INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL MONETARY FUND VANUATU Joint World Bank-IMF Debt Sustainability Analysis1 June 2019 Prepared jointly by the staffs of the International Development Association (IDA) and the International Monetary Fund (IMF) Approved by Lalita Moorty (IDA)and Odd Per Brekk (IMF) Vanuatu: Joint Bank-Fund Debt Sustainability Analysis Risk of external debt distress: Moderate Overall risk of debt distress Moderate Granularity in the risk rating Limited space to absorb shock Application of judgment No The updated DSA suggests that the external risk of debt distress for Vanuatu remains moderate with limited space to absorb shocks. All external debt indicators remain below the relevant indicative thresholds under the baseline scenario, incorporating the average long-term effects of natural disasters on growth and the fiscal and current account balances. A tailored natural disaster shock, reflecting Vanuatu’s vulnerability to disasters, would cause the present value (PV) of public and publicly guaranteed (PPG) external debt-to-GDP ratio to breach the threshold from 2024 onwards. The overall risk of debt distress is assessed as moderate. Although the PV of the public-debt-to-GDP ratio remains below the 55 percent benchmark under the baseline scenario, the public-debt-to-GDP ratio would breach the authorities’ debt ceiling of 60 percent by 2025. Moreover, a tailored natural disaster shock would lead to a significant deterioration in debt sustainability, breaching the benchmark. The breach of the authorities’ debt ceiling and of the benchmark indicates the need for rebuilding fiscal buffers and enhancing resilience against shocks, including from natural disasters. This requires both stronger revenue mobilization measures, including an introduction of the proposed income taxes, and expenditure rationalization in the medium term. When contracting new public infrastructure projects, the authorities are encouraged to seek grants or concessional loans as much as possible to contain its debt burden. 1 The two most recent observations for Vanuatu’s Composite Indicator (CI) index are 2.94 and 2.99, indicating that the country’ s debt-carrying capacity is medium. According to the new “Guidance Note on the Bank -Fund Debt Sustainability Framework for Low-income Countries” (http://www.imf.org/en/Publications/Policy-Papers/Issues/2018/02/14/pp122617guidance-note-on-lic- dsf), the relevant indicative thresholds for the medium category are: 40 percent for the present value (PV) of the debt-to-GDP ratio,180 percent for the PV of the debt-to-exports ratio, 15 percent for the debt service-to-exports ratio, and 18 percent for the debt-service-to-revenue ratio. These thresholds are applicable to public and publicly guaranteed (PPG) external debt. The benchmark of the PV of total public-sector debt for a medium debt carrying capacity is 55 percent. 1 PUBLIC DEBT COVERAGE 1. The coverage of public sector debt for this debt sustainability analysis is central government debt, central government-guaranteed debt, and central bank debt, which has been borrowed on behalf of the government. 2 Because of data limitations, non-guaranteed SOE debt and private external debt are not included in the analysis.3 Given the limited capacity to borrow both externally and domestically by Vanuatu’s state and local governments, SOEs and its private sector, data deficiencies do not affect the overall assessment. Coverage of Public Sector Debt Subsectors of the public sector Sub-sectors covered 1 Central government X 2 State and local government 3 Other elements in the general government 4 o/w: Social security fund 5 o/w: Extra budgetary funds (EBFs) 6 Guarantees (to other entities in the public and private sector, including to SOEs) X 7 Central bank (borrowed on behalf of the government) X 8 Non-guaranteed SOE debt BACKGROUND ON DEBT 2. After Cyclone Pam struck Stock of Public Debt (External and Domestic) at End-2018 Vanuatu in 2015, public sector debt has In million In million of As a share of In percent of of Vatu US dollars total debt GDP increased sharply to 52.4 percent of GDP Total public debt 52,826 471 100.0 52.4 in 2018 from 26.1 percent in 2014. This External 45,520 406 86.2 45.2 Multilateral 16,466 147 31.2 16.3 was mainly caused by new disbursement for ADB 7,726 69 14.6 7.7 infrastructure development supported by IDA 6,478 58 12.3 6.4 IMF 2,262 20 4.3 2.2 bilateral partners, including the Japan Bilateral 27,332 243 51.7 27.1 China EXIM Bank 17,080 152 32.3 17.0 International Cooperation Agency (JICA) JICA 10,201 91 19.3 10.1 Others 51 0 0.1 0.1 and the Export-Import Bank of China Publicly guaranteed debt 1,722 15 3.3 1.7 Domestic 7,307 65 13.8 7.3 (China EXIM Bank). In addition to the Government bonds 6,267 56 11.9 6.2 IMF’s disbursement of USD 23.8 million in RBV Public Corporation 2,513 2,350 22 21 4.8 4.4 2.5 2.3 June 2015, the IDA and ADB have Commercial Banks 1,288 11 2.4 1.3 Others 116 1 0.2 0.1 provided loans and grants to support the Publicly guaranteed debt 1,040 9 2.0 1.0 Source: Vanuatu authorities and IMF staff estimates. reconstruction and improvement of roads 2 The technical assistance provided by PFTAC helps the country’s authorities expand the coverage of government financial statistics (GFS) from budgetary central government to general government. The broader coverage of public sector debt can be expected as a result of the PFTAC TA program. For non-guaranteed SOE debt, the authorities are currently revising the Government Business Enterprises Act bill, which will be complemented by the upcoming report that will discuss the financial position of, and fiscal risks posed by SOEs. The report should enable staff to identifiy or estimate the size of the SOE debt. 3 Please note that the size of private external debt does not affect the risk rating for PPG external debt and public-sector debt, which does not include private external debt. 2 and schools. As of end-2018, the share of bilateral and multilateral creditors amounted to 51.7 and 31.2 percent of total public debt, respectively. Of public domestic debt, central government bonds were largely held by public corporations (primarily the Vanuatu National Provident Fund, VNPF), followed by the Reserve Bank of Vanuatu (RBV) and commercial banks. There are also government-guaranteed debts for state-owned enterprises (SOEs), such as Air Vanuatu prior to 2019.4 3. Windfall revenues from the economic citizenship programs (ECPs) have enabled the authorities to embark on a debt reduction program.5 They paid off domestic and external debt in the amount of VUV 1.8 billion and VUV 1.5 billion, respectively, in 2018. External loan repayments included VUV 1.0 billion to China, VUV 0.4 billion to the ADB, and VUV 60 million to the IDA. 4. Following the end of the Tanna and Malekula Road Rehabilitation and Upgrade Program (Phase I), the authorities signed a Phase II loan agreement, amounting to VUV 5.7 billion, with China in November 2018. As the Phase II project was effectively an extension of the Phase I project, the financing terms and grant element were the same.6 The grant element was 29.2 percent, lower than the authorities’ commitment of a 35 percent grant component, which was first introduced in 2015 under its Debt Management Strategy (2015–17), one year after the Phase I project was signed. The authorities intend to retain their 35 percent grant component target as they update the debt management strategy. BACKGROUND ON MACROECONOMIC FORECASTS 5. Similar to the last DSA, the baseline scenario, which is consistent with the macroeconomic framework, incorporates the effects of natural disasters and climate change over the longer-term. The years 2019–24 are assumed to be free from newly-occurring major, costly disasters to simplify the policy discussion of the near-term outlook - standard practice in DSAs for other Pacific island small states with a similar risk profile. However, from 2025 onwards, the baseline incorporates the average long-term effects of natural disasters and climate change. Based on staff’s research on the impact of natural disasters, real GDP growth is lowered by 0.5 percentage points annually, the current account deficit is raised by 1.3 percentage points of GDP and the fiscal deficit is increased by 0.35 percentage points of GDP relative to disaster-free projections.7 The projected changes in 2025 for these three variables are smaller than the effects 4 The amounts are the original guarantees as provided by the authorities. The current outstanding amount might be lower, if some of the guaranteed debt has been repaid by the debt’s issuer. 5 The ECPs include the Vanuatu Development Support Program (VDSP) and Vanuatu Contribution Program (VCP), outlined in Box 1 of Vanuatu: 2018 Article IV Consultation, IMF Country Report No. 18/109. 6 The financing terms of China’s new loan are an interest rate of 2 percent, a grace period which shall not exceed 7 years, and a maturity of 20 years. A grant element has been calculated based on financing terms with a 5 percent discount rate. 7 Please see the detail in the, Lee and others, 2018, “The Economic Impact of Natural Disaster in Pacific Island Countries,” IM F Working Paper 18/108 (https://www.imf.org/en/Publications/WP/Issues/2018/05/10/The-Economic-Impact-of-Natural-Disasters- in-Pacific-Island-Countries-Adaptation-and-45826). 3 listed above. This is because real GDP growth is projected to rise in 2025 (in the absence of newly- occurring natural disasters), as the negative effect of recent natural disasters such as the Ambae and Ambryn volcanic eruptions and Cyclone Oma wanes. Similarly, the assumed increase in the fiscal and current account deficits from 2025 onwards (due to incorporation of the average effect of natural disasters and climate change) is masked somewhat by a coincident decline in the projected acquisition of non-financial assets. The discount rate used to calculate the net present value of external debt remains at 5 percent. The main assumptions are: • Real GDP growth is projected at 2.8 percent on average during 2019–29, which is lower than growth rates in the past three years, during which public investment has boomed and reconstruction efforts have been ongoing after Cyclone Pam. It is also lower than the 10- year average of 3.1 percent in the previous DSA, better reflecting the authorities’ longstanding views. • Inflation (measured by the GDP price deflator) is projected to average 2.2 percent (in U.S. dollar terms, the relevant measure for external debt), and 2.5 percent (in domestic currency term, the relevant measure for public debt) during 2019–29 both similar to their historical averages. • The non-interest current account deficit is projected to rise to 3.8 percent of GDP on average over 2019–29, relative to the historical average of 2.7 percent. This reflects the high import content for key infrastructure projects. It is lower than last year’s assumption of 6.6 percent because of higher expected ECP revenues and remittances. • Foreign direct investment inflows are expected to average 3.3 percent of GDP over 2019– 29, lower than the historical average of 5.1 percent, which included the post-Cyclone-Pam investment boom. • The primary deficit is expected to be 3.1 percent of GDP on average over 2019–2029, more negative than the historical average of 1.1 percent and last year’s assumption of 2.5 percent. This reflects higher infrastructure spending going forward than the previous DSA, and a more accurate accounting of maintenance costs for infrastructure. Staff does not take into account the possible introduction of income taxes. • External borrowing and grants will continue to be strong. Borrowing is driven in the short term by the disbursements for the new USD 51 million project supported by China, that should take place from 2019 to 2021. From 2022 onwards, staff assumes a slightly lower disbursement as a percent of GDP from bilateral development partners. The level of new annual external borrowing is expected to average around 5.0 percent of GDP, higher than last year’s assumption of 4.2 percent of GDP, reflecting the new loan from China and the authorities’ increased willingness to borrow externally to promote infrastructure development. Grant and lending flows from multilateral development partners are expected to increase over the medium term because of the scaling-up of IDA 4 and ADB financing.8 However, grants are expected to decline over the longer term, as the country’s economy grows. • The government-guaranteed debts as of end-2018 will continue for the projection period. Staff assumed that the government would not provide any guarantees for any new borrowing by SOEs, including Air Vanuatu. 6. The realism tool highlights that assumptions on the primary balance are conservative (Figure 4). The three-year adjustment in the primary deficit between 2018 and 2021 is at 8.9 percent of GDP. The deteriorating fiscal position is based on a conservative assumption for the proceeds from the ECPs and stronger infrastructure spending. The assumption on real growth in 2019 and 2020 is lower than possible growth paths which are calculated by the model based on a one-year fiscal adjustment. Two charts on public and private investment rates and their contributions to real GDP growth are not available because of a lack of data. Staff will try to estimate the capital stock if relevant information becomes available. Vanuatu: Baseline Macroeconomic Assumption (In percent of GDP, unless otherwise stated) 2008-18 2018 DSA Effect of natural 2019-29 Historical 2018-28 disaster and average average average climate change 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Real GDP growth 3.4 3.0 2.8 2.8 2.9 2.9 2.6 2.6 2.6 2.6 2.6 2.3 2.8 3.1 0.5 GDP deflator in US dollars (change in percent) -1.3 2.3 2.5 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.2 2.2 3.5 Non-interest current account deficit 0.7 4.9 4.2 3.8 3.5 3.6 4.1 4.2 4.2 4.3 4.4 2.7 3.8 6.6 1.3 Net FDI (negative = inflow) -4.2 -4.0 -3.8 -3.6 -3.4 -3.2 -3.1 -2.9 -2.8 -2.6 -2.5 -5.1 -3.3 -3.6 Primary deficit 2.3 2.7 3.1 3.2 3.2 3.1 3.2 3.2 3.2 3.2 3.2 1.1 3.1 2.5 0.35 Grants 5.8 5.8 5.7 5.6 5.6 5.5 5.5 5.5 5.5 5.6 5.6 6.1 5.6 7.6 Source: IMF staff projections. COUNTRY CLASSIFICATION 7. The country’s debt-carrying capacity as applied in the 2019 DSA is medium. The Composite Indicator (CI) index for Vanuatu, which has been calculated based on the April 2019 Calculation of the CI Index Components Coefficients (A) 10-year average CI Score components Contribution of values (B) (A*B) = (C) components CPIA 0.385 3.388 1.30 44% Real growth rate (in percent) 2.719 2.840 0.08 3% Import coverage of reserves (in percent) 4.052 54.466 2.21 74% Import coverage of reserves^2 (in percent) -3.990 29.665 -1.18 -40% Remittances as percent of GDP (in percent) 2.022 4.846 0.10 3% World economic growth (in percent) 13.520 3.579 0.48 16% CI Score 2.99 100% CI rating Medium Source: IMF staff calculations. 8 With respect to projected new borrowing from IDA and ADB, DSAs always assume terms that would prevail if the country was at low risk of debt distress, independent of current actual terms (which can change on a year to year basis). This is done to avoid a circular situation where the assumption that future commitments will be on grant terms would yield actual commitments on credit terms. 5 WEO (but with updated data on remittances) and the 2017 CPIA, is 2.94, indicating that the county’s debt-carrying capacity would be medium in the revised LIC-DSF framework. 8. The relevant indicative thresholds for the medium category are: 40 percent for the PV of debt-to-GDP ratio,180 percent for the PV of the debt-to-exports ratio, 15 percent for the debt service-to-exports ratio, and 18 percent for the debt service-to-revenue ratio. These thresholds are applicable to public and publicly guaranteed (PPG) external debt. The benchmark for the PV of total public sector debt under medium debt carrying capacity is 55 percent of GDP. PPG External Debt Thresholds and Total Public Debt Benchmarks Debt carrying PV of PPG external debt PV of PPG external debt PV of total public debt capacity in percent of in percent of in percent of (CI classification) GDP Exports Exports Revenue GDP Weak 30 140 10 14 35 Medium 40 180 15 18 55 Strong 55 240 21 23 70 DETERMINATION OF SCENARIO STRESS TESTS 9. Given Vanuatu’s vulnerability to natural disasters, staff conducted a tailored stress test for a natural disaster shock. Vanuatu, which is defined as a small developing natural- disaster-prone state in the IMF (2016) policy paper on small states, is automatically subject to the LIC-DSF standard natural disaster shock. This is a one-off shock of 10 percentage points to the debt-to-GDP ratio in the second year of the projection period (2020 in this case). Staff adjusted the default parameters by assuming a reduction of real GDP and export growth by 4 and 10 percentage points respectively. 9 For combined contingent liability shock, staff adjusted the levels for the increase in public debt from SOEs from 2 percent to 4 percent of GDP to reflect the government’s financial support to Air Vanuatu in 2019. 10 Staff continued using the default decrease in GDP of 5 percent from financial market turbulence. For Vanuatu, the default 5 percent of GDP value of the contingent liability can be interpreted as including a capital injection to an undercapitalized domestic bank. Combined Contingent Liability Shock 1 The country's coverage of public debt The central government, central bank, government-guaranteed debt Used for the Reasons for deviations from the Default analysis default settings 2 Other elements of the general government not captured in 1. 0 percent of GDP 0.0 To reflect the government's 3 SoE's debt (guaranteed and not guaranteed by the government) 1/ 2 percent of GDP 4.0 financial support to Air Vanuatu 4 PPP 35 percent of PPP stock 0.0 5 Financial market (the default value of 5 percent of GDP is the minimum value) 5 percent of GDP 5.0 Total (2+3+4+5) (in percent of GDP) 9.0 1/ The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country's public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE's debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%. 9 Please see the details in IMF, 2016, “Small States' Resilience to Natural Disasters and Climate Change: Role for the IMF,” IMF Policy Paper December 2016 (https://www.imf.org/en/Publications/Policy-Papers/Issues/2016/12/31/Small-States-Resilience-to- Natural-Disasters-and-Climate-Change-Role-for-the-IMF-PP5079). 10 In February and April 2019, the government provided two loans to Air Vanuatu, totaling VUV 1,230 million. The money is being used as deposits to purchase new aircraft. Further costs associated with these aircraft purchases have not been incorporated into this DSA because of a lack of confirmed information on the terms and potential financing sources. 6 DEBT SUSTAINABILITY External Debt Sustainability Analysis 10. All external PPG debt indicators remain below the policy-relevant thresholds for the projection period under the baseline scenario (Figure 1 and Table 1). These thresholds include the present value (PV) of the external-debt-to-GDP ratio, the PV of the external-debt-to-exports ratio, the external-debt-service-to-exports ratio, and the external-debt-service-to-revenue ratio. The PV of external-debt-to GDP ratio is expected to increase continuously from 27.0 percent in 2018 to 35.6 percent in 2029 mainly because of new disbursements for key infrastructure projects. As Figure 3 shows, the main driver of debt dynamics during the projection period is the current account deficit. 11. The stress tests indicate that a tailored natural disaster shock has the largest impact on debt trajectory, causing a breach of the external-debt-to-GDP threshold from 2024 onwards. This suggests the need for rebuilding fiscal buffers to enhance resilience against natural disasters. Other tests, including shocks to exports, other flows and the nominal exchange rate (depreciation), would also lead to breaches in the thresholds (Table 3). The export shock, which was the largest impact under the 2018 DSA, still is the fourth largest impact, which continues to suggest the need for expanding the export base through economic diversification. Public Sector Debt Sustainability Analysis 12. The PV of public-debt-to-GDP ratio does not breach the 55 percent benchmark under the baseline scenario (Figure 2 and Table 2). However, the public-debt-to-GDP ratio would rise from 52.4 percent in 2018 to breach the authorities’ stated public-debt-to-GDP target of 60 percent by 2025 (Table 2). As Figure 3 indicates, the breach is primarily driven by a primary deficit caused by elevated capital spending. 13. The stress tests, including the contingent liability shock, demonstrate deteriorating debt sustainability (Figure 2 and Table 4). The tailored natural disaster shock would breach its benchmark in 2029, while other shocks would not result in a breach (Table 4). The shock to real GDP growth has the third largest impact on debt sustainability. This highlights the need for encouraging stronger economic growth and the importance of rebuilding fiscal buffers against external shocks in the medium term. The contingent liability shock would not lead to a breach, but would result in an average deterioration of the debt position relative to the baseline of 5 percent of GDP. The authorities need to consider fiscal risk from contingent liability across SOEs when they provide guarantees to them. RISK RATING AND VULNERABILITIES 14. The debt sustainability analysis under the revised LIC-DSF framework suggests that Vanuatu’s risk of external debt distress remains moderate, with limited space to absorb 7 shocks. While there is no breach of external debt thresholds under the baseline scenario, the results of the stress tests indicate that the tailored natural disaster shock would result in a breach of the threshold for the PV of external-debt-to-GDP ratio. This underscores the importance of enhancing resilience against natural disasters. Figure 5 shows that there is limited space to absorb shocks, indicating the need for creating fiscal space to address future shocks. Even though debt service indicators remain well below their thresholds both under the baseline and stress test scenarios, loan-funded projects should be contracted as much as possible on favorable concessional terms to help contain the debt burden and respect the authorities’ stated goal of achieving a 35 percent grant element for such loans. 15. The DSA suggests that overall risk of debt distress is moderate. Even though the 55 percent benchmark for the PV of the external-debt-to-GDP ratio would not be breached under the baseline scenario, the public-debt-to-GDP ratio would breach the authorities’ target of 60 percent by 2025. This suggests the need for both stronger revenue mobilization measures, including the introduction of an income tax (personal and/or corporate), and expenditure rationalization in the medium term. Additional borrowing from other bilateral partners and a provision of additional debt guarantees would result in a breach of the authorities’ target in the short term. The authorities need to prioritize which loans to accept and limit guarantees to SOEs, including Air Vanuatu, to safeguard debt sustainability. The tailored natural disaster shock has the largest impact on public debt sustainability, resulting in the PV of external-debt-to-GDP ratio reaching 55 percent in 2029. The authorities are encouraged to rebuild fiscal buffers to enhance resilience against external shocks. AUTHORITIES’ VIEWS 16. The authorities broadly agreed with the staff assessment of debt sustainability analysis under the revised LIC-DSF. Given high infrastructure needs, the authorities underscored the need for financial support from bilateral and multilateral donors for any new projects. At the same time, they intended to maintain a grant-element target of at least 35 percent and seek grant financing as much as possible to reduce debt burden. They stressed their commitment to make prepayments to contain debt accumulation by using their strong cash reserves, which had been accumulating from particularly strong ECP revenues starting in 2016. They noted a difference in the coverage of public sector debt relative to published Budget 2019 figures, which did not include the IMF loans disbursed after Cyclone Pam in 2015 in their definition of public debt, as the payments had been directed to the RBV. The difference is very limited at 2.2 percent of GDP as of end-2018. The authorities noted that the DSA uses the original guaranteed debt amounts provided by the authorities. 17. The authorities also agreed with the assumptions in the DSA used in its forecasts. This included assumptions on the grant element of new loans and emphasis on the PPG debt target, as they remained committed to maintaining a grant-element target of at least 35 percent on new loans and the PPG-debt-to-GDP target of 60 percent. The DSA’s approach to the forecasts for publicly-guaranteed debt matched the government’s strongly stressed intention that it will be difficult to provide any guarantees in the near future for borrowing by SOEs. 8 Table 1. Vanuatu: External Debt Sustainability Framework, Baseline Scenario, 2016–39 (In percent of GDP, unless otherwise indicated) Actual Projections Average 8/ Historical Projections 2016 2017 2018 2019 2020 2021 2022 2023 2024 2029 2039 External debt (nominal) 1/ 36.2 43.8 45.2 46.0 47.5 49.2 50.6 51.9 53.0 57.2 54.0 19.8 52.5 Definition of external/domestic debt Residency-based of which: public and publicly guaranteed (PPG) 36.2 43.8 45.2 46.0 47.5 49.2 50.6 51.9 53.0 57.2 54.0 19.8 52.5 Is there a material difference between the No two criteria? Change in external debt 9.1 7.5 1.4 0.8 1.5 1.7 1.4 1.2 1.1 0.4 -0.6 Identified net debt-creating flows -6.9 -1.4 -10.1 -4.5 0.1 -0.3 -0.5 -0.7 -0.5 1.2 0.4 -4.9 -0.2 Non-interest current account deficit -0.8 6.1 -4.0 0.7 4.9 4.2 3.8 3.5 3.6 4.4 2.6 2.7 3.8 Deficit in balance of goods and services 15.4 12.2 9.7 7.1 10.9 10.0 9.2 8.7 8.5 8.1 4.6 9.0 8.8 Exports 43.2 41.5 44.3 46.8 46.5 46.2 45.8 45.5 45.3 44.8 44.9 45.5 45.5 Debt Accumulation Imports 58.6 53.7 54.1 53.9 57.4 56.2 55.0 54.2 53.7 52.9 49.5 54.5 54.3 9.0 49 Net current transfers (negative = inflow) -16.1 -7.0 -12.3 -4.9 -4.6 -4.3 -4.0 -3.9 -3.9 -3.5 -3.0 -7.6 -4.0 of which: official -10.9 -1.8 -2.2 -1.8 -1.7 -1.6 -1.5 -1.5 -1.4 -1.1 -0.6 8.0 47 Other current account flows (negative = net inflow) 0.0 0.8 -1.4 -1.4 -1.4 -1.4 -1.3 -1.2 -1.0 -0.2 1.1 1.3 -1.0 7.0 Net FDI (negative = inflow) -5.6 -4.5 -4.4 -4.2 -4.0 -3.8 -3.6 -3.4 -3.2 -2.5 -1.5 -5.1 -3.3 45 Endogenous debt dynamics 2/ -0.5 -3.0 -1.8 -1.0 -0.8 -0.7 -0.7 -0.8 -0.8 -0.7 -0.7 6.0 Contribution from nominal interest rate 0.3 0.4 0.5 0.5 0.5 0.5 0.6 0.6 0.6 0.7 0.7 5.0 43 Contribution from real GDP growth -0.9 -1.4 -1.3 -1.5 -1.3 -1.3 -1.3 -1.4 -1.4 -1.4 -1.4 Contribution from price and exchange rate changes 0.1 -1.9 -0.9 … … … … … … … … 4.0 41 Residual 3/ 16.0 8.9 11.5 5.3 1.5 2.0 1.9 1.9 1.6 -0.7 -1.1 10.2 1.3 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 3.0 39 2.0 Sustainability indicators 37 PV of PPG external debt-to-GDP ratio ... ... 27.0 28.5 29.5 30.6 31.3 32.0 32.7 35.6 34.4 1.0 PV of PPG external debt-to-exports ratio ... ... 60.8 60.9 63.5 66.3 68.4 70.3 72.1 79.6 76.7 0.0 35 PPG debt service-to-exports ratio 2.1 2.3 5.1 4.1 3.6 3.9 4.1 4.2 4.1 4.5 5.1 2019 2021 2023 2025 2027 2029 PPG debt service-to-revenue ratio 4.1 3.6 7.6 8.6 7.5 8.2 8.5 8.6 8.4 9.6 11.1 Gross external financing need (Million of U.S. dollars) -43.2 22.5 -56.9 -14.9 25.2 23.7 22.9 23.5 27.0 62.7 91.4 Rate of Debt Accumulation Grant-equivalent financing (% of GDP) Key macroeconomic assumptions Grant element of new borrowing (% right scale) Real GDP growth (in percent) 3.5 4.4 3.2 3.4 3.0 2.8 2.8 2.9 2.9 2.6 2.6 2.3 2.8 GDP deflator in US dollar terms (change in percent) -0.3 5.6 2.1 -1.3 2.3 2.5 2.6 2.6 2.6 2.6 2.6 2.2 2.2 Effective interest rate (percent) 4/ 1.1 1.2 1.2 1.1 1.2 1.2 1.3 1.3 1.3 1.3 1.3 1.4 1.2 External debt (nominal) 1/ Growth of exports of G&S (US dollar terms, in percent) 5.0 5.7 12.8 7.7 4.7 4.6 4.6 4.9 4.9 5.1 5.3 4.6 5.2 of which: Private Growth of imports of G&S (US dollar terms, in percent) -6.0 1.0 6.2 1.7 12.3 3.1 3.2 4.1 4.7 4.9 2.9 3.3 4.9 70 Grant element of new public sector borrowing (in percent) ... ... ... 41.9 43.6 44.9 47.5 47.5 47.2 46.4 44.5 ... 46.0 Government revenues (excluding grants, in percent of GDP) 22.5 26.4 29.9 22.1 22.1 22.2 22.2 22.1 22.0 21.3 20.5 21.1 21.9 60 Aid flows (in Million of US dollars) 5/ 66.2 74.1 52.4 82.5 91.2 99.1 107.2 112.4 115.9 143.5 218.6 Grant-equivalent financing (in percent of GDP) 6/ ... ... ... 7.8 8.0 8.2 8.1 8.1 7.9 7.7 7.3 ... 7.9 50 Grant-equivalent financing (in percent of external financing) 6/ ... ... ... 74.5 73.9 73.2 74.7 74.8 74.8 75.7 78.0 ... 74.8 40 Nominal GDP (Million of US dollars) 798 880 928 947 998 1051 1109 1170 1236 1598 2675 Nominal dollar GDP growth 3.1 10.3 5.4 2.1 5.4 5.3 5.5 5.6 5.6 5.3 5.3 4.6 5.1 30 Memorandum items: 20 PV of external debt 7/ ... ... 27.0 28.5 29.5 30.6 31.3 32.0 32.7 35.6 34.4 In percent of exports ... ... 60.8 60.9 63.5 66.3 68.4 70.3 72.1 79.6 76.7 10 Total external debt service-to-exports ratio 2.1 2.3 5.1 4.1 3.6 3.9 4.1 4.2 4.1 4.5 5.1 PV of PPG external debt (in Million of US dollars) 250.2 269.9 295.0 321.9 347.6 374.7 403.5 569.7 920.3 0 (PVt-PVt-1)/GDPt-1 (in percent) 2.1 2.6 2.7 2.4 2.4 2.5 2.2 1.5 2019 2021 2023 2025 2027 2029 Non-interest current account deficit that stabilizes debt ratio -9.9 -1.5 -5.4 0.0 3.3 2.5 2.4 2.3 2.5 4.0 3.3 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) + Ɛα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, Ɛ=nominal appreciation of the local currency, and α= share of local currency-denominated external debt in total external debt. 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/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ 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). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 9 Table 2. Vanuatu: Public Sector Debt Sustainability Framework, Baseline Scenario, 2016–39 (In percent of GDP, unless otherwise indicated) Actual Projections Average 6/ 2016 2017 2018 2019 2020 2021 2022 2023 2024 2029 2039 Historical Projections Public sector debt 1/ 46.4 53.2 52.4 52.9 53.9 55.3 56.6 57.9 59.0 65.1 74.4 27.6 59.0 Definition of external/domestic Residency- of which: external debt 36.2 43.8 45.2 46.0 47.5 49.2 50.6 51.9 53.0 57.2 54.0 19.8 52.5 debt based of which: local-currency denominated 10.1 9.4 7.3 6.9 6.4 6.1 6.0 6.0 6.0 8.0 20.3 Change in public sector debt 10.5 6.8 -0.7 0.5 1.0 1.4 1.3 1.2 1.1 1.1 0.8 Is there a material difference Identified debt-creating flows 2.9 -4.8 -5.6 0.5 1.0 1.4 1.3 1.2 1.1 1.1 0.8 0.5 1.2 No between the two criteria? Primary deficit 2.9 -0.1 -5.8 2.3 2.7 3.1 3.2 3.2 3.1 3.2 2.6 1.1 3.1 Revenue and grants 30.8 34.8 35.5 27.9 28.0 28.0 27.8 27.7 27.6 26.8 26.2 27.3 27.5 of which: grants 8.3 8.4 5.6 5.8 5.8 5.7 5.6 5.6 5.5 5.6 5.6 6.1 5.6 Public sector debt 1/ Primary (noninterest) expenditure 33.7 34.7 29.7 30.2 30.7 31.1 31.0 30.9 30.7 30.0 28.7 28.3 30.5 Automatic debt dynamics 0.0 -4.6 0.2 -1.8 -1.7 -1.7 -1.8 -1.9 -2.0 -2.0 -1.8 of which: local-currency denominated Contribution from interest rate/growth differential -0.8 -1.7 -1.4 -1.7 -1.5 -1.6 -1.5 -1.6 -1.7 -1.7 -1.5 of which: foreign-currency denominated of which: contribution from average real interest rate 0.4 0.3 0.2 0.0 0.0 -0.1 0.0 0.0 -0.1 -0.1 0.3 of which: contribution from real GDP growth -1.2 -2.0 -1.6 -1.7 -1.5 -1.5 -1.5 -1.6 -1.6 -1.6 -1.9 70 Contribution from real exchange rate depreciation 0.8 -3.0 1.6 ... ... ... ... ... ... ... ... 60 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 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 50 Recognition of contingent liabilities (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 40 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 30 Other debt creating or reducing flow (please specify) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 20 Residual 7.6 11.6 4.9 -0.1 -0.2 -0.2 -0.3 -0.3 -0.3 -0.3 -0.3 4.7 -0.2 10 Sustainability indicators 0 PV of public debt-to-GDP ratio 2/ ... ... 35.1 35.4 36.0 36.7 37.4 38.0 38.7 43.6 54.8 2019 2021 2023 2025 2027 2029 PV of public debt-to-revenue and grants ratio … … 99.0 126.8 128.6 131.2 134.4 137.2 140.4 162.4 209.4 Debt service-to-revenue and grants ratio 3/ 9.9 9.8 12.4 10.8 12.2 10.9 11.7 11.7 8.6 11.7 16.7 of which: held by residents Gross financing need 4/ 6.0 3.3 -1.4 5.3 6.1 6.2 6.4 6.4 5.5 6.3 7.0 of which: held by non-residents Key macroeconomic and fiscal assumptions 70 Real GDP growth (in percent) 3.5 4.4 3.2 3.4 3.0 2.8 2.8 2.9 2.9 2.6 2.6 2.3 2.8 60 Average nominal interest rate on external debt (in percent) 1.2 1.2 1.2 1.1 1.2 1.2 1.3 1.3 1.3 1.3 1.3 1.4 1.2 50 Average real interest rate on domestic debt (in percent) 7.0 2.5 3.2 4.7 4.7 4.8 4.7 4.8 4.8 4.4 4.1 3.8 4.7 Real exchange rate depreciation (in percent, + indicates depreciation) 3.1 -8.6 3.8 … ... ... ... ... ... ... ... -0.9 ... 40 Inflation rate (GDP deflator, in percent) 1.8 4.2 2.9 2.1 2.3 2.5 2.6 2.6 2.6 2.6 2.6 2.6 2.5 30 Growth of real primary spending (deflated by GDP deflator, in percent) -9.2 7.5 -11.7 5.3 4.6 4.3 2.4 2.5 2.2 2.1 2.1 4.9 2.9 20 Primary deficit that stabilizes the debt-to-GDP ratio 5/ -7.6 -7.0 -5.1 1.8 1.7 1.7 1.8 1.9 2.0 2.0 1.8 -6.5 1.9 10 PV of contingent liabilities (not included in public sector debt) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 2019 2021 2023 2025 2027 2029 Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt: The central government, central bank, government-guaranteed debt. Definition of external debt is Residency-based. 2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt. 4/ 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 and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 10 Figure 1. Vanuatu: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2019–29 1/ PV of debt-to GDP ratio PV of debt-to-exports ratio 50 200 45 180 40 160 35 140 30 120 25 100 20 80 15 60 10 40 5 Most extreme shock is Natural disaster 20 Most extreme shock is Natural disaster 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Debt service-to-exports ratio Debt service-to-revenue ratio 16 20 18 14 16 12 14 10 12 8 10 8 6 6 4 4 2 2 Most extreme shock is Exports Most extreme shock is One-time depreciation 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Baseline Historical scenario Most extreme shock 1/ Threshold Customization of Default Settings Borrowing Assumptions for Stress Tests* Size Interactions Default User defined Shares of marginal debt No No External PPG MLT debt 100% Tailored Tests Terms of marginal debt Combined CLs Yes Avg. nominal interest rate on new borrowing in USD 1.3% 1.3% Natural Disasters No Yes USD Discount rate 5.0% 5.0% Commodity Prices 2/ n.a. n.a. Avg. maturity (incl. grace period) 31 31 Market Financing n.a. n.a. Avg. grace period 8 8 Note: "Yes" indicates any change to the size or * Note: All the additional financing needs generated by the shocks under the stress tests are interactions of the default settings for the stress tests. assumed to be covered by PPG external MLT debt in the external DSA. Default terms of marginal "n.a." indicates that the stress test does not apply. debt are based on baseline 10-year projections. Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. Stress tests with one-off breaches are also presented (if any), while these one- off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one- off breach, only that stress test (with a one-off breach) would be presented. 2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department. 11 Figure 2. Vanuatu: Indicators of Public Debt Under Alternative Scenarios, 2019–29 1/ PV of Debt-to-GDP Ratio 60 50 40 30 20 Most extreme shock is Natural disaster 10 0 2019 2021 2023 2025 2027 2029 PV of Debt-to-Revenue Ratio Debt Service-to-Revenue Ratio 250 16 14 200 12 10 150 8 100 6 4 50 Most extreme shock is Natural disaster Most extreme shock is One-time depreciation 2 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Baseline Most extreme shock 1/ Public debt benchmark Historical scenario Borrowing Assumptions for Stress Tests* Default User defined Shares of marginal debt External PPG medium and long-term 85% 85% Domestic medium and long-term 15% 15% Domestic short-term 2% 0% Terms of marginal debt External MLT debt Avg. nominal interest rate on new borrowing in USD 1.3% 1.3% Avg. maturity (incl. grace period) 31 31 Avg. grace period 8 8 Domestic MLT debt Avg. real interest rate on new borrowing 4.7% 4.7% Avg. maturity (incl. grace period) 10 10 Avg. grace period 9 9 Domestic short-term debt Avg. real interest rate -2.5% -2.5% * Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections. Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented. 12 Table 3. Vanuatu: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2019–29 (In percent) Projections 1/ 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 PV of debt-to GDP ratio Baseline 28 30 31 31 32 33 33 34 35 35 36 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2029 2/ 28 28 28 27 27 26 25 24 23 21 20 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A B. Bound Tests B1. Real GDP growth 28 30 32 33 34 35 35 36 37 37 38 B2. Primary balance 28 31 34 34 35 36 36 37 38 38 38 B3. Exports 28 32 38 38 39 40 40 41 42 42 42 B4. Other flows 3/ 28 34 40 41 41 42 42 43 44 44 44 B5. Depreciation 28 37 35 36 37 38 39 40 41 42 42 B6. Combination of B1-B5 28 35 39 39 40 41 41 42 43 43 43 C. Tailored Tests C1. Combined contingent liabilities 28 34 35 36 36 37 38 38 39 39 40 C2. Natural disaster 28 36 37 39 40 41 42 43 44 45 46 C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 40 40 40 40 40 40 40 40 40 40 40 PV of debt-to-exports ratio Baseline 61 64 66 68 70 72 74 76 77 79 80 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2029 2/ 61 60 60 59 59 58 56 54 51 47 44 0 61 62 63 64 65 66 67 67 66 65 63 B. Bound Tests B1. Real GDP growth 61 64 66 68 70 72 74 76 77 79 80 B2. Primary balance 61 67 73 75 77 79 81 82 84 85 86 B3. Exports 61 74 94 97 99 101 103 105 106 108 108 B4. Other flows 3/ 61 74 87 89 90 92 94 96 97 98 98 B5. Depreciation 61 64 61 63 65 67 69 71 72 74 75 B6. Combination of B1-B5 61 74 77 86 88 90 92 93 95 96 97 C. Tailored Tests C1. Combined contingent liabilities 61 73 76 78 80 81 83 85 87 88 89 C2. Natural disaster 61 82 86 90 93 96 99 102 104 107 109 C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 180 180 180 180 180 180 180 180 180 180 180 Debt service-to-exports ratio Baseline 4 4 4 4 4 4 4 4 4 4 5 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2029 2/ 4 4 4 4 4 4 4 4 4 4 4 0 4 3 4 4 4 4 4 3 4 4 4 B. Bound Tests B1. Real GDP growth 4 4 4 4 4 4 4 4 4 4 5 B2. Primary balance 4 4 4 4 4 4 4 4 4 4 5 B3. Exports 4 4 5 5 5 5 5 5 5 5 6 B4. Other flows 3/ 4 4 4 5 5 5 4 4 5 5 5 B5. Depreciation 4 4 4 4 4 4 4 4 4 4 4 B6. Combination of B1-B5 4 4 4 5 5 5 5 4 5 5 6 C. Tailored Tests C1. Combined contingent liabilities 4 4 4 4 4 4 4 4 4 5 5 C2. Natural disaster 4 4 5 5 5 5 5 5 5 5 5 C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 15 15 15 15 15 15 15 15 15 15 15 Debt service-to-revenue ratio Baseline 9 8 8 9 9 8 8 8 9 9 10 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2029 2/ 9 8 8 8 8 8 8 7 8 8 8 0 9 7 8 8 8 8 7 7 8 8 8 B. Bound Tests B1. Real GDP growth 9 8 9 9 9 9 9 8 9 10 10 B2. Primary balance 9 8 8 9 9 9 8 8 9 9 10 B3. Exports 9 8 9 9 9 9 9 9 9 10 11 B4. Other flows 3/ 9 8 9 9 10 9 9 9 9 10 11 B5. Depreciation 9 9 10 10 10 10 10 10 11 11 12 B6. Combination of B1-B5 9 8 9 10 10 10 9 9 10 10 12 C. Tailored Tests C1. Combined contingent liabilities 9 8 9 9 9 9 9 8 9 9 10 C2. Natural disaster 9 8 9 9 9 9 9 9 9 10 10 C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Threshold 18 18 18 18 18 18 18 18 18 18 18 Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the threshold. 2/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 3/ Includes official and private transfers and FDI. 13 Table 4. Vanuatu: Sensitivity Analysis for Key Indicators of Public Debt 2019–29 Projections 1/ 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 PV of Debt-to-GDP Ratio Baseline 35 36 37 37 38 39 40 41 42 43 44 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2029 2/ 35 35 35 34 34 33 33 33 32 32 32 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A B. Bound Tests B1. Real GDP growth 35 37 40 42 43 45 46 48 50 52 53 B2. Primary balance 35 38 41 41 42 42 43 44 45 46 47 B3. Exports 35 38 43 43 44 45 45 46 47 48 49 B4. Other flows 3/ 35 41 46 47 47 48 49 49 50 51 52 B5. Depreciation 35 43 41 40 38 37 37 36 35 35 34 B6. Combination of B1-B5 35 37 38 36 37 37 38 39 40 41 42 C. Tailored Tests C1. Combined contingent liabilities 35 42 42 43 43 44 45 46 47 48 49 C2. Natural disaster 35 44 45 47 48 49 50 52 53 55 56 C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Public debt benchmark 55 55 55 55 55 55 55 55 55 55 55 PV of Debt-to-Revenue Ratio Baseline 127 129 131 134 137 140 145 149 153 158 162 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2029 2/ 127 125 123 122 121 120 120 119 119 119 119 0 11 15 13 13 12 9 9 11 9 9 9 B. Bound Tests B1. Real GDP growth 127 133 142 148 154 160 167 174 182 189 197 B2. Primary balance 127 136 145 148 151 154 158 163 167 171 176 B3. Exports 127 136 153 156 159 162 166 170 174 178 182 B4. Other flows 3/ 127 146 165 168 170 173 177 181 186 190 193 B5. Depreciation 127 155 150 145 141 138 136 134 132 131 130 B6. Combination of B1-B5 127 131 135 131 133 137 141 145 149 154 158 C. Tailored Tests C1. Combined contingent liabilities 127 149 151 154 157 160 164 168 173 177 181 C2. Natural disaster 127 157 161 166 171 176 182 189 195 201 208 C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Debt Service-to-Revenue Ratio Baseline 11 12 11 12 12 9 8 11 9 10 12 A. Alternative Scenarios A1. Key variables at their historical averages in 2019-2029 2/ 11 12 11 11 11 8 8 10 8 9 10 0 11 15 13 13 12 9 9 11 9 9 9 B. Bound Tests B1. Real GDP growth 11 12 11 12 12 9 9 12 10 11 13 B2. Primary balance 11 12 11 12 12 9 9 11 10 10 12 B3. Exports 11 12 11 12 12 9 9 11 9 10 12 B4. Other flows 3/ 11 12 11 12 12 9 9 12 10 10 13 B5. Depreciation 11 13 13 13 13 10 10 12 11 11 13 B6. Combination of B1-B5 11 12 11 11 11 8 8 11 9 9 12 C. Tailored Tests C1. Combined contingent liabilities 11 12 12 12 12 9 9 11 10 10 12 C2. Natural disaster 11 13 12 13 13 10 10 12 10 11 13 C3. Commodity price n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C4. Market Financing n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the benchmark. 2/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP. 3/ Includes official and private transfers and FDI. 14 Figure 3. Vanuatu: Drivers of Debt Dynamics – Baseline Scenario External debt Gross Nominal PPG External Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Current DSA 80 80 Residual 80 Previous DSA proj. 60 70 DSA-2013 60 Interquartile range (25-75) Price and 60 exchange rate40 40 50 Real GDP growth 20 20 Change in PPG 40 debt 3/ 30 Nominal 0 0 interest rate 20 Median -20 -20 Current 10 account + FDI -40 -40 0 Contri bution of Change in 5-year 5-year Di s tribution across LICs 2/ 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 unexpected PPG debt 3/ historical projected -60 cha nges change change Public debt Gross Nominal Public Debt Debt-creating flows Unexpected Changes in Debt 1/ (in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP) Residual Current DSA Previous DSA proj. 60 35 DSA-2013 Interquartile 80 Other debt 30 range (25-75) creating flows 70 40 25 Real Exchange 60 rate depreciation 20 20 50 Real GDP growth 15 Change in debt 40 0 10 30 Real interest rate 20 5 Primary deficit -20 10 0 Median 0 Change in debt -5 Distribution across LICs 2/ 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Contribution of -10 unexpected 1/ Difference between anticipated and actual contributions on debt ratios. 2/ Distribution across LICs for which LIC DSAs were produced. 3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation. 15 Figure 4. Vanuatu: Realism Tools 3-Year Adjustment in Primary Balance Fiscal Adjustment and Possible Growth Paths 1/ (Percentage points of GDP) 12 0 14 Distribution 1/ -1 10 12 Projected 3-yr adjustment -2 3-year PB adjustment greater than 2.5 In percentage points of GDP percentage points of GDP in approx. top 8 -3 10 quartile In percent -4 8 6 -5 6 4 -6 4 -7 2 -8 2 0 -9 0 2013 2014 2015 2016 2017 2018 2019 2020 Baseline Multiplier = 0.2 Multiplier = 0.4 More -3.5 -2.0 -0.5 -4.5 -4.0 -3.0 -2.5 -1.5 -1.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 Multiplier = 0.6 Multiplier = 0.8 1/ Data cover Fund-supported programs for LICs (excluding emergency financing) approved since 1990. The 1/ Bars refer to annual projected fiscal adjustment (right-hand side scale) and lines show possible real size of 3-year adjustment from program inception is found on the horizontal axis; the percent of sample is GDP growth paths under different fiscal multipliers (left-hand side scale). found on the vertical axis. 16 Figure 5. Vanuatu: Qualification of the Moderate Category, 2019–29 1/ PV of debt-to GDP ratio PV of debt-to-exports ratio 45 200 40 180 Threshold 35 160 140 (1-X)*Threshold 30 120 25 (1-Y)*&Threshold 100 20 80 15 60 10 40 5 20 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Debt service-to-exports ratio Debt service-to-revenue ratio 16 20 18 14 16 12 14 10 12 8 10 8 6 6 4 4 2 2 0 0 2019 2021 2023 2025 2027 2029 2019 2021 2023 2025 2027 2029 Threshold Baseline Limited space Some space Substantial space Sources: Country authorities; and staff estimates and projections. 1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent. 17