline. 3/ Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels). 4/ Includes official and private transfers and FDI. 5/ Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent. 6/ Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2. 13 Figure 2. Indicators of Public Debt Under Alternative Scenarios, 2013-2033 1/ Baseline Fix Primary Balance at avg. 2013-15 level Most extreme shock One-time depreciation Historical scenario 80 PV of Debt-to-GDP Ratio 70 60 50 40 30 20 10 0 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 250 PV of Debt-to-Revenue Ratio 2/ 200 150 100 50 0 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 14 Debt Service-to-Revenue Ratio 12 10 8 6 4 2 0 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 Sources: Country authorities and IMF staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in 2023. 2/ Revenues are defined inclusive of grants. Table 3.Mozambique: Public Sector Debt Sustainability Framework, Baseline Scenario, 2010-2033 (Percent of GDP, unless otherwise indicated) hide hide hide hide Actual Projections 5/ 5/ Standard 2013-18 2019-33 Average 2010 2011 2012 Deviation 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Average 2023 2033 Average Public sector debt 1/ 46.1 39.3 42.2 47.1 50.2 51.3 52.5 52.9 52.4 51.2 43.3 40.3 40.7 35.4 30.8 of which: foreign-currency denominated 40.2 32.6 36.3 41.7 44.7 45.9 47.4 47.7 47.1 45.8 39.3 36.9 37.6 33.1 30.0 Change in public sector debt 0.5 -6.8 2.9 4.9 3.2 1.1 1.2 0.4 -0.5 -1.2 -7.8 -3.0 0.4 -5.3 -0.9 Identified debt-creating flows 3.4 -8.1 3.5 3.9 2.3 0.8 1.1 0.2 -0.5 -1.3 -8.4 -3.7 -0.3 -6.0 -1.1 Primary deficit 3.1 3.3 3.2 3.0 0.9 4.7 5.9 5.2 4.8 4.2 3.4 3.3 1.7 1.3 1.0 4.7 0.9 0.5 0.9 Revenue and grants 29.5 30.0 29.8 31.2 29.9 29.7 29.6 29.6 29.4 28.5 27.9 27.3 27.7 28.6 33.6 Of which: grants 9.0 7.8 5.4 5.1 4.8 4.0 3.3 2.8 2.3 1.9 1.4 1.1 1.0 0.7 0.2 Primary (noninterest) expenditure 32.5 33.4 33.0 35.9 35.8 34.9 34.4 33.8 32.8 31.8 29.6 28.6 28.7 29.5 34.1 Automatic debt dynamics 0.5 -11.4 0.3 -0.8 -3.6 -4.5 -3.8 -4.0 -3.9 -4.6 -10.1 -5.0 -1.4 -6.9 -1.6 Contribution from interest rate/growth differential 2.0 -9.5 -3.2 -0.5 -2.8 -4.1 -4.0 -3.9 -3.9 -4.6 -10.1 -5.1 -1.4 -6.9 -1.6 Of which: contribution from average real interest rate 5.0 -6.3 -0.5 2.3 0.9 -0.2 -0.2 0.0 0.0 0.0 0.0 0.2 0.3 0.3 0.3 Of which: contribution from real GDP growth -3.0 -3.1 -2.7 -2.8 -3.7 -3.9 -3.8 -3.9 -3.9 -4.6 -10.0 -5.3 -1.7 -7.2 -2.0 Contribution from real exchange rate depreciation -1.5 -1.9 3.5 -0.3 -0.8 -0.3 0.2 0.0 0.0 0.0 0.0 0.2 0.0 ... ... Other identified debt-creating flows -0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Privatization receipts (negative) -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Debt relief (HIPC and other) -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other (specify, 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 0.0 0.0 0.0 0.0 Residual, including asset changes -2.9 1.3 -0.6 1.0 0.9 0.3 0.1 0.2 0.0 0.1 0.6 0.6 0.8 0.7 0.3 14 Other Sustainability Indicators PV of public sector debt ... ... 32.9 37.2 40.4 41.9 43.5 44.5 44.7 44.3 37.9 35.6 36.2 31.8 29.2 Of which: foreign-currency denominated ... ... 27.0 31.8 34.9 36.6 38.4 39.3 39.4 39.0 33.8 32.2 33.2 29.5 28.4 Of which: external ... ... 27.0 31.8 34.9 36.6 38.4 39.3 39.4 39.0 33.8 32.2 33.2 29.5 28.4 PV of contingent liabilities (not included in public sector debt) ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... Gross financing need 2/ 4.5 4.7 3.9 6.7 8.0 7.6 7.4 6.8 6.2 6.0 3.9 3.4 3.2 2.9 3.0 PV of public sector debt-to-revenue and grants ratio (percent) … … 110.2 119.3 135.2 141.2 147.1 150.3 152.3 155.3 135.7 130.1 130.9 111.3 86.8 PV of public sector debt-to-revenue ratio (percent) … … 134.8 142.3 160.8 163.1 165.6 165.7 165.5 166.5 142.8 135.5 135.6 114.2 87.2 Of which: external 3/ … … 110.7 121.6 138.9 142.2 146.3 146.4 146.0 146.5 127.5 122.7 124.2 105.7 84.9 Debt service-to-revenue and grants ratio (percent) 4/ 4.8 4.6 2.4 6.4 7.1 8.0 8.6 9.0 9.3 9.6 8.0 7.8 8.0 7.0 7.4 Debt service-to-revenue ratio (percent) 4/ 7.0 6.3 2.9 7.6 8.4 9.2 9.7 9.9 10.2 10.3 8.4 8.1 8.3 7.2 7.5 Primary deficit that stabilizes the debt-to-GDP ratio 2.6 10.1 0.3 -0.1 2.7 4.2 3.7 3.8 3.9 4.5 9.5 4.3 0.6 6.2 1.4 Key macroeconomic and fiscal assumptions Real GDP growth (percent) 7.1 7.3 7.4 7.4 0.8 7.0 8.5 8.5 8.0 8.0 8.0 9.7 24.4 13.9 4.4 8.0 21.6 6.6 8.9 Average nominal interest rate on forex debt (percent) 0.6 0.9 0.0 0.6 0.4 1.2 1.5 1.7 1.9 2.0 2.1 2.3 2.4 2.5 2.6 1.7 2.7 3.4 2.9 Average real interest rate on domestic debt (percent) 4.6 5.3 8.6 6.1 7.6 9.5 10.4 10.1 10.5 11.3 11.0 10.8 8.4 8.4 8.4 10.5 8.4 8.4 8.6 Real exchange rate depreciation (percent, + indicates depreciatio -3.4 -6.2 11.9 1.0 12.2 -1.0 ... ... ... ... ... ... ... ... ... ... ... ... ... Inflation rate (GDP deflator, percent) 10.5 8.1 3.0 7.2 2.4 5.0 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.5 5.6 5.6 5.6 Growth of real primary spending (deflated by GDP deflator, perce 0.1 0.1 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.1 0.0 0.1 0.2 0.1 0.0 0.1 0.3 0.1 0.1 Grant element of new external borrowing (percent) ... ... ... … … 18.3 15.3 12.9 10.5 8.8 5.6 4.0 3.0 2.1 1.2 11.9 0.0 -5.8 -1.3 Sources: Country authorities; and staff estimates and projections. 1/ Covers nonfinancial public sector. Gross debt is used. 2/ 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. 3/ Revenues excluding grants. 4/ Debt service is defined as the sum of interest and amortization of medium and long-term debt. 5/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. 15 Table 4.Mozambique: Sensitivity Analysis for Key Indicators of Public Debt 2013-2033 hide hide hide Projections 2013 2014 2015 2016 2017 2018 2019 2020 2021 2023 2033 PV of Debt-to-GDP Ratio Baseline 37 40 42 44 45 45 44 38 36 32 29 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 37 38 38 39 39 40 40 41 43 45 51 A2. Primary balance is unchanged from 2013-15 average 37 40 42 44 46 47 48 44 45 46 70 A3. Permanently lower GDP growth 1/ 37 41 42 44 45 46 45 39 37 34 37 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2014-2015 37 42 45 47 49 50 50 43 41 38 41 B2. Primary balance is at historical average minus one standard deviations in 2014-2015 37 39 39 41 42 43 42 36 34 31 29 B3. Combination of B1-B2 using one half standard deviation shocks 37 39 39 42 44 45 45 39 38 35 38 B4. One-time 30 percent real depreciation in 2014 37 53 53 54 54 54 53 45 42 38 38 B5. 10 percent of GDP increase in other debt-creating flows in 2014 37 49 50 51 51 51 50 42 40 35 31 PV of Debt-to-Revenue Ratio 2/ Baseline 119 135 141 147 150 152 155 136 130 111 87 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 119 128 129 131 133 135 141 147 154 157 152 A2. Primary balance is unchanged from 2013-15 average 119 134 140 147 154 161 170 159 164 162 208 A3. Permanently lower GDP growth 1/ 119 135 142 148 152 155 159 140 135 118 109 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2014-2015 119 138 150 158 164 168 174 154 150 132 122 B2. Primary balance is at historical average minus one standard deviations in 2014-2015 119 129 132 139 142 145 148 130 125 108 85 B3. Combination of B1-B2 using one half standard deviation shocks 119 129 132 141 148 153 158 141 137 122 112 B4. One-time 30 percent real depreciation in 2014 119 178 179 182 182 183 185 161 155 133 112 B5. 10 percent of GDP increase in other debt-creating flows in 2014 119 165 168 172 173 174 175 152 145 122 92 Debt Service-to-Revenue Ratio 2/ Baseline 6 7 8 9 9 9 10 8 8 7 7 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 6 7 8 8 9 9 10 9 10 9 11 A2. Primary balance is unchanged from 2013-15 average 6 7 8 9 9 9 10 8 8 8 12 A3. Permanently lower GDP growth 1/ 6 7 8 9 9 9 10 8 8 7 8 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2014-2015 6 7 8 9 9 10 10 9 8 8 9 B2. Primary balance is at historical average minus one standard deviations in 2014-2015 6 7 8 8 9 9 9 8 8 7 7 B3. Combination of B1-B2 using one half standard deviation shocks 6 7 8 8 9 9 10 8 8 7 8 B4. One-time 30 percent real depreciation in 2014 6 8 10 11 12 13 13 11 11 10 12 B5. 10 percent of GDP increase in other debt-creating flows in 2014 6 7 9 9 10 10 10 8 8 8 8 Sources: Country authorities; and staff estimates and projections. 1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period. 2/ Revenues are defined inclusive of grants.