89106 INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL MONETARY FUND REPUBLIC OF MADAGASCAR Joint Bank-Fund Debt Sustainability Analysis 2014 Update Prepared by the staffs of the International Development Association and the International Monetary Fund Approved by Jeffrey D. Lewis and Marcelo Giugale (IDA) and David Robinson and Chris Lane (IMF) June 3, 2014 Using the joint IDA-IMF debt sustainability framework for low income countries, the debt sustainability analysis (DSA) assesses Madagascar’s risk of external debt distress to be ‘low’. This is unchanged from the last DSA carried out in 2008. The public DSA suggests that Madagascar’s total public and publically guaranteed (PPG) debt dynamics are sustainable, although weak fiscal revenue generation is a source of vulnerability. The authorities agreed with the assessment. 2 I. INTRODUCTION 1. This DSA has been prepared jointly by IMF and World Bank staff. It is based on the framework for low-income countries approved by the respective Executive Boards. The framework takes into account indicative thresholds for debt burden indicators determined by the quality of the country’s policies and institutions1. The assessment comprises a baseline scenario and a set of alternative scenarios. II. RECENT DEVELOPMENTS AND CURRENT DEBT SITUATION 2. Since HIPC Completion in 2006, Madagascar’s external PPG debt as a proportion of GDP has been on a modest downward trend. At end-2013, PPG nominal external debt was 23 percent of GDP, below Madagascar’s post-HIPC average of 25 percent (Figure 1). This was partly as a result of reduced donor inflows during the crisis period. Around 80 percent of external debt is owed to multilateral creditors, mainly the World Bank. 3. Domestic PPG debt has risen since 2008, partly to compensate for fewer external financing opportunities. In 2008, domestic debt was 7 percent of GDP, which increased to 11 percent by end- 2013 (Table 1). This debt includes domestic budgetary arrears, which increased sharply in 2013. 4. Overall, the debt strategy of the authorities has been prudent over the crisis. Total PPG debt was stable around 33 percent of Figure 1: Evolution of Madagascar’s nominal PPG debt GDP throughout the transition, and the 40 authorities refrained from borrowing 35 externally on non-concessional terms. 30 However, the debt service to revenue 25 20 ratio has increased due to a greater 15 reliance on domestic financing and 10 declining fiscal revenues (Figure 1). 5 5. This DSA includes public debt 0 2006 2007 2008 2009 2010 2011 2012 2013 and guarantees of the general Domestic debt to GDP ratio (percent) External debt to GDP ratio (percent) Debt service to revenue ratio (percent) government. Local governments do not Sources: Malagasy authorities and IMF staff estimates. formally issue debt liabilities, but may have arrears to domestic counterparties, for which data are not available. The measure of debt is on a gross rather than net basis. 1 According to the World Bank Country and Policy Institutional Assessment (CPIA) Index, Madagascar is rated as a ‘low’ performer, a downgrade since the last DSA in 2008. The indicative thresholds for external debt applicable for that category of countries are: (i) 30 percent for the PV of debt-to-GDP ratio; (ii) 100 percent for PV of debt-to-exports ratio; (iii) 200 percent for the PV of debt to fiscal revenues ratio; (iv) 15 percent for the debt service to exports ratio; and (v) 18 percent for the debt service to revenue ratio. The indicative threshold for the PV of total PPG debt is 38 percent of GDP. 3 Table 1 Madagascar: Break-Down of Total PPG Debt (End-2013) Creditor Amount (US$m) Percent of GDP Percent of total Domestic debt, of which: 1,214 11.4 33.3 Bonds 513 4.8 14.1 Other inc arrears 701 6.6 19.2 External debt, of which: 2,427 22.8 66.7 Multilateral 1,884 17.7 51.7 Paris Club 108 1.0 3.0 Non-Paris Club 416 3.9 11.4 Commercial 18 0.2 0.5 Total PPG debt 3,641 34.2 100.0 6. Private external debt is mainly issued by subsidiaries of multinational companies. According to the authorities, external debt owed by domestically owned companies and households is negligible (around US$15 million). There are, however, a number of multinational companies— for instance in the mining, banking, telecommunication sector—whose wholly owned local subsidiaries have issued external debt. The authorities do not have comprehensive data on these obligations. But by far the largest of these debtors is the Nickel/Cobalt mine and processing facility near Antananarivo, where, reflecting the financial structure of the initial capital investment in the project, the local subsidiary has external debt of around US$2 billion (20 percent of GDP). This obligation accounts for the bulk of the increase in total external debt from 24 percent of GDP in 2007 to 44 percent at end- 2013. This commercial loan is scheduled to be fully repaid by 2030. III. UNDERLYING ASSUMPTIONS 7. The key variables driving the debt dynamics are forecast to improve over the coming years, but remain more conservative than the medium-term projections in the 2008 DSA (Box 1). The strengthening economic recovery forecast in the macroeconomic framework will provide space for the authorities to invest in much needed infrastructure. Much of this investment will be financed through concessional external borrowing and grants, although the latter will decline over the longer-term. The average grant element of new borrowing is projected to decline from 50 percent today to around 35 percent in 2034. 4 Box 1: Baseline Macroeconomic Assumptions Real GDP growth. Growth is expected to recover to around 4.5 percent over the medium term, compared to an average of 3.2 percent over the last decade (which includes the crisis years). This is driven by improved confidence, a re-engagement of development partners, and increased mining exports. Inflation and interest rates. Inflation as measured by the GDP deflator in US dollar terms is likely to stay low and stable, averaging around 2 percent. The highly concessional terms of the external PPG debt implies a real effective interest rate of around -0.8 percent over 2014–19. This gradually increases as the degree of concessionality is assumed to decline. Current account. Mining exports are expected to gradually increase as the two major projects reach full production capacity. This will be accompanied by a bounce back in imports, as domestic consumption and investment recover. These two factors are projected to largely offset each other, leading to a relatively stable non-interest current account of around 3.5 percent of GDP. Tax revenues. This is an area of vulnerability for debt sustainability. Fiscal revenues have fallen from (a relatively modest) 11.8 percent of GDP in 2008, to 9.3 in 2013. The DSA assumes the authorities will be able to reach 2008 levels by around 2017– 18; rising further to over 15.5 percent by 2034. Grants. Donor support is projected to rapidly increase in 2014 to around pre-crisis levels, and then stabilize over the medium term. Over the long-run, grants are assumed to decline to zero by 2034. Total expenditure. Government spending will initially fall with the removal of the fuel subsidy over the next 12 months but then gradually increase as the government raises social and infrastructure spending. IV. EXTERNAL DEBT SUSTAINABILITY ANALYSIS A. Baseline Scenario 8. The level of PPG external debt, which is currently a little over US$2.4 billion, is projected to gradually grow throughout the forecast horizon. It is forecast to increase from 23 percent of GDP in 2013 to 30 percent by 2034, as the government supports much needed infrastructure investment and social spending. A persistent trade deficit and outflows from the mining sector2 are balanced with increasing grant inflows (over the next decade) and relatively strong growth. FDI inflows are assumed to be lower than that experienced over the last few years, during which major mining projects were being constructed. As the Malagasy economy develops, non-concessional borrowing is projected to increase, especially after 2020 (Table 3). 2 The large residual in Table 4 is partly related to mining activity. Mining exports are recorded in full in the balance of payment statistics. However, only a fraction of these receipts actually return to Madagascar, with the remainder being repatriated to the parent companies. Another contribution to the residual relates to discrepancies in the authorities’ debt database between the sum of amortizing debt and the debt stock. 5 Table 2. Madagascar: Baseline Macroeconomic Assumptions 2014 2015 2016 2017 2018 2008 DSA* Real GDP growth (percent) 3.0 4.0 4.5 4.5 4.5 6.2 GDP deflator in US$ terms (percent) 2.0 2.0 2.5 2.2 2.0 3.0 Non-interest current account (percent GDP) -3.1 -5.4 -5.2 -5.0 -4.3 -5.3 Total revenues (percent of GDP) 11.1 11.3 12.3 12.0 12.3 14.1 Grants (percent of GDP) 3.7 3.7 3.7 3.7 3.7 4.1 Expenditure inc. interest (percent of GDP) 17.3 17.2 17.5 17.8 18.2 21.0 *Projected medium-term values in the 2008 DSA. Source: IMF staff projections. Table 3. Madagascar: Projected Disbursements of PPG External Debt 2014 2015 2014–19 Average 2020–34 Average Concessional (Millions of US$) 280 304 338 684 Percent of GDP 2.5 2.6 2.6 2.6 Non-concessional (Millions of US$) 0 0 3.71 123 Percent of GDP 0 0 0.0 0.4 Total (Millions of US$) 280 304 341 807 Percent of GDP 2.5 2.6 2.6 3.0 Sources: Mlalagasy authorities and IMF staff projections. 9. Under the baseline projection, all PPG external debt indicators remain below the policy- dependent debt burden thresholds (Figure 2). The present value (PV) of the current level of PPG external debt, 11.9 percent of GDP, is projected to increase to 17.6 percent by 2034. This projection is broadly consistent with the medium term forecast from the last DSA conducted in 2008. 10. Private external debt is projected to slowly decline, as the mining project loans are repaid. Given the exceptional nature of this project, the DSA does not forecast substantial new external borrowing from the private sector. As the ultimate liability of the existing loans is to the multinational shareholders, rather than resident entities (such as domestic banks or the government), these do not constitute a threat to external sustainability. 6 B. Alternative Scenarios 11. Three alternative scenarios are constructed to stress-test the baseline external PPG debt projection. First, the standard bounds tests, which apply pre-defined shocks to the key macroeconomic variables that drive external debt 3. Second, a historical scenario where macroeconomic variables are assumed to equal their average over 2004–13. Third, a customized scenario, focused on non-concessional borrowing. These shocks are illustrated in Figure 2 and Table 5. 12. None of the standard bounds tests cause a breach of the thresholds for PPG external debt. The historical scenario4 projects a rapid increase in all debt metrics, and causes a breach for four of the five external debt thresholds. But there are two reasons to put less weight on this scenario. First, the very large current account deficit in 2008 and 2009 (over 20 percent of GDP in both years) was mainly driven by substantial imports associated with large mining investments, which were partly financed through non-debt creating FDI. Second, the historical averages are calculated over a period of crisis in Madagascar, where key variables such as growth are unlikely to persist at such levels for a long period of time. 13. The third scenario is based on a customized set-up. It assumes that, on top of the baseline projections, the authorities contract a US$400 million non-concessional loan, disbursed over 2014–16. While this expanded baseline does not lead to breaches of any threshold as shown in Figure 2, it could lead to a deterioration in the risk of debt distress as stress tests may push debt indicators above relevant thresholds. The authorities need to remain vigilant on debt sustainability pressures if they embark on contracting non-concessional borrowing. V. PUBLIC DSA A. Baseline Scenario 14. Domestic PPG debt as a proportion of GDP is projected to decline over the next decade, with the authorities substituting away from local financing into concessional borrowing, as donor relations normalize, and with the clearance of domestic arrears. Domestic PPG debt is expected to grow as a proportion of GDP over the long-term, as domestic markets deepen. 15. The present value of total PPG debt is projected to increase from 23 percent of GDP at present to 25 percent by 2034 - well below the threshold (Table 7). Madagascar’s relatively weak revenue to GDP ratio, leaves the authorities somewhat vulnerable on the debt service to revenue measure, which is likely to increase through time as higher interest payments (associated with less concessional financing) increase at a faster rate than revenue mobilization. 3 Summarized in footnote 1 of Figure 2. 4 Key macroeconomic variables (non-interest current account, growth, GDP deflator, growth of exports, current official transfers and net FDI) remain fixed at the average of the 2004–13 period. 7 B. Alternative Scenarios 16. Of the three alternative scenarios used to stress-test the baseline, one causes a breach of the threshold in 2032 (Figure 3). This breach is the scenario whereby the primary deficit as a proportion of GDP remains unchanged throughout the forecast, generating the highest debt to GDP ratio trajectory. However, staff and authorities agree that reducing the current gap between revenue and spending is a priority, thus this scenario is not viewed as sufficient to motivate a change in the overall debt sustainability risk rating. VI. CONCLUSIONS 17. The authorities agree with the overall assessment that the risk of external distress is low. And also that the risks from private external debt and public domestic debt do not justify a change in the overall debt sustainability assessment. The authorities plan to use this DSA to help develop their medium-term debt strategy. Furthermore, they hope that the upcoming World Bank funded DSA training will help strengthen their capacity to take greater ownership of this analysis themselves. Staff and the authorities will also seek to gather more data and gain a deeper understanding of Madagascar’s private external debt stock. Table 4. Madagascar: External Debt Sustainability Framework, Baseline Scenario, 2008-2034 1/ 6/ 6/ Actual Historical Standard Projections Average Deviation 2014-2019 2020-2034 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Average 2024 2034 Average External debt (nominal) 1/ 29.5 35.9 39.4 42.4 45.1 43.7 36.0 19.8 42.9 40.9 38.9 37.5 36.6 35.8 38.8 33.3 35.8 33.6 of which: public and publicly guaranteed (PPG) 24.5 25.7 24.4 24.3 24.3 22.8 24.7 23.3 24.1 24.3 24.7 25.1 25.6 26.2 25.0 28.5 30.2 29.0 Change in external debt 5.4 6.4 3.5 3.1 2.7 -1.4 -4.0 16.1 -0.8 -2.1 -1.9 -1.4 -1.0 -0.7 -1.3 -0.4 0.9 0.0 Identified net debt-creating flows 8.4 16.0 5.1 -5.5 -1.2 -3.0 -3.3 -1.0 -1.3 -1.6 -2.0 -2.4 -3.0 -2.3 Non-interest current account deficit 20.6 21.2 7.8 6.6 6.5 5.1 9.4 6.5 3.1 5.4 5.2 5.0 4.3 3.9 4.5 3.7 4.3 4.1 Deficit in balance of goods and services 24.4 23.7 13.4 11.3 9.6 8.2 14.9 5.4 6.3 6.9 7.3 7.6 7.3 7.0 7.1 7.7 7.9 8.0 Exports 26.6 22.4 24.1 26.9 29.3 30.3 32.6 32.8 32.5 32.9 34.0 35.3 41.1 51.2 43.5 Imports 50.9 46.1 37.6 38.2 38.9 38.5 38.9 39.7 39.8 40.5 41.3 42.3 48.9 59.1 51.5 Net current transfers (negative = inflow) -4.3 -3.6 -5.0 -6.0 -6.1 -6.0 -6.9 3.3 -7.5 -7.4 -7.4 -7.4 -7.4 -7.4 -7.4 -7.4 -6.5 -7.1 of which: official -3.6 -0.9 -0.9 -1.5 -1.2 -1.3 -1.9 1.8 -3.7 -3.7 -3.7 -3.7 -3.7 -3.7 -3.7 -3.7 0.0 -2.2 Other current account flows (negative = net inflow) 0.5 1.1 -0.6 1.3 3.0 2.9 1.5 1.1 4.3 5.9 5.3 4.8 4.4 4.3 4.8 3.4 3.0 3.2 Net FDI (negative = inflow) -6.9 -8.2 -4.0 -7.8 -7.9 -5.2 -5.2 2.5 -5.4 -5.1 -5.1 -5.1 -5.1 -5.1 -5.1 -5.1 -5.1 -5.1 Endogenous debt dynamics 2/ -5.3 3.0 1.2 -4.3 0.2 -3.0 -1.1 9.0 -1.1 -1.4 -1.4 -1.4 -1.2 -1.2 -1.3 -1.6 -1.6 -1.6 Contribution from nominal interest rate 0.0 0.0 1.9 0.3 0.3 0.3 0.3 0.6 0.2 0.3 0.3 0.2 0.4 0.4 0.3 0.5 0.6 0.5 Contribution from real GDP growth -1.4 1.1 0.0 -0.5 -1.1 -1.0 -1.7 2.0 -1.3 -1.6 -1.7 -1.6 -1.6 -1.6 -1.6 -1.4 0.0 -1.3 Contribution from price and exchange rate changes -3.9 1.8 -0.6 -4.1 0.9 -2.3 … … … … … … … … Residual (3-4) 3/ -3.0 -9.5 -1.7 8.6 3.9 1.6 -7.2 15.4 2.5 -1.1 -0.6 0.1 1.0 1.7 0.6 2.6 3.2 2.5 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 0.0 0.0 0.0 PV of external debt 4/ ... ... ... ... ... 32.8 31.6 29.5 27.6 26.2 25.0 24.2 21.2 23.2 In percent of exports ... ... ... ... ... 108.3 96.9 90.1 84.8 79.5 73.6 68.5 51.6 45.4 PV of PPG external debt ... ... ... ... ... 11.9 12.8 13.0 13.3 13.7 14.1 14.6 16.4 17.6 In percent of exports ... ... ... ... ... 39.2 39.2 39.7 40.9 41.8 41.5 41.2 39.9 34.4 In percent of government revenues ... ... ... ... ... 124 115 115 108 115 115 116 119 113 Debt service-to-exports ratio (in percent) 0.6 2.0 9.0 2.3 2.0 1.7 2.6 2.7 2.8 2.4 2.8 2.5 2.9 3.5 PPG debt service-to-exports ratio (in percent) 0.6 2.0 2.3 2.3 2.0 1.7 2.6 2.7 2.8 2.4 2.8 2.5 2.9 3.5 PPG debt service-to-revenue ratio (in percent) 1.4 4.5 5.0 6.3 6.2 5.5 7.7 7.8 7.4 6.7 7.6 6.9 8.8 11.6 Non-interest current account deficit that stabilizes debt ratio 15.2 14.7 4.4 3.6 3.8 6.5 3.9 7.5 7.1 6.4 5.2 4.6 4.2 3.5 Key macroeconomic assumptions 8 Real GDP growth (in percent) 7.2 -3.5 0.1 1.5 2.5 2.4 3.2 3.3 3.0 4.0 4.5 4.5 4.5 4.5 4.2 4.5 4.5 4.5 GDP deflator in US dollar terms (change in percent) 19.6 -5.8 1.7 11.5 -2.2 5.3 4.5 13.9 2.0 2.0 2.5 2.2 2.0 2.0 2.1 2.0 2.0 2.0 Effective interest rate (percent) 5/ 0.0 0.0 5.3 0.8 0.7 0.6 0.7 1.6 0.5 0.6 0.7 0.5 1.2 1.0 0.8 1.5 1.7 1.6 Growth of exports of G&S (US dollar terms, in percent) 11.7 -23.5 9.8 25.9 9.4 11.4 11.3 16.4 13.1 6.3 6.3 8.1 10.2 10.8 9.1 8.2 10.0 9.3 Growth of imports of G&S (US dollar terms, in percent) 40.4 -17.9 -16.9 14.9 2.1 6.6 10.5 21.3 6.3 7.8 7.5 8.6 8.9 9.2 8.0 9.1 9.0 9.1 Grant element of new public sector borrowing (in percent) ... ... ... ... ... ... ... ... 43.0 43.5 43.1 43.1 42.6 42.0 42.9 39.0 32.1 36.8 Government revenues (excluding grants, in percent of GDP) 12.1 9.9 11.3 9.8 9.7 9.6 10.8 1.0 11.1 11.3 12.3 12.0 12.3 12.6 11.9 13.8 15.7 14.4 Aid flows (in Millions of US dollars) 7/ 321.0 141.8 169.6 193 120 134 583 615 659 704 751 801 1105 623 of which: Grants 321.0 141.8 169.6 193 120 134 418 433 464 496 529 564 778 40 of which: Concessional loans 0.0 0.0 0.0 0.0 0.0 0.0 165.0 182.1 195.1 208.5 222.3 237.1 326.9 583.5 Grant-equivalent financing (in percent of GDP) 8/ ... ... ... ... ... ... 4.8 4.8 4.8 4.8 4.8 4.8 4.8 4.8 1.1 3.3 Grant-equivalent financing (in percent of external financing) 8/ ... ... ... ... ... ... 77.1 76.7 76.5 76.5 76.1 75.7 76.4 73.5 34.2 60.6 Memorandum items: Nominal GDP (Millions of US dollars) 9413.0 8550.4 8705.0 9854 9881 10645 11188 11824 12669 13537 14431 15392 21228 40413 Nominal dollar GDP growth 28.2 -9.2 1.8 13.2 0.3 7.7 5.1 5.7 7.1 6.8 6.6 6.7 6.3 6.7 6.7 6.6 PV of PPG external debt (in Millions of US dollars) 1247.9 1377.1 1513.6 1659.6 1833.9 2007.1 2209.2 3438.7 7015.7 (PVt-PVt-1)/GDPt-1 (in percent) 1.2 1.2 1.2 1.4 1.3 1.4 1.3 1.3 1.2 1.3 Gross workers' remittances (Millions of US dollars) … … … … … … … … … … … … … … PV of PPG external debt (in percent of GDP + remittances) ... ... 11.9 12.8 13.0 13.3 13.7 14.1 14.6 16.4 17.6 PV of PPG external debt (in percent of exports + remittances) ... ... 39.2 39.2 39.7 40.9 41.8 41.5 41.2 39.9 34.4 Debt service of PPG external debt (in percent of exports + remittances) ... ... 1.7 2.6 2.7 2.8 2.4 2.8 2.5 2.9 3.5 Sources: Country authorities; and staff estimates and projections. 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 Figure 2. Madagascar: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2014-2034 1/ a. Debt Accumulation b.PV of debt-to GDP ratio 6.0 50 70 45 5.0 60 40 35 50 4.0 30 3.0 25 40 20 2.0 30 15 10 20 1.0 5 0.0 0 10 2014 2019 2024 2029 2034 0 Rate of Debt Accumulation 2014 2019 2024 2029 2034 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 140 400 120 350 300 100 250 80 200 60 150 40 100 20 50 0 0 2014 2019 2024 2029 2034 2014 2019 2024 2029 2034 e.Debt service-to-exports ratio f.Debt service-to-revenue ratio 16 30 14 25 12 20 10 8 15 6 10 4 5 2 0 0 2014 2019 2024 2029 2034 2014 2019 2024 2029 2034 Baseline Historical scenario Most extreme shock 1/ Threshold Non-concessional borrowing scenario 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 2024. In figure b. it corresponds to a Combination shock; in c. to a Exports shock; in d. to a Combination shock; in e. to a Exports shock and in figure f. to a Combination shock Table 5. Madagascar: Sensitivity Analysis For Key Indicators Of Public and Publicly Guaranteed External Debt, 2014–34 (In Percent) Projections 2014 2015 2016 2017 2018 2019 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 PV of debt-to GDP ratio Baseline 13 13 13 14 14 15 16 17 17 17 17 17 17 17 17 18 18 A. Alternative Scenarios A1. Key variables at their historical averages in 2014-2034 1/ 13 16 19 22 25 29 46 49 51 52 54 55 56 57 58 59 60 A2. New public sector loans on less favorable terms in 2014-2034 2 13 13 14 16 17 18 23 24 25 26 27 28 28 29 30 31 32 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2015-2016 13 13 14 14 15 15 17 17 17 18 18 18 18 18 18 18 18 B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/ 13 15 20 20 21 21 22 21 21 21 21 20 20 20 20 20 19 B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-2016 13 14 17 17 18 18 21 21 21 21 21 21 21 22 22 22 22 B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/ 13 17 22 22 22 22 23 22 22 22 21 21 21 20 20 20 20 B5. Combination of B1-B4 using one-half standard deviation shocks 13 17 24 24 24 24 25 25 24 24 24 23 23 23 23 23 22 B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/ 13 18 19 19 20 20 23 23 23 24 24 24 24 24 24 24 24 PV of debt-to-exports ratio Baseline 39 40 41 42 41 41 40 40 40 39 39 38 37 37 36 35 34 A. Alternative Scenarios A1. Key variables at their historical averages in 2014-2034 1/ 39 48 57 66 74 82 112 116 120 122 123 123 123 122 121 119 117 A2. New public sector loans on less favorable terms in 2014-2034 2 39 41 45 48 49 50 56 58 59 60 61 61 62 62 63 63 63 B. Bound Tests 10 B1. Real GDP growth at historical average minus one standard deviation in 2015-2016 39 39 41 41 41 41 39 39 39 39 38 38 37 36 35 35 34 B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/ 39 53 78 78 76 75 66 64 63 61 59 57 55 53 51 50 48 B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-2016 39 39 41 41 41 41 39 39 39 39 38 38 37 36 35 35 34 B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/ 39 52 67 66 65 63 55 54 52 50 49 47 45 43 42 40 39 B5. Combination of B1-B4 using one-half standard deviation shocks 39 51 68 68 66 65 57 55 54 52 51 49 47 45 44 42 41 B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/ 39 39 41 41 41 41 39 39 39 39 38 38 37 36 35 35 34 PV of debt-to-revenue ratio Baseline 115 115 108 115 115 116 119 119 118 118 117 115 114 114 113 113 113 A. Alternative Scenarios A1. Key variables at their historical averages in 2014-2034 1/ 115 138 151 182 206 230 333 347 357 364 369 373 375 377 378 379 382 A2. New public sector loans on less favorable terms in 2014-2034 2 115 119 118 130 136 141 168 172 176 180 183 186 189 193 196 201 204 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2015-2016 115 117 113 120 120 121 124 124 123 122 121 120 119 118 117 117 116 B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/ 115 136 164 171 169 166 157 153 149 145 141 137 134 131 128 126 124 B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-2016 115 128 136 144 145 145 149 149 148 147 146 144 143 142 141 141 140 B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/ 115 152 175 182 179 176 164 159 155 150 146 141 138 134 131 128 126 B5. Combination of B1-B4 using one-half standard deviation shocks 115 152 192 199 197 194 181 177 172 168 163 158 154 150 147 144 142 B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/ 115 161 151 160 161 162 166 166 165 164 162 161 159 158 157 157 156 Table 5. Madagascar: Sensitivity Analysis For Key Indicators of Public and Publicly Guaranteed External Debt, 2014–34 (concluded) Projections 2014 2015 2016 2017 2018 2019 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Debt service-to-exports ratio Baseline 3 3 3 2 3 2 3 3 3 3 4 4 4 4 4 4 4 A. Alternative Scenarios A1. Key variables at their historical averages in 2014-2034 1/ 3 3 3 3 3 3 5 6 6 7 7 7 8 8 8 8 8 A2. New public sector loans on less favorable terms in 2014-2034 2 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 4 4 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2015-2016 3 3 3 2 3 2 3 3 3 3 4 4 4 4 4 4 4 B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/ 3 3 4 4 4 4 5 5 5 5 6 6 6 5 5 5 5 B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-2016 3 3 3 2 3 2 3 3 3 3 4 4 4 4 4 4 4 B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/ 3 3 3 3 3 3 4 4 4 5 5 5 5 4 4 4 4 B5. Combination of B1-B4 using one-half standard deviation shocks 3 3 3 3 4 3 4 5 5 5 5 5 5 5 5 4 4 B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/ 3 3 3 2 3 2 3 3 3 3 4 4 4 4 4 4 4 Debt service-to-revenue ratio Baseline 8 8 7 7 8 7 9 9 10 10 11 11 11 11 11 12 12 11 A. Alternative Scenarios A1. Key variables at their historical averages in 2014-2034 1/ 8 8 8 8 9 9 15 17 18 20 21 22 23 24 24 25 25 A2. New public sector loans on less favorable terms in 2014-2034 2 8 8 7 7 8 8 9 10 11 11 12 12 13 13 14 14 14 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2015-2016 8 8 8 7 8 7 9 10 10 11 11 12 12 12 12 12 12 B2. Export value growth at historical average minus one standard deviation in 2015-2016 3/ 8 8 8 8 9 8 12 12 13 13 13 13 13 13 13 13 13 B3. US dollar GDP deflator at historical average minus one standard deviation in 2015-2016 8 9 9 8 10 9 11 12 13 13 14 14 14 15 15 15 15 B4. Net non-debt creating flows at historical average minus one standard deviation in 2015-2016 4/ 8 8 9 9 10 9 13 13 13 14 14 14 14 14 14 14 13 B5. Combination of B1-B4 using one-half standard deviation shocks 8 8 9 10 11 10 14 14 15 15 15 16 16 15 15 15 15 B6. One-time 30 percent nominal depreciation relative to the baseline in 2015 5/ 8 11 11 9 11 10 12 13 14 15 15 16 16 16 16 16 16 Memorandum item: Grant element assumed on residual financing (i.e., financing required above baseline) 6/ 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 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. Table 6. Madagascar: Public Sector Debt Sustainability Framework, Baseline Scenario, 2008–34 (In Percent of GDP, unless otherwise indicated) Actual Projections 5/ 5/ Standard 2014-19 2020-34 Average 2008 2009 2010 2011 2012 2013 Deviation 2014 2015 2016 2017 2018 2019 Average 2024 2034 Average Public sector debt 1/ 31.8 33.4 32.0 32.6 33.8 34.2 45.0 24.4 34.5 34.3 34.2 34.0 34.0 33.9 34.1 35.1 37.4 35.8 of which: foreign-currency denominated 24.5 25.7 24.4 24.3 24.3 22.8 35.7 23.3 24.1 24.3 24.7 25.1 25.6 26.2 25.0 28.5 30.2 29.0 Change in public sector debt -1.0 1.6 -1.5 0.6 1.2 0.4 0.3 -0.2 -0.1 -0.2 -0.1 -0.1 0.4 0.0 Identified debt-creating flows ... 3.1 0.5 1.2 0.9 3.1 0.8 -0.6 -1.1 -0.3 -0.1 -0.2 0.4 0.3 Primary deficit 1.6 2.1 0.0 2.0 2.5 5.3 1.8 1.8 1.7 1.4 0.7 1.4 1.3 1.3 1.3 1.8 1.8 1.7 Revenue and grants 15.5 11.5 13.2 11.7 10.9 10.9 14.9 3.9 14.9 15.0 16.0 15.7 15.9 16.3 15.6 17.5 15.8 16.6 of which: grants 3.4 1.7 1.9 2.0 1.2 1.3 4.1 3.2 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7 0.1 2.2 Primary (noninterest) expenditure 17.0 13.6 13.2 13.7 13.4 16.2 16.8 3.5 16.6 16.4 16.7 17.1 17.2 17.5 16.9 19.3 17.6 18.3 Automatic debt dynamics ... 1.0 0.5 -0.8 -1.6 -2.2 -0.9 -2.0 -1.8 -1.7 -1.4 -1.5 -1.5 -1.5 Contribution from interest rate/growth differential ... 1.5 -0.1 -0.5 -0.8 -0.8 -1.3 -1.6 -1.7 -1.6 -1.4 -1.6 -1.6 -1.6 of which: contribution from average real interest rate ... 0.3 0.0 -0.1 0.0 0.0 -0.3 -0.3 -0.2 -0.2 0.1 -0.1 -0.1 0.0 of which: contribution from real GDP growth -2.2 1.2 0.0 -0.5 -0.8 -0.8 -1.0 -1.3 -1.5 -1.5 -1.5 -1.5 -1.5 -1.6 Contribution from real exchange rate depreciation ... -0.5 0.6 -0.3 -0.7 -1.3 0.5 -0.4 -0.1 0.0 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 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 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 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 0.0 0.0 0.0 Reduction of domestic arrears 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 ... -1.5 -2.0 -0.6 0.3 -2.7 -1.3 1.2 -0.5 0.5 1.0 0.1 0.0 0.1 0.2 0.0 -0.3 0.0 Other Sustainability Indicators PV of public sector debt ... ... ... ... ... 23.3 23.1 23.0 22.8 22.7 22.4 22.2 23.0 24.8 of which: foreign-currency denominated ... ... ... ... ... 11.9 12.8 13.0 13.3 13.7 14.1 14.6 16.4 17.6 of which: external ... ... ... ... ... 11.9 12.8 13.0 13.3 13.7 14.1 14.6 16.4 17.6 12 PV of contingent liabilities (not included in public sector debt) ... ... ... ... ... ... ... ... ... ... ... ... ... ... Gross financing need 2/ 7.0 7.6 5.7 7.8 8.6 12.2 16.7 17.3 9.6 8.7 7.8 8.2 7.9 7.4 8.3 7.2 8.2 7.5 PV of public sector debt-to-revenue and grants ratio (in percent) … … … … … 214.5 155.5 153.5 142.8 144.8 140.9 136.8 131.6 156.7 PV of public sector debt-to-revenue ratio (in percent) … … … … … 242.6 207.7 203.3 185.3 189.0 183.0 176.5 166.6 157.7 of which: external 3/ … … … … … 123.8 114.7 115.2 107.9 114.5 115.2 115.5 119.1 112.2 Debt service-to-revenue and grants ratio (in percent) 4/ 11.1 17.2 16.2 19.7 21.4 22.7 56.2 80.4 18.2 17.9 16.6 15.8 16.0 14.5 16.5 14.0 20.0 16.5 Debt service-to-revenue ratio (in percent) 4/ 14.2 20.1 19.0 23.7 24.1 25.7 93.0 149.3 24.3 23.8 21.5 20.7 20.8 18.8 21.6 17.7 20.1 18.8 Primary deficit that stabilizes the debt-to-GDP ratio 1.4 1.3 4.9 2.5 2.1 1.4 1.6 0.8 1.6 1.3 1.3 1.3 1.4 1.8 1.4 0.0 Key macroeconomic and fiscal assumptions 0.0 Real GDP growth (in percent) 7.2 -3.5 0.1 1.5 2.5 2.4 3.2 3.3 3.0 4.0 4.5 4.5 4.5 4.5 4.2 4.5 4.5 4.5 Average nominal interest rate on forex debt (in percent) 0.0 0.0 1.0 1.3 1.2 1.2 0.5 0.6 1.0 1.1 1.3 0.8 1.8 1.5 1.2 1.8 2.0 1.8 Average real interest rate on domestic debt (in percent) -0.5 0.3 0.3 1.5 1.0 0.0 1.1 3.3 -1.8 -1.2 0.2 1.2 1.9 1.9 0.4 1.9 1.9 1.9 Real exchange rate depreciation (in percent, + indicates depreciation … -1.8 2.3 -1.2 -3.0 -5.7 -1.9 2.9 2.1 ... ... ... ... ... ... ... ... ... Inflation rate (GDP deflator, in percent) 9.0 7.8 8.6 8.0 6.0 5.8 9.8 3.8 7.4 7.3 5.7 5.3 5.0 5.0 5.9 5.0 5.0 5.0 Growth of real primary spending (deflated by GDP deflator, in percen 0.0 -0.2 0.0 5.7 -0.2 23.7 2.9 7.5 5.7 2.7 6.5 7.1 5.2 6.5 5.6 6.1 0.9 4.3 Grant element of new external borrowing (in percent) ... ... ... ... ... ... … … 43.0 43.5 43.1 43.1 42.6 42.0 42.9 39.0 32.1 36.8 Sources: Country authorities; and staff estimates and projections. 1/ General government gross debt 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. 13 Figure 3. Madagascar: Indicators Of Public Debt Under Alternative Scenarios, 2014–34 Baseline Fix Primary Balance Most extreme shock 1/ Historical scenario Public debt benchmark 45 40 PV of Debt-to-GDP Ratio 35 30 25 20 15 10 5 0 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 250 PV of Debt-to-Revenue Ratio 2/ 200 150 100 50 0 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 35 Debt Service-to-Revenue Ratio 2/ 30 25 20 15 10 5 0 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 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 2024. 2/ Revenues are defined inclusive of grants. 14 Table 7. Madagascar: Sensitivity Analysis for Key Indicators of Public Debt, 2014–34 Projections 2014 2015 2016 2017 2018 2019 2024 2034 PV of Debt-to-GDP Ratio Baseline 23 23 23 23 22 22 23 25 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 23 23 24 25 25 26 28 32 A2. Primary balance is unchanged from 2014 23 23 24 24 24 24 25 26 A3. Permanently lower GDP growth 1/ 23 23 23 24 24 24 28 43 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2015-20 23 24 26 27 27 28 32 41 B2. Primary balance is at historical average minus one standard deviations in 2015-201 23 25 27 26 26 26 26 27 B3. Combination of B1-B2 using one half standard deviation shocks 23 24 27 27 27 27 30 35 B4. One-time 30 percent real depreciation in 2015 23 28 27 27 26 25 25 27 B5. 10 percent of GDP increase in other debt-creating flows in 2015 23 30 30 30 29 29 29 29 PV of Debt-to-Revenue Ratio 2/ Baseline 156 154 143 145 141 137 132 157 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 156 157 152 157 157 155 157 201 A2. Primary balance is unchanged from 2014 156 155 149 152 150 147 142 165 A3. Permanently lower GDP growth 1/ 156 155 146 149 148 146 159 270 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2015-20 156 160 159 166 167 166 180 258 B2. Primary balance is at historical average minus one standard deviations in 2015-201 156 165 167 169 163 158 149 170 B3. Combination of B1-B2 using one half standard deviation shocks 156 163 164 169 167 165 169 224 B4. One-time 30 percent real depreciation in 2015 156 188 171 170 162 155 143 169 B5. 10 percent of GDP increase in other debt-creating flows in 2015 156 203 189 188 183 177 164 182 Debt Service-to-Revenue Ratio 2/ Baseline 18 18 17 16 16 15 14 20 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 18 18 17 17 18 16 16 26 A2. Primary balance is unchanged from 2014 18 18 17 17 18 15 15 21 A3. Permanently lower GDP growth 1/ 18 18 17 16 17 15 16 30 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2015-20 18 18 18 18 19 18 18 29 B2. Primary balance is at historical average minus one standard deviations in 2015-201 18 18 17 20 20 16 15 21 B3. Combination of B1-B2 using one half standard deviation shocks 18 18 18 19 20 17 17 26 B4. One-time 30 percent real depreciation in 2015 18 19 19 19 19 18 18 29 B5. 10 percent of GDP increase in other debt-creating flows in 2015 18 18 20 29 18 18 16 23 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.