INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL MONETARY FUND DEMOCRATIC REPUBLIC OF SÃO TOMÉ AND PRÍNCIPE Joint Bank-Fund Debt Sustainability Analysis – 2018 Update1 Prepared jointly by International Development Association and the International Monetary Fund and staffs in collaboration with the authorities of São Tomé and Príncipe. Approved by Paloma Anos-Casero (IDA) and David Owen and Kevin Fletcher (IMF) São Tomé and Príncipe is classified as being in debt distress according to this joint World Bank-IMF low-income country debt sustainability analysis (DSA). This assessment has changed from the previous DSA completed in December 2017 (high risk of external debt distress) due to the prolonged negotiations on rescheduling external arrears. Nonetheless, São Tomé and Príncipe’s debt ratios have improved since the previous DSA. Specifically, the ratio of the present value of public and publicly- guaranteed (PPG) external debt to GDP no longer exceeds its threshold under the baseline scenario, due to lower-than-expected loan disbursements in 2017, an appreciation of the euro vis-à-vis the U.S. dollar, and higher-than-expected GDP deflator growth. As in the previous DSA, the debt service ratios stay below their respective thresholds under almost all scenarios. Nevertheless, the ratios of the present value of debt to exports and to revenue still exceed their respective thresholds under the baseline scenario early in the projection period, though they decline over time. This DSA underscores the importance of lowering all PPG external debt indicators below their thresholds by continuing fiscal consolidation, eschewing non-concessional loans, promoting growth, and expanding the export base. 1 The DSA update was prepared by World Bank and IMF staffs in collaboration with the authorities of São Tomé and Príncipe. The analysis updates the previous Joint DSA dated December 11, 2017 (IMF Country Report No. 17/382). The DSA follows the IMF and World Bank Staff Guidance Note on the Application of the Joint Fund-Bank Debt Sustainability Framework for Low-Income Countries (November 5, 2013). The DSA uses the unified discount rate of 5 percent set out in Decision No. 15462 (October 11, 2013). For the purpose of defining debt burden thresholds under the Debt Sustainability Framework (DSF), São Tomé and Príncipe is classified as a weak policy performer. São Tomé and Príncipe’s average rating on the World Bank’s Country Policy and Institutional Assessment (CPIA) for the period 2014-16 is 3.07. The corresponding indicative thresholds are: 30 percent for the NPV of debt-to-GDP ratio; 100 percent for the net present value (NPV) of debt-to-exports ratio; 200 percent for NPV of debt-to-revenue ratio; 15 percent for the debt service-to-exports ratio; and 18 percent for the debt service-to-revenue ratio. BACKGROUND 1. This debt sustainability analysis (DSA) updates the DSA for São Tomé and Príncipe that was completed on December 11, 2017 (IMF Country Report No. 17/382). That DSA concluded that São Tomé and Príncipe stood at high risk of debt distress. 2. Total public and publicly guaranteed (PPG) external debt decreased from 52.5 percent of GDP in 2016 to 45.7 percent of GDP in 2017 (Text Text Table 1. São Tomé and Príncipe: Table 1).2 PPG external debt at end-2017 was also lower Public Debt Stock than the previous projection of 49.9 percent of GDP. This Million Share of GDP (As of end 2017) decline was mainly driven by lower-than-expected USD (%) disbursements due to absorption constraints (Text Table Total PPG debt 267.6 64.4% 2), an appreciation of the euro vis-à-vis the U.S. dollar, Total PPG external debt 189.8 45.7% and higher-than-expected GDP deflator growth. Multilateral Creditors 45.3 10.9% Meanwhile, preliminary data indicate that the stock of IDA 11.9 2.9% domestic debt also decreased, bringing total PPG debt BADEA 12.0 2.9% from 67.6 percent of GDP in 2016 to 64.4 percent of FIDA 5.8 1.4% AfDB 6.9 1.7% GDP in 2017, mainly due to the positive price differential IMF 6.7 1.6% between imported and pump oil prices, which was used OPEC 2.0 0.5% to reduce the debt owed to the oil importing company, Bilateral Creditors 131.9 31.7% ENCO. Domestic debt includes domestic arrears and Portugal 59.6 14.3% government securities issued in the domestic market Angola 55.6 13.4% 1 China 10.0 2.4% (around 4.2 percent of GDP). 1 Brazil 4.3 1.0% 3. Looking forward, the 2018 budget foresees Equatorial Guinea 1.7 0.4% Belgium 0.8 0.2% $11.0 million (2.4 percent of GDP) in loan External suppliers' debt 12.5 3.0% disbursements (Text Table 2). A large share of this is Domestic debt2 77.8 18.7% expected to come from the AfDB. Already contracted Domestic arrears 60.3 14.5% debt that was not disbursed in 2017 and is not expected to ENCO (oil importing company) 38.5 9.3% be disbursed in 2018 is projected to be disbursed in 2019- CST (telecom) 5.8 1.4% EMAE (water and electricity) 2.6 0.6% 21. Other suppliers 13.4 3.2% Domestic debt (other) 17.5 4.2% 4. In terms of coverage, the DSA includes only Memorandum items: 0.0% debt contracted or guaranteed by the central Pre-HIPC legacy arrears 54.9 13.2% government. State-owned enterprises (SOEs) do not Italy1 24.3 5.8% have external debt. Angola 30.6 7.4% Arrears from EMAE to ENCO2 66.6 16.0% 5. São Tomé and Príncipe continues to have Sources: Country authorities and IMF staff estimates 1 Commercial debt guaranteed by the government. post-HIPC arrears with bilateral creditors. These 2 Preliminary data arrears are to Angola (US$4.8 million), Brazil (US$4.3 2 These debt numbers exclude pre-HIPC initiative arrears equal to 14.0 percent of GDP (on the assumption of debt forgiveness) and a disputed loan from Nigeria equal to 7.6 percent of GDP. 2 million), and Equatorial Guinea (US$1.7 million). In total, they equal 2.8 percent of GDP. In addition, a loan from Nigeria equal to 7.6 percent of GDP is excluded from the debt stock, as it is under dispute according to information provided by the São Tomé and Príncipe authorities. Text Table 3 provides more details on the arrears and disputed debt. Text Table 2. Loan Disbursements 1 2016 Proj. 2017 2017 Proj. 2018 Proj. 2019-21 Kuwait 0.0 1.7 0.0 1.7 14.7 EIB 0.0 0.0 0.0 0.0 12.7 AfDB 0.9 7.6 2.2 4.5 13.4 Portugal 2.7 2.2 0.0 0.0 6.8 BADEA 1.4 1.2 0.3 1.2 6.0 IMF 1.8 1.8 1.8 1.8 0.0 Angola 4.5 4.5 4.5 0.0 0.0 IFAD 0.0 1.9 0.0 1.8 0.0 Sum 11.3 20.9 8.8 11.0 53.6 Percent of GDP 3.2 5.3 1.9 2.4 3.1 1 Projection in the December 2017 DSA. Text Table 3. Arrears and Disputed Debt (As of end-December 2017) Type Description DSA Treatment Pre-HIPC legacy arrears São Tomé and Príncipe has pre-HIPC legacy arrears to Angola Not included in the DSA. (14.0 percent of GDP) ($30.6 million) and Italy ($24.3 million), in total $54.9 million. São Tomé and Príncipe is making best efforts to reach an agreement consistent with the representative Paris Club agreement. In 2017 São Tomé and Príncipe was able to secure relief from pre-HIPC legacy arrears to China of $18.4 million. Post-HIPC bilateral São Tomé and Príncipe has post-HIPC arrears to Angola ($4.8 Included in the DSA. arrears million), Brazil ($4.3 million), and Equatorial Guinea ($1.7 million), (2.8 percent of GDP) in total $10.8 million. The government has actively sought debt rescheduling agreements with Angola and Equatorial Guinea through correspondence and high-level meetings. However, responses are pending from these two countries on continuing the negotiations. These arrears are the result of weak debt management, and staff assesses that São Tomé and Príncipe has the capacity to repay them over time. Domestic arrears São Tomé and Príncipe has domestic arrears to the oil-company Included in the DSA. (14.5 percent of GDP) ENCO ($38.5 million), the telecom company CST ($5.8 million), and the water and electricity company EMAE ($2.6 million). There are 3 also arrears to other suppliers amounting to $13.4 million. In total, the domestic arrears amount to $60.3 million. The government has a domestic arrears clearance plan. Disputed debt A loan from Nigeria in the amount of $30 million was excluded from Not included in the DSA. (7.6 percent of GDP) the debt stock as there is no signed contract with repayment conditions between the two countries. Nonetheless, the authorities acknowledged the receipt of the funds, which were spent as evidenced by budget documents. This loan was extended as advances on oil revenues in the context of the joint development zone between these two countries, but this project has stalled. According to São Tomé and Príncipe authorities, this loan is under dispute since it should only be repaid in case revenues from oil are materialized. The authorities are still waiting for responses from Nigeria on discussing the disputed loan. 6. São Tomé and Príncipe continues to engage actively in rescheduling negotiations with these creditors. An agreement with the Brazilian government was reached, pending ratification by the Brazilian Senate. The government has actively sought debt rescheduling agreements with Angola and Equatorial Guinea through correspondence and high-level meetings. However, responses are pending from these two countries on continuing the negotiations. Similarly, Nigeria is yet to respond to the authorities’ request for discussing the disputed loan. MACROECONOMIC ASSUMPTIONS 7. The macroeconomic assumptions have changed modestly from the previous DSA. The current DSA assumes lower long-run real GDP growth (4.9 percent instead of 5.4) due to uncertainty about the implementation of large projects. At the same time, the GDP deflator has been raised in line with recently released deflator series by the authorities. In addition, FDI and the current account deficit3 have been raised in line with the recently heightened interest in oil exploration (Text Table 4), as evidenced by the large oil signature bonus and the announcement of tenders on new exploration blocks. 3 Higher FDI inflows will lead to more imports of investment goods, and thus a higher current account deficit. 4 Text Table 4. Macroeconomic Assumptions Historical Forecasts 2017 2018 Last 4 2017 2018 DSA1 DSA1 years DSA1 DSA 2007-16 2008-17 2014-17 2017-37 2018-38 Real GDP growth (percent) 4.3 4.8 4.6 5.4 4.9 Inflation (percent average) 13.2 11.9 5.8 3.4 3.4 GDP deflator (percent) 5.6 5.8 2.4 2.2 2.9 Domestic primary balance (percent of GDP) -4.5 -3.9 -3.1 -1.3 -1.0 Primary balance (percent of GDP) -9.3 -8.7 -5.5 -2.4 -1.6 Grants (percent of GDP) 17.3 16.7 11.8 7.6 7.4 New borrowing (percent of GDP) 7.6 7.5 5.5 2.3 2.3 FDI (percent of GDP) 15.7 13.0 7.8 3.8 11.9 USD export growth (percent) 21.9 24.6 24.3 6.6 6.2 USD import growth (percent) 9.6 10.3 3.3 5.5 6.3 Current account balance, excluding grants (percent of GDP) -38.7 -36.3 -24.2 -13.2 -17.1 Current account balance, including grants (percent of GDP) -21.4 -19.6 -12.4 -5.6 -9.7 1 IMF Country Report No. 17/382 EXTERNAL DEBT SUSTAINABILITY 8. Under the baseline scenario, the present value (PV) of debt to exports and the PV of debt to revenue both breach their indicative thresholds, but debt service ratios remain below their thresholds under almost all scenarios (Figure 1).4 These breaches also occurred in the previous DSA. However, the PV of PPG debt to GDP no longer breaches its threshold. This improvement from the previous DSA is driven by lower-than-expected disbursements in 2017, an appreciation of the euro vis-à-vis the U.S. dollar, and higher-than-expected GDP deflator growth. Like in the previous DSA, the debt service ratios continue to stay below their thresholds under all scenarios, except the debt-service-to-exports ratio under the historical scenario. All indicators improve over time under the baseline and the most extreme scenarios as a result of economic growth, fiscal consolidation, slower debt accumulation, expansion of the export base, and constrained imports. 9. Under stress tests with the most extreme shock, all external debt stock indicators breach their respective thresholds early in the projection period, albeit with a declining trend (Figure 1, solid black lines). As in the previous DSA, export-based indicators are most sensitive to exports shocks, while the remaining indicators are most sensitive to a one-time 30-percent depreciation shock. This highlights the need to diversify the export base and maintain the credibility of the exchange rate peg. 4 São Tomé and Príncipe’s quality of policies and institutions, as measured by the average World Bank’s Country Policy and Institutional Assessment (CPIA) for the period 2014-16, is 3.07 (weak performer). The corresponding indicative thresholds are: 30 percent for the net present value (NPV) of debt-to-GDP ratio; 100 percent for the NPV of debt-to-export ratio; 200 percent for NPV of debt-to-revenue ratio; 15 percent for the debt service-to-exports ratio; and 18 percent for the debt service-to-revenue ratio. 5 PUBLIC DEBT SUSTAINABILITY 10. Unlike the previous DSA, the PV of total public debt to GDP ratio no longer breaches the benchmark under the baseline and fixed primary balance scenarios (Figure 2). The baseline scenario has improved for the reasons discussed above. The fixed primary balance scenario has also improved because a primary surplus of 0.6 percent of GDP is expected for 2018, in contrast with the primary deficit in 2017 of 1.0 percent of GDP, on account of a signing bonus for oil exploration. As is the case in the previous DSA, public debt dynamics appear unsustainable under the historical scenario, underscoring the importance of continued fiscal consolidation and fostering private-sector led growth through structural reforms. The PV of debt to revenue ratio is most sensitive to a deterioration of one standard deviation in the historical primary deficit. The other two indicators are most sensitive to a one-time 30-percent depreciation. DEBT DISTRESS QUALIFICATION AND CONCLUSIONS 11. São Tomé and Príncipe’s classification has been updated to stand in debt distress. This change was not made at the time of the previous DSA because the regularization of São Tomé and Príncipe’s post-HIPC sovereign arrears (to Angola, Brazil, and Equatorial Guinea, totaling around 2.8 percent of GDP) was considered imminent. As these arrears are still not regularized, staff now views the appropriate classification as being in debt distress. São Tomé and Príncipe continues to actively seek rescheduling agreements. 12. Absent these arrears, São Tomé and Príncipe would be classified at high risk of debt distress. This reflects the threshold breaches under the baseline scenario. Two other aggravating factors are that (i) a large part of the government’s domestic arrears, namely those to ENCO, are denominated in U.S. dollars and ENCO is majority foreign-owned and (ii) there are considerable contingent liabilities stemming from the state-owned electricity enterprise EMAE, which are not considered in this DSA, as it focuses only on the central government. However, the World Bank is providing technical assistance to São Tomé and Príncipe to improve its debt and SOE management, which should help reduce the incidence of external and domestic arrears. Fiscal consolidation, prudence in contracting new debt, and continued diversification of the economy and export base are needed to improve debt indicators over the medium term. 13. These findings underscore the importance of maintaining strong policies in order to reduce debt-related risks. Such policies include continuing fiscal consolidation, eschewing non- concessional loans, promoting growth, and expanding the export base. 14. Authorities’ views: In response to the staff’s presentation of this analysis in March-April 2018, the authorities broadly agreed with the assessment. They understood that the main reason for being classified as being in debt distress is the existence of long-standing external arrears. Moreover, they reiterated their commitment to borrow at a measured pace, to strive for debt sustainability, and to actively seek restructuring of the current arrears. 6 Figure 1. São Tomé and Príncipe: Indicators of Public and Publicly Gu aranteed External Debt Under Alternative Scenarios, 2018–38 a. Debt Accumulation b.PV of debt-to GDP ratio 16 40 80 14 35 70 12 30 60 10 25 50 8 20 40 6 15 30 4 10 2 5 20 0 0 10 2018 2023 2028 2033 2038 0 Rate of Debt Accumulation 2018 2023 2028 2033 2038 Grant-equivalent financing (% of GDP) Grant element of new borrowing (% right scale) c.PV of debt-to-exports ratio d.PV of debt-to-revenue ratio 450 400 400 350 350 300 300 250 250 200 200 150 150 100 100 50 50 0 0 2018 2023 2028 2033 2038 2018 2023 2028 2033 2038 e.Debt service-to-exports ratio f.Debt service-to-revenue ratio 20 20 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 2018 2023 2028 2033 2038 2018 2023 2028 2033 2038 Baseline Historical scenario Most extreme shock 1/ Threshold Sources: São Tomé and Príncipe’s authorities, and IMF staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio on or before 2028. The most extreme shocks are a one-time 30-percent nominal depreciation in Figures a, b, d, and f; and a one standard deviation decrease in the historical export value growth in the case of c and e. 7 Figure 2. São Tomé and Príncipe: Indicators of Public Debt Under Alternative Scenarios, 2018–38 Most extreme shock One-time depreciation Baseline Fix Primary Balance Most extreme shock 1/ Historical scenario Public debt benchmark 70 60 PV of Debt-to-GDP Ratio 50 40 30 20 10 0 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 300 PV of Debt-to-Revenue Ratio 2/ 250 200 150 100 50 0 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 14 Debt Service-to-Revenue Ratio 2/ 12 10 8 6 4 2 0 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio on or before 2028. 2/ Revenues are defined inclusive of grants. 8 Table 1. São Tomé and Príncipe: External Debt Sustainability Framework, Baseline Scenario, 2018–38 (Percent of GDP, unless otherwise indicated) 6/ 6/ Actual Historical Standard Projections Average Deviation 2018-2023 2024-2038 2015 2016 2017 2018 2019 2020 2021 2022 2023 Average 2028 2038 Average External debt (nominal) 1/ 62.8 52.5 45.7 42.1 41.4 40.5 38.8 37.4 36.1 29.9 24.1 of which: public and publicly guaranteed (PPG) 62.8 52.5 45.7 42.1 41.4 40.5 38.8 37.4 36.1 29.9 24.1 Change in external debt 11.5 -10.3 -6.8 -3.5 -0.8 -0.8 -1.7 -1.4 -1.3 -0.9 -0.2 Identified net debt-creating flows 10.3 -6.2 -7.5 -5.5 -3.3 -4.6 -5.1 -4.5 -4.6 -3.3 -3.3 Non-interest current account deficit 12.7 6.2 7.8 19.3 8.8 6.4 9.3 8.1 7.5 8.1 8.1 9.5 10.9 9.8 Deficit in balance of goods and services 31.1 25.7 22.3 22.9 24.0 22.0 19.8 19.0 18.1 16.0 16.3 Exports 28.5 27.3 26.9 23.9 23.5 22.8 22.1 22.1 22.0 20.4 19.0 Imports 59.6 53.0 49.2 46.9 47.5 44.9 42.0 41.0 40.1 36.4 35.3 Net current transfers (negative = inflow) -18.4 -18.9 -15.2 -20.2 3.7 -17.3 -16.0 -15.8 -14.7 -13.7 -12.9 -9.6 -9.4 -9.7 of which: official -12.7 -13.7 -10.6 -13.2 -12.2 -12.2 -11.1 -10.2 -9.3 -5.9 -5.0 Other current account flows (negative = net inflow) 0.0 -0.5 0.8 0.7 1.3 1.9 2.4 2.9 2.9 3.2 4.0 Net FDI (negative = inflow) -8.2 -5.8 -10.6 -13.0 12.0 -10.7 -11.4 -11.4 -11.3 -11.3 -11.4 -11.8 -13.5 -12.2 Endogenous debt dynamics 2/ 5.8 -6.6 -4.8 -1.1 -1.2 -1.4 -1.4 -1.3 -1.3 -1.0 -0.7 Contribution from nominal interest rate 0.3 0.3 0.4 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.5 Contribution from real GDP growth -2.2 -2.3 -1.8 -1.5 -1.7 -1.9 -1.8 -1.8 -1.7 -1.4 -1.2 Contribution from price and exchange rate changes 7.6 -4.5 -3.3 … … … … … … … … Residual (3-4) 3/ 1.2 -4.1 0.7 2.0 2.6 3.8 3.4 3.2 3.3 2.4 3.2 of which: exceptional financing 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/ ... ... 28.4 26.9 26.9 26.8 26.1 25.6 25.1 21.7 17.6 In percent of exports ... ... 105.6 112.6 114.7 117.5 117.9 115.9 114.1 106.5 93.1 PV of PPG external debt ... ... 28.4 26.9 26.9 26.8 26.1 25.6 25.1 21.7 17.6 In percent of exports ... ... 105.6 112.6 114.7 117.5 117.9 115.9 114.1 106.5 93.1 In percent of government revenues ... ... 219.3 195.5 211.9 203.5 189.5 177.1 166.4 127.9 88.1 Debt service-to-exports ratio (in percent) 3.8 3.3 3.1 4.7 5.7 5.8 5.8 5.8 5.9 6.4 7.8 PPG debt service-to-exports ratio (in percent) 3.8 3.3 3.1 4.7 5.7 5.8 5.8 5.8 5.9 6.4 7.8 PPG debt service-to-revenue ratio (in percent) 7.8 6.6 6.4 8.1 10.5 10.0 9.3 8.9 8.6 7.7 7.4 Total gross financing need (Millions of U.S. dollars) 17.7 4.6 -7.4 -15.1 -4.0 -11.0 -16.0 -13.5 -15.0 -10.9 -22.4 Non-interest current account deficit that stabilizes debt ratio 1.2 16.6 14.6 9.9 10.1 9.0 9.2 9.5 9.4 10.4 11.1 Key macroeconomic assumptions Real GDP growth (in percent) 3.8 4.2 3.9 4.8 1.8 4.0 4.5 5.0 5.0 5.0 5.0 4.8 5.0 5.0 5.0 GDP deflator in US dollar terms (change in percent) -12.9 7.8 6.7 5.8 9.5 14.2 7.4 6.3 4.5 2.9 2.1 6.2 2.1 0.0 1.6 Effective interest rate (percent) 5/ 0.6 0.5 0.8 0.8 0.2 1.1 1.2 1.3 1.3 1.4 1.4 1.3 1.6 2.0 1.7 Growth of exports of G&S (US dollar terms, in percent) 1.7 7.4 9.6 24.6 23.4 5.4 10.1 8.5 6.4 7.7 6.7 7.5 5.6 5.6 5.6 Growth of imports of G&S (US dollar terms, in percent) -18.2 -0.2 2.9 10.3 19.1 13.1 13.8 5.4 2.6 5.6 4.7 7.5 5.4 6.0 5.8 Grant element of new public sector borrowing (in percent) ... ... ... ... ... 34.9 34.9 34.9 34.9 34.9 34.9 34.9 34.9 34.9 34.9 Government revenues (excluding grants, in percent of GDP) 14.0 13.6 13.0 13.8 12.7 13.2 13.8 14.5 15.1 17.0 20.0 17.9 Aid flows (in Millions of US dollars) 7/ 71.0 56.9 50.6 70.9 88.7 95.7 88.2 84.1 84.0 82.7 137.3 of which: Grants 36.4 46.9 39.5 59.8 64.0 71.0 71.2 70.3 69.2 61.7 98.2 of which: Concessional loans 34.5 10.1 11.1 11.1 24.7 24.7 17.0 13.8 14.8 21.0 39.1 Grant-equivalent financing (in percent of GDP) 8/ ... ... ... 13.7 13.9 13.6 12.0 10.9 10.0 6.6 5.7 6.5 Grant-equivalent financing (in percent of external financing) 8/ ... ... ... 89.8 81.9 83.2 87.4 89.3 88.5 83.5 81.5 83.0 Memorandum items: Nominal GDP (Millions of US dollars) 315.5 354.2 392.5 466.1 523.1 583.8 640.5 691.7 741.5 1049.6 1956.3 Nominal dollar GDP growth -9.6 12.3 10.8 18.7 12.2 11.6 9.7 8.0 7.2 11.2 7.2 5.0 6.7 PV of PPG external debt (in Millions of US dollars) 118.3 126.3 141.7 157.1 167.9 176.3 185.2 227.3 340.1 (PVt-PVt-1)/GDPt-1 (in percent) 2.1 3.3 3.0 1.8 1.3 1.3 2.1 1.1 0.7 0.9 Gross workers' remittances (Millions of US dollars) 18.1 18.6 18.1 19.1 19.7 21.0 22.9 24.7 26.7 39.5 86.5 PV of PPG external debt (in percent of GDP + remittances) ... ... 27.2 25.9 25.9 25.9 25.2 24.7 24.2 21.0 16.9 PV of PPG external debt (in percent of exports + remittances) ... ... 90.2 96.1 98.8 101.5 101.6 99.8 98.0 89.9 75.5 Debt service of PPG external debt (in percent of exports + remittances) ... ... 2.6 4.0 4.9 5.0 5.0 5.0 5.1 5.4 6.3 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). 9 Table 2a. São Tomé and Príncipe: Sensitivity Analysis of Key Indicators of Public and Publicly Guaranteed External Debt, 2018-38 (Percent) Projections 2018 2019 2020 2021 2022 2023 2028 2038 PV of debt-to GDP ratio Baseline 27 27 27 26 26 25 22 18 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 27 33 39 43 48 51 63 72 A2. New public sector loans on less favorable terms in 2018-2038 2 27 28 29 29 28 28 27 26 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2019-2020 27 27 28 27 26 26 22 18 B2. Export value growth at historical average minus one standard deviation in 2019-2020 3/ 27 28 30 29 29 28 24 18 B3. US dollar GDP deflator at historical average minus one standard deviation in 2019-2020 27 30 33 32 31 31 27 21 B4. Net non-debt creating flows at historical average minus one standard deviation in 2019-2020 4/ 27 34 39 38 37 36 31 21 B5. Combination of B1-B4 using one-half standard deviation shocks 27 31 35 34 33 32 28 21 B6. One-time 30 percent nominal depreciation relative to the baseline in 2019 5/ 27 38 37 36 35 35 30 24 PV of debt-to-exports ratio Baseline 113 115 118 118 116 114 107 93 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 113 139 169 196 215 232 310 382 A2. New public sector loans on less favorable terms in 2018-2038 2 113 120 127 130 129 129 132 137 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2019-2020 113 115 118 118 115 114 106 92 B2. Export value growth at historical average minus one standard deviation in 2019-2020 3/ 113 131 155 155 151 148 138 113 B3. US dollar GDP deflator at historical average minus one standard deviation in 2019-2020 113 115 118 118 115 114 106 92 B4. Net non-debt creating flows at historical average minus one standard deviation in 2019-2020 4/ 113 143 172 171 166 163 152 111 B5. Combination of B1-B4 using one-half standard deviation shocks 113 121 127 127 124 122 114 92 B6. One-time 30 percent nominal depreciation relative to the baseline in 2019 5/ 113 115 118 118 115 114 106 92 PV of debt-to-revenue ratio Baseline 196 212 204 189 177 166 128 88 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 196 257 293 315 329 339 372 362 A2. New public sector loans on less favorable terms in 2018-2038 2 196 222 220 209 197 188 158 130 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2019-2020 196 216 211 197 182 171 132 90 B2. Export value growth at historical average minus one standard deviation in 2019-2020 3/ 196 223 229 213 197 185 142 92 B3. US dollar GDP deflator at historical average minus one standard deviation in 2019-2020 196 238 251 234 217 204 157 107 B4. Net non-debt creating flows at historical average minus one standard deviation in 2019-2020 4/ 196 264 298 275 254 238 183 105 B5. Combination of B1-B4 using one-half standard deviation shocks 196 245 267 247 229 215 165 105 B6. One-time 30 percent nominal depreciation relative to the baseline in 2019 5/ 196 296 283 264 245 230 177 120 10 Table 2b. São Tomé and Príncipe: Sensitivity Analysis of Key Indicators of Public and Publicly Guaranteed External Debt, 2018–38 (concluded) (Percent) Projections 2018 2019 2020 2021 2022 2023 2028 2038 Debt service-to-exports ratio Baseline 5 6 6 6 6 6 6 8 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 5 6 7 7 8 8 10 19 A2. New public sector loans on less favorable terms in 2018-2038 2 5 6 6 6 6 7 8 11 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2019-2020 5 6 6 6 6 6 6 8 B2. Export value growth at historical average minus one standard deviation in 2019-2020 3/ 5 6 7 7 7 7 8 10 B3. US dollar GDP deflator at historical average minus one standard deviation in 2019-2020 5 6 6 6 6 6 6 8 B4. Net non-debt creating flows at historical average minus one standard deviation in 2019-2020 4/ 5 6 7 7 7 7 8 11 B5. Combination of B1-B4 using one-half standard deviation shocks 5 6 6 6 6 6 6 8 B6. One-time 30 percent nominal depreciation relative to the baseline in 2019 5/ 5 6 6 6 6 6 6 8 Debt service-to-revenue ratio Baseline 8 11 10 9 9 9 8 7 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 8 11 11 12 12 12 13 18 A2. New public sector loans on less favorable terms in 2018-2038 2 8 11 10 10 10 10 10 11 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2019-2020 8 11 10 10 9 9 8 8 B2. Export value growth at historical average minus one standard deviation in 2019-2020 3/ 8 11 10 10 10 9 8 8 B3. US dollar GDP deflator at historical average minus one standard deviation in 2019-2020 8 12 12 11 11 11 9 9 B4. Net non-debt creating flows at historical average minus one standard deviation in 2019-2020 4/ 8 11 11 12 11 11 9 10 B5. Combination of B1-B4 using one-half standard deviation shocks 8 11 12 11 11 10 9 9 B6. One-time 30 percent nominal depreciation relative to the baseline in 2019 5/ 8 15 14 13 12 12 11 10 Memorandum item: Grant element assumed on residual financing (i.e., financing required above baseline) 6/ 35 35 35 35 35 35 35 35 Sources: Country authorities; and staff estimates and projections. 1/ Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 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. 11 Table 3. São Tomé and Príncipe: Public Sector Debt Sustainability Framework, Baseline Scenario, 2015–2038 (Percent of GDP, unless otherwise indicated) Actual Estimate Projections 5/ 5/ Standard 2018-23 2024-38 Average 2015 2016 2017 Deviation 2018 2019 2020 2021 2022 2023 Average 2028 2038 Average Public sector debt 1/ 62.8 67.6 56.7 51.7 49.7 47.9 45.3 43.4 41.5 33.3 25.4 of which: foreign-currency denominated 62.8 52.5 45.7 42.1 41.4 40.5 38.8 37.4 36.1 29.9 24.1 Change in public sector debt 11.5 4.8 -10.9 -5.0 -2.0 -1.8 -2.5 -2.0 -1.8 -1.2 -0.3 Identified debt-creating flows 10.5 0.5 -8.1 -5.4 -1.3 -1.4 -2.4 -1.5 -1.3 -0.2 0.8 Primary deficit 8.7 4.7 3.0 8.7 6.3 0.2 3.8 3.1 1.3 1.1 1.1 1.8 1.7 1.6 1.6 Revenue and grants 25.5 26.8 23.0 26.6 24.9 25.3 24.9 24.6 24.4 22.9 25.0 of which: grants 11.5 13.2 10.1 12.8 12.2 12.2 11.1 10.2 9.3 5.9 5.0 Primary (noninterest) expenditure 34.2 31.5 26.1 26.8 28.7 28.4 26.2 25.7 25.5 24.5 26.6 Automatic debt dynamics 1.8 -4.2 -11.1 -5.6 -5.1 -4.5 -3.7 -2.6 -2.5 -1.9 -0.8 Contribution from interest rate/growth differential -2.1 -3.0 -3.7 -3.1 -3.1 -3.0 -2.7 -2.5 -2.4 -1.8 -1.2 of which: contribution from average real interest rate -0.2 -0.5 -1.2 -0.9 -0.9 -0.6 -0.5 -0.4 -0.3 -0.2 0.0 of which: contribution from real GDP growth -1.9 -2.5 -2.5 -2.2 -2.2 -2.4 -2.3 -2.2 -2.1 -1.6 -1.2 Contribution from real exchange rate depreciation 3.9 -1.2 -7.4 -2.5 -1.9 -1.5 -0.9 0.0 -0.1 ... ... Other identified debt-creating flows 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) 0.0 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 Debt relief (HIPC and other) 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 Residual, including asset changes 1.0 4.2 -2.8 0.5 -0.7 -0.4 -0.1 -0.5 -0.5 -1.0 -1.1 Other Sustainability Indicators PV of public sector debt ... ... 39.5 36.5 35.3 34.1 32.6 31.5 30.5 25.1 18.9 DEMOCRATIC REPUBLIC OF SÃO TOMÉ AND PRÍNCIPE of which: foreign-currency denominated ... ... 28.4 26.9 26.9 26.8 26.1 25.6 25.1 21.7 17.6 of which: external ... ... 28.4 26.9 26.9 26.8 26.1 25.6 25.1 21.7 17.6 PV of contingent liabilities (not included in public sector debt) ... ... ... ... ... ... ... ... ... ... ... Gross financing need 2/ 9.8 5.6 3.8 1.3 5.1 4.4 2.5 2.4 2.4 3.0 3.1 PV of public sector debt-to-revenue and grants ratio (in percent) … … 171.3 137.1 141.3 134.7 131.0 128.1 124.9 109.6 75.6 PV of public sector debt-to-revenue ratio (in percent) … … 304.3 265.0 277.5 259.1 236.7 218.1 202.2 147.5 94.6 of which: external 3/ … … 219.3 195.5 211.9 203.5 189.5 177.1 166.4 127.9 88.1 Debt service-to-revenue and grants ratio (in percent) 4/ 4.3 3.4 3.6 4.2 5.4 5.2 5.1 5.2 5.3 5.7 5.9 Debt service-to-revenue ratio (in percent) 4/ 7.8 6.6 6.4 8.1 10.5 10.0 9.3 8.9 8.6 7.7 7.4 Primary deficit that stabilizes the debt-to-GDP ratio -2.8 0.0 13.9 5.1 5.8 4.9 3.8 3.1 3.0 2.9 1.9 Key macroeconomic and fiscal assumptions Real GDP growth (in percent) 3.8 4.2 3.9 4.8 1.8 4.0 4.5 5.0 5.0 5.0 5.0 4.8 5.0 5.0 5.0 Average nominal interest rate on forex debt (in percent) 0.6 0.5 0.8 0.8 0.2 1.1 1.2 1.3 1.3 1.4 1.4 1.3 1.6 2.0 1.7 Average real interest rate on domestic debt (in percent) ... ... ... … … … … … … … … … … … … Real exchange rate depreciation (in percent, + indicates depreciation) 8.0 -2.0 -14.9 -4.4 9.2 … … ... ... ... ... ... ... ... ... Inflation rate (GDP deflator, in percent) 4.2 8.1 4.7 10.8 7.5 3.9 6.2 5.0 3.7 2.9 3.0 4.1 3.0 3.0 3.0 Growth of real primary spending (deflated by GDP deflator, in percent) 18.0 -4.0 -14.1 0.0 7.7 6.8 12.3 3.8 -3.4 3.2 4.3 4.5 4.3 6.1 5.3 Grant element of new external borrowing (in percent) ... ... ... … … 34.9 34.9 34.9 34.9 34.9 34.9 34.9 34.9 34.9 ... TARY FUND2 Sources: Country authorities; and staff estimates and projections. 1/ Public debt consists of central government debt. Gross debt is considered. 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. 12 Table 4. São Tomé and Príncipe: Sensitivity Analysis of Key Indicators of Public Debt, 2018–38 Projections 2018 2019 2020 2021 2022 2023 2028 2038 PV of Debt-to-GDP Ratio Baseline 36 35 34 33 32 30 25 19 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 36 37 38 40 42 43 51 65 A2. Primary balance is unchanged from 2018 36 34 32 30 28 27 19 9 A3. Permanently lower GDP growth 1/ 36 35 34 33 32 31 27 26 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2019-2020 36 36 36 34 33 32 28 23 B2. Primary balance is at historical average minus one standard deviations in 2019-2020 36 40 43 41 40 39 32 23 B3. Combination of B1-B2 using one half standard deviation shocks 36 39 41 40 38 37 32 24 B4. One-time 30 percent real depreciation in 2019 36 45 43 40 38 37 29 21 B5. 10 percent of GDP increase in other debt-creating flows in 2019 36 39 38 36 35 34 28 21 PV of Debt-to-Revenue Ratio 2/ Baseline 137 141 135 131 128 125 110 76 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 137 149 151 159 169 178 222 258 A2. Primary balance is unchanged from 2018 137 135 124 119 115 110 84 38 A3. Permanently lower GDP growth 1/ 137 142 135 132 130 128 118 101 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2019-2020 137 143 138 135 133 131 120 92 B2. Primary balance is at historical average minus one standard deviations in 2019-2020 137 160 171 166 163 159 142 93 B3. Combination of B1-B2 using one half standard deviation shocks 137 155 162 158 155 152 138 96 B4. One-time 30 percent real depreciation in 2019 137 181 168 161 156 151 128 83 B5. 10 percent of GDP increase in other debt-creating flows in 2019 137 158 150 146 143 139 123 83 Debt Service-to-Revenue Ratio 2/ Baseline 4 5 5 5 5 5 6 6 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 4 5 5 5 5 5 6 12 A2. Primary balance is unchanged from 2018 4 5 5 5 5 5 5 5 A3. Permanently lower GDP growth 1/ 4 5 5 5 5 5 6 7 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2019-2020 4 5 5 5 5 5 6 7 B2. Primary balance is at historical average minus one standard deviations in 2019-2020 4 5 5 5 5 5 7 7 B3. Combination of B1-B2 using one half standard deviation shocks 4 5 5 5 5 5 7 7 B4. One-time 30 percent real depreciation in 2019 4 6 7 7 7 8 8 9 B5. 10 percent of GDP increase in other debt-creating flows in 2019 4 5 5 5 5 5 7 6 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. 13