72984 INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL MONETARY FUND LAO PEOPLE'S DEMOCRATIC REPUBLIC Joint Bank-Fund Debt Sustainability Analysis Update Prepared by the staffs of the International Development Association and the International Monetary Fund1 Approved by Jeffrey D. Lewis and Sudhir Shetty (IDA) and David Cowen and Masato Miyazaki (IMF) August 31, 2012   Following the improvement in the country’s CPIA rating, Lao P.D.R.’s risk of debt distress is reclassified from high to moderate, as all external debt distress indicators stay below policy- dependent indicative thresholds during the forecasting period under baseline assumptions, although thresholds are breached in the presence of certain shocks.2 In addition, debt service ratios remain comfortably within the policy-dependent indicative thresholds even under stress conditions, due to the high level of concessionality of official borrowing. The new risk classification will have important implications for Lao P.D.R.’s borrowing capacity. While the composition of concessional funds is expected to be skewed away from grants and towards loans, the overall envelope of external resources available to the country should increase.                                                              1 This DSA was prepared jointly by the World Bank (WB) and IMF, in consultation with the Asian Development Bank (AsDB). The debt data underlying this exercise were provided by the Lao P.D.R. authorities, the AsDB, and the WB, combined with IMF staff’s estimates. 2 The low-income country debt sustainability framework (LIC DSF) recognizes that better policies and institutions allow countries to manage higher levels of debt, and thus the threshold levels for debt indicators are policy- dependent. In the LIC-DSF, the quality of a country’s policies and institutions is measured by the World Bank’s Country Policy and Institutional Assessment (CPIA) index and classified into three categories: strong, medium, and weak. Lao P.D.R.’s policies and institutions, as measured by the CPIA, averaged 3.29 over the past 3 years. Since its average CPIA has been above the 3.25 mark for two years in a row, Lao P.D.R.’s policy performance has been reclassified from weak to medium according to the “Staff Guidance Note on the Application of the Joint Fund-Bank Debt Sustainability Framework for Low-income Countries (www.wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2008/10/15/000333037_20081015235232/Re ndered/PDF/397480BR0Box3311022610SecM200810441.pdf and www.imf.org/external/np/pp/eng/2010/012210.pdf).� Therefore, the relevant indicative thresholds for this category are: 40 percent for the PV of debt-to-GDP ratio, 150 percent for the PV of debt-to-exports ratio, 250 percent for the PV of debt-to-revenue ratio, 20 percent for the debt service-to-exports ratio, and 20 percent for the debt service-to- revenue ratio. These thresholds are applicable to public and publicly guaranteed external debt. 2  I. INTRODUCTION 1. The LIC DSA for Lao P.D.R. reclassifies the risk reclassification. the risk of debt distress from high to 2. The high level of concessionality of moderate.3 Recent improvements in Lao P.D.R.’s official borrowing keeps debt service ratios at CPIA index led to a reclassification of its policy manageable levels. In addition, public and performance from weak to moderate.4 publicly-guaranteed (PPG) external debt stock Consequently, Lao P.D.R.’s indicative debt distress indicators are expected to remain below policy- thresholds were raised relative to 2011 levels. dependent indicative thresholds throughout the These higher thresholds combined with a similar entire projection period under the baseline. Thresholds for External Debt However, shocks to the domestic and external (In percent) Threshold environment or excessively loose macroeconomic policies may push the stock of external public Indicator Before Now debt beyond sustainable levels, with some debt Present value of debt to GDP 30 40 Present value of debt to exports 100 150 distress indicators breaching their respective Present value of debt to revenue 200 250 thresholds under certain stress tests.5 In this Debt service to exports 15 20 regard, debt dynamics are most sensitive to large Debt service to revenue 1/ 25 20 Source: Lao P.D.R. authorities; and IMF and World Bank real depreciations of the kip, as external debt is staff estimates predominantly denominated in foreign currency. 1/ For debt service to revenue ratio, the applicable thresholds have been reduced. debt dynamics relative to the previous DSA led to II. BACKGROUND AND ASSUMPTIONS 3. Lao P.D.R.’s external PPG debt remains 44.4 percent of GDP in 2011. 5The corresponding elevated, but its burden has eased net present value (PV) of debt at end-2011 was considerably in the recent past. 3The nominal 29.8 percent of GDP, down from 36.6 percent of stock of PPG debt increased from US$3.5 billion in GDP in 2010. Similarly, the PV of PPG debt relative 2010 to US$3.7 billion in 2011. 4However, high to exports declined from 85.9 percent in 2010 to real GDP growth and the Kip’s appreciation vis-à- 78.1 percent in 2011. vis the U.S. dollar contributed to a decline in the 4. Approximately 56 percent of PPG debt debt-to-GDP ratio from 50.3 percent of GDP to in Lao P.D.R. is held by multilateral creditors, mainly the Asian Development Bank (AsDB— 33 percent) and the International Development                                                              3                                                              See the joint IMF-WB DSA for 2011: IDA/SecM2011- 0565 and IMF Country Report No.12/165. 5 Stress tests include sharp exchange rate depreciation, 4 Lao P.D.R.’s CPIA index was raised from 3.28 in 2010 more adverse terms of additional foreign financing, to 3.4 in 2011. and reductions in GDP growth among others shocks. 3    Association (IDA—18 percent). Around 38 percent challenges, the long-term power purchase of the debt is held by bilateral creditors—mainly agreements that are signed for these projects and China, India, Japan, Korea, Russia, and Thailand. the resulting government revenues in the form of Noteworthy, the importance of bilateral creditors royalties, dividends, and profit tax payments has increased vis-à-vis multilateral ones. Albeit arguably reduce the risk of debt distress. small, the share of nonconcessional PPG debt has 6. Recorded domestic public debt rose to increased steadily in the last several years, 8.9 percent of GDP in 2011, up from standing at 6.3 percent in 2011. This increase was 8.5 percent of GDP in 2010, as the central bank expected given heavy investments in hydropower disbursed more loans to finance local and electricity generation projects, including the government’s off-budget infrastructure projects. need by the public sector to finance equity stakes. Lending from the Bank of Lao P.D.R. (BoL) to local Lao P.D.R.: Stock of Public and governments represents about three-quarters of Publicly Guaranteed External Debt at End-2011 the recorded total domestic debt, with the As a Share of remainder inclusive of government bonds related In Billions of Total External In percent of to the recapitalization of state-owned commercial U.S. Dollar Debt GDP Total 3.7 100 44.4 banks (SOCBs). Total PPG domestic and external Multilateral 2.1 55.8 24.7 debt stood at 53.2 percent of GDP in 2011, down Bilateral 1.4 37.9 16.9 from 58.8 percent the year before. This Commercial 1/ 0.2 6.3 2.8 Source: Lao P.D.R. authorities; and IMF and World Bank improvement is also driven chiefly by the staff estimates combination of GDP growth and exchange rate 1/ Includes direct borrowing by state-owned enterprises on nonconcessional terms. effects. The stock of BoL’s loans to local governments is projected to peak in 2012 as the 5. The increasing presence of bilateral BoL’s quasi-fiscal operations are terminated. creditors underscores the need to strengthen Lao P.D.R.: External Public Debt Indicators at End-2011 debt management capacity. This is particularly Indicative thresholds End-2011 important to ensure that debt sustainability Present value of debt, as a percent of: considerations are taken into account when new GDP 40 29.8 Exports 150 78.1 debt is contracted. A mitigating factor for Revenue 250 182.9 Lao P.D.R.’s external debt burden lies in the Debt service, as a percent of: prospective returns on the hydropower and Exports 20 3.2 mining projects that have been financed in part Revenue 20 7.5 Source: Lao P.D.R. authorities; and IMF and World Bank by external PPG debt. While many of these staff estimates projects face construction and implementation III. ASSUMPTIONS UNDERLYING THE DEBT SUSTAINABILITY ANALYSIS 7. Box 1 summarizes the medium-term current policies—projects annual average growth macroeconomic framework underlying the of 7.9 percent between 2012 and 2017, in line DSA. The baseline scenario—which is based on with the authorities’ targets. Growth would be   4  supported by the strong performance of exports, business climate and the continued transition especially from the resource sector, as well as by towards a market-based economy will also buoyant domestic activity, in particular agriculture, contribute to steady and more broad-based manufacturing, and services. Improvements to the growth in Lao P.D.R. Lao P.D.R. Macroeconomic Assumptions: Comparison with 2011 8. External financing is assumed to (Average over the 20 year projection horizon) remain largely on concessional terms over the 2011 DSA 2012 DSA medium term. As Lao P.D.R. graduates from GDP growth 6.7 6.8 its low-income country status over the longer GDP deflator in US dollar terms (in percent) 3.3 2.1 term, grant financing is expected to decline Non-interest current account deficit 11.4 11.8 Primary deficit 0.3 0.7 relative to loans from bilateral creditors as well as Source: Lao P.D.R. authorities, and IMF and World Bank staff estimates. from commercial sources. IV. DEBT SUSTAINABILITY A.   External Debt Sustainability Analysis  9. Contrary to the previous DSAs, the PV in the last case the new policy-dependent of debt-to-GDP ratio is not expected to cross threshold is not breached. A rise in the cost of the policy-dependent indicative thresholds at additional financing (by 200 basis points relative any point during the forecasting period under to the baseline) would increase the PV of debt-to- baseline conditions (Figure 1 and Table 1). This exports ratio by more than 30 percentage points marked improvement is driven by the increase in in the long run relative to the baseline. However, the indicative threshold, as Lao P.D.R.’s policy even under this extreme scenario, there would be performance was raised from weak to moderate no breaches of the corresponding threshold, due to its improved CPIA index of 3.4 in 2011. contrary to the results in the previous DSA when Similarly to last year’s DSA, all three external debt policy performance was still rated as weak. Hence, stock indicators are projected to remain basically improved policy performance reduced the flat until about 2018, as large projected vulnerability of Lao P.D.R.’s external debt to disbursements are expected to be counteracted potential shocks to the cost of public funds. by a combination of debt repayment and high 11. Debt dynamics continue to be GDP growth during the next several years. Also in markedly worse under an alternative scenario line with the previous DSA, debt service ratios fall in which key variables are at their historical comfortably below policy-dependent thresholds averages. Through 2015, debt dynamics are during the entire forecasting period. more favorable under this historical scenario – which takes into account the appreciation of the 10. Exchange rate and shocks to the cost kip relative to the U.S. dollar experienced during of new loans present the most important risks to external debt sustainability. Table 3 and Figure 1 illustrate how a one-off 30 percent depreciation of the kip vis-à-vis the U.S. dollar would lead to a sharp rise in the PV of the debt- to-GDP and the PV of debt-to-revenues, although 5  2002–2011.6 In later years, this effect is outweighed by the higher historical average of the current account deficit (14.7 percent of GDP per annum compared to 10.0 percent of GDP per annum in the baseline), and the lower historical                                                                6 The kip appreciated 3 percent per year on average during this period.   6  Box 1: Baseline Scenario—Underlying Assumptions (2012–32) The baseline macroeconomic framework assumes that the economy will be underpinned by further development of Lao P.D.R.’s potential in hydropower and mining, supported by continued reforms aimed at transitioning to a market economy and the strengthening of macroeconomic policies. Real GDP growth is projected to average 7.9 percent External financing is assumed to remain on largely between 2012–17. The near-term outlook is boosted by concessional terms over the medium term. In the long- expanding production of mining and hydropower, with run, however, grant financing decreases with economic the (US$3.7 billion) Hongsa Lignite mining and power development. station expected to start operations in 2015–16. In  Multilateral creditors: Projected loan addition, the outlook for tourism and agriculture is disbursements in the medium term are relatively favorable, buoyed by domestic demand and strong FDI low, since IDA and AsDB have a pipeline of inflows. Over the longer term, assumed structural operations financed on grant terms. Over the reforms would create a better environment for private longer term, grant financing decreases with investment, broadening the sources of growth. Real economic development and project loans are GDP is expected to moderate to 6.5 percent on average assumed to increase moderately. during 2018–32, as production in the resource sector  Bilateral creditors: For 2012–13, project loan reaches maturity. Over time, the share of agriculture in disbursements also increase, as donors provide GDP is expected to decline, as the transition to a support to the government’s development agenda. market based economy is accompanied by the rising Over the medium and longer term, greater importance of the industry and services sectors. participation by new emerging market creditors Graduation from low-income status could be achieved results in an increased role for bilateral finance, in the second half of the projection period. including for lending purposes to state-owned Inflation is projected to average 5.1 percent in 2012, down  enterprises. from 7.6 percent in 2011, on the back of lower food and fuel   Commercial creditors: Over the medium term, price inflation. Over the medium term, inflation is expected  commercial disbursements are relatively small, to decline further, but it is projected to remain above  principally used to finance a portion of the 4 percent until 2017.  government’s equity stake participation in the new The balance of payments continues to be driven by hydropower projects. The DSA assumes that developments in the resource sector, which has an disbursements of the government’s borrowing to important bearing both in the current account and the finance its equity stake in the Hongsa Lignite capital and financial account. Starting from a large project will take place in 2014 and 2015. deficit of 21.4 percent of GDP in 2011, the current Fiscal policy is projected to remain on a consolidation account is projected to improve considerably in the path, with the primary deficit declining from 2.4 percent long-term. While the nonresource current account of GDP in 2011 to 1.3 percent of GDP in 2018, before deficit is projected to deteriorate until 2018, the reaching 0.5 percent of GDP towards the end of the resource current account is forecasted to move into projection period. Reductions in the deficit are largely surplus as early as 2016, building on the maturation of driven by expected declines in primary expenditures, mining and hydropower projects. In this context, the since the ratio of revenues and grants to GDP are assumed pick up in nonresource exports and services is forecasted to decline from their 2012 peak starting in driven by strengthened competitiveness and regional 2013. integration, supported by improvements in the Domestic debt decreases over the medium term driven investment climate, streamlining of business by repayments of the lending to local governments regulations, and the prevalence of trade commitments. from the BoL. In the long term, net external finance The overall external position is expected to strengthen declines relative to GDP, and a larger share of budget over time, exemplified by the gradual improvement in deficits is financed domestically, pushing domestic debt the international reserves position. Private capital to higher but sustainable levels.   inflows in the form of FDI are expected to remain high through the first half of the projection period as large new projects get under way before they gradually decline to a more sustainable level. 7  average for FDI (4.6 percent of GDP per annum baseline, putting Lao P.D.R. on an unsustainable compared to 9.0 percent of GDP per annum in the path in the long run. Therefore, a negative shock baseline). These estimates indicate that the to FDI in Lao P.D.R. would force it to reduce historical scenario assumes around 9 percentage substantially its current account deficit in order to points of GDP more in debt accumulation the avoid external debt distress. B.   Public Sector Debt Sustainability  12. In line with the previous DSA’s the fifth bound test, which considers the effect of projections, the PV of total PPG debt in a 10 percent of GDP increase in other debt- percent of GDP and in percent of revenue are creating flows, provides hints on the possible both projected to decline markedly over the effect of a resolution of relevant contingent public long run under baseline assumptions (Figure 2 liabilities. and Table 2). Domestic debt is expected to 15. Alternative scenarios show less decline from 8.9 percent of GDP in 2011 to about positive debt dynamics over the longer term. 5.4 percent of GDP by 2017. In addition, the PV of For example, in a historical scenario where real debt-to-revenue ratio is also projected to decline GDP growth and the primary balance are fixed at during the forecasting period. their historical averages, the PV of public debt-to- 13. Public debt ratios are particularly GDP ratio rises above 42 percent by 2032. If, sensitive to a kip depreciation over the however, the primary balance were fixed at the medium term (Figure 2 and Table 4). Similarly to level projected for 2012, the PV of debt-to-GDP the results in the last DSA, a 30 percent real would be roughly unchanged in the medium term, depreciation of the kip would immediately raise but it would be higher relative to baseline the PV of public debt-to-GDP and the PV of conditions by the end of the projection period. public debt-to-revenue, before both indicators Together, these results highlight the importance start a declining trend once again. While the debt of efforts towards improving fiscal balances over service-to-revenue ratio is relatively stable under time, even relative to the positive fiscal the baseline scenario, it would increase performance expected for this year. permanently by a substantial margin if the kip 16. The baseline scenario also assumes were to depreciate sharply. It should be noted that the BoL will slow down its quasi-fiscal that this scenario is likely to overstate risks given operations. Naturally, public debt dynamics that a significant share of GDP, including most of could deteriorate significantly should this the resource GDP, is earned in foreign currency. assumption not materialize. 14. Public debt indicators are susceptible to the effects of contingent liabilities. The settlement of arrears and debts to contractors, related to public investment projects implemented by local governments and the recapitalization of SOCBs could lead to a rise in recorded domestic public debt. As an illustration,   8  V. THE AUTHORITIES' VIEWS 17. Authorities broadly agreed with the 18. Two main sources of disagreement are overall assessment and indicated they are the nonrecognition of US$600 million of supportive of the reclassification of debt disbursements from China over the medium distress. They expect to capitalize on the better term as well as the expected exchange rate risk classification to expand access to official depreciation built into the framework. The resources and improve their ability to finance authorities did not acknowledge staff’s previous capital needs. In addition, the authorities agreed estimates of large disbursements of new funds with staff that a better risk classification may from China between 2012 and 2017.7 In addition, improve access to nonconcessional loans in the they questioned staff’s projections for the future. This is important since Lao P.D.R. is evolution of the kip-U.S. dollar exchange rate— expected to rely more on commercial funds as it driven by inflation differentials—which has an graduates from its low-income country status important bearing on external debt indicators. over the medium term.  VI. CONCLUSION 19. Due to recent improvements in policy Lao P.D.R.7 and a weaker balance of payments8 performance, Lao P.D.R.’s risk of debt distress would worsen debt dynamics. Thus, a tightening has been reclassified from high to moderate. of macroeconomic policies can support external The improved 2011 CPIA index moved Lao P.D.R. sustainability. Cautious assessment and to the group of countries with medium rather monitoring of large-scale projects and private than weak policy performance, raising its policy- external debt will be required to mitigate the risks dependent debt distress thresholds. Consequently, posed to external and public debt sustainability, the new marks are not breached by any of the especially if some of these projects are financed debt distress indicators under baseline conditions. Since debt dynamics are relatively similar to what                                                              was projected in the previous DSA, it is clear that 7 the risk reclassification is driven by improvements  The staff maintained the $600 million of estimated disbursements as this was information collected by in domestic policies and institutions.  previous missions. These disbursements do not, however, result in a material change in the overall 20. These gains notwithstanding, results assessment of debt distress.  are still sensitive to assumptions regarding 8  In a customized scenario where commodity prices investment and performance of the resource decline by 20 percent in 2013 and 2014, debt stock sector. Despite long-term contracts with fixed indicators approach or even reach their policy- dependent thresholds, illustrating the vulnerability of prices for energy exports to neighboring countries, Lao P.D.R. to commodity price shocks. However, this Lao P.D.R.’s economy remains exposed to customized scenario poses less of a threat to debt fluctuations in copper and gold prices in the dynamics than the historical scenario.  medium term, as well as to economic developments in its main trading partners (China, Thailand and Vietnam).8 Lower growth in 9    from commercial sources, such as bonds backed capacity and developing a medium-term by future revenues.  borrowing strategy for the government could also lead to more efficient utilization of borrowed 21. External borrowing should mostly be funds and more favorable debt dynamics even obtained on concessional terms and fiscal and under stress scenarios. If these conditions were to quasi-fiscal liabilities should be carefully materialize, Lao P.D.R.’s risk of debt distress could managed, to further create buffers against improve even further.  vulnerabilities. Improving debt management   10  Figure 1. Lao PDR: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2012-2032 1/ a. Debt Accumulation b.PV of debt-to GDP ratio 4 30 70 3 25 60 3 50 20 2 15 40 2 30 10 1 20 1 5 10 0 0 2012 2017 2022 2027 2032 0 Rate of Debt Accumulation Grant-equivalent financing (% of GDP) 2012 2017 2022 2027 2032 Grant element of new borrowing (% right scale) c.PV of debt-to-exports ratio 400 d.PV of debt-to-revenue ratio 250 350 200 300 250 150 200 100 150 100 50 50 0 0 2012 2017 2022 2027 2032 2012 2017 2022 2027 2032 e.Debt service-to-exports ratio f.Debt service-to-revenue ratio 25 25 20 20 15 15 10 10 5 5 0 0 2012 2017 2022 2027 2032 2012 2017 2022 2027 2032 Baseline Historical scenario Most extreme shock 1/ Threshold Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in 2022. In figure b. it corresponds to a One-time depreciation shock; in c. to a Terms shock; in d. to a One-time depreciation shock; in e. to a Terms shock and in figure f. to a One-time depreciation shock   11    Figure 2.Lao PDR: Indicators of Public Debt Under Alternative Scenarios, 2012-2032 1/ Baseline Fix Primary Balance Most extreme shock One-time depreciation Historical scenario 60 PV of Debt-to-GDP Ratio 50 40 30 20 10 0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 300 PV of Debt-to-Revenue Ratio 2/ 250 200 150 100 50 0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 18 16 Debt Service-to-Revenue Ratio 2/ 14 12 10 8 6 4 2 0 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 Sources: Country authorities; and staff estimates and projections. 1/ The most extreme stress test is the test that yields the highest ratio in 2022. 2/ Revenues are defined inclusive of grants.     Table 2. Lao PDR: Public Sector Debt Sustainability Framework, Baseline Scenario, 2009–2032 (In percent of GDP, unless otherwise indicated) Actual Projections Standard 2012–17 2018–32 Average 2009 2010 2011 1/ Deviation 2012 2013 2014 2015 2016 2017 Average 2022 2032 Average Public sector debt 2/ 63.1 58.8 53.2 53.4 52.1 50.9 50.0 49.0 47.8 38.4 26.7 o/w foreign-currency denominated 56.0 50.3 44.3 44.1 43.7 43.4 43.3 43.0 42.4 35.1 26.0 Change in public sector debt 4.9 -4.2 -5.6 0.2 -1.2 -1.2 -0.9 -1.0 -1.2 -1.8 -1.5 Identified debt-creating flows 4.9 -8.0 -6.2 -2.7 -3.0 -2.3 -2.3 -2.3 -2.2 -2.4 -1.3 Primary deficit 6.1 3.7 2.4 3.3 1.2 1.4 1.3 1.6 1.6 1.5 1.5 1.5 0.3 0.4 0.4 Revenue and grants 17.9 18.1 18.4 19.5 19.5 19.4 19.4 19.3 19.1 18.2 16.9 of which: grants 2.3 2.3 2.1 1.9 1.8 1.7 1.7 1.6 1.5 1.0 0.0 Primary (noninterest) expenditure 24.1 21.8 20.8 20.9 20.8 21.1 21.0 20.8 20.5 18.4 17.2 Automatic debt dynamics -1.0 -11.7 -8.6 -4.1 -4.2 -3.9 -3.9 -3.8 -3.7 -2.7 -1.6 Contribution from interest rate/growth differential -3.8 -5.0 -5.3 -4.1 -3.9 -3.7 -3.7 -3.7 -3.6 -2.5 -1.5 of which: contribution from average real interest rate 0.3 -0.3 -0.9 0.0 0.1 0.1 0.0 0.0 0.0 0.0 0.1 of which: contribution from real GDP growth -4.1 -4.7 -4.4 -4.1 -4.0 -3.7 -3.7 -3.7 -3.5 -2.5 -1.6 12  Contribution from real exchange rate depreciation 2.8 -6.7 -3.3 0.0 -0.3 -0.2 -0.2 -0.1 -0.1 ... ... Other identified debt-creating flows -0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Privatization receipts (negative) -0.3 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 -0.1 3.8 0.6 2.9 1.7 1.1 1.4 1.3 1.1 0.7 -0.3 Other Sustainability Indicators PV of public sector debt ... ... 38.7 39.3 38.6 37.8 37.2 36.6 35.9 29.3 21.0 o/w foreign-currency denominated ... ... 29.8 30.1 30.2 30.3 30.5 30.6 30.5 26.0 20.3 o/w external ... ... 29.8 30.1 30.2 30.3 30.5 30.6 30.5 26.0 20.3 PV of contingent liabilities (not included in public sector debt) ... ... ... ... ... ... ... ... ... ... ... Gross financing need 3/ 9.2 6.6 4.8 4.5 4.8 5.7 5.4 5.1 4.8 3.1 2.6 PV of public sector debt-to-revenue and grants ratio (in percent) … … 210.5 201.6 197.9 194.3 192.0 189.8 188.1 161.4 124.7 PV of public sector debt-to-revenue ratio (in percent) … … 237.4 222.8 217.8 212.8 210.1 206.9 204.1 170.4 124.8 o/w external 4/ … … 182.9 170.7 170.6 170.7 172.3 173.0 173.4 151.4 120.6 Debt service-to-revenue and grants ratio (in percent) 5/ 10.2 10.3 7.2 10.1 10.8 10.3 9.9 9.3 8.9 9.7 9.7 Debt service-to-revenue ratio (in percent) 5/ 11.7 11.8 8.1 11.1 11.9 11.3 10.8 10.2 9.7 10.3 9.7 Primary deficit that stabilizes the debt-to-GDP ratio 1.3 7.9 8.1 1.2 2.5 2.8 2.5 2.5 2.6 2.0 1.9 Key macroeconomic and fiscal assumptions Real GDP growth (in percent) 7.5 8.1 8.0 7.5 0.7 8.3 8.0 7.7 7.8 7.9 7.8 7.9 6.7 5.9 6.5 Average nominal interest rate on forex debt (in percent) 0.9 1.4 0.7 0.9 0.3 1.5 1.5 1.7 1.7 1.7 1.7 1.6 1.7 2.1 1.8 Average real interest rate on domestic debt (in percent) 8.5 -7.0 -6.8 2.1 10.0 -1.2 -0.6 -0.5 -0.6 -0.5 -0.7 -0.7 -0.9 -1.3 -0.8 Real exchange rate depreciation (in percent, + indicates depreciation) 5.6 -12.9 -7.2 -6.7 7.7 -0.1 ... ... ... ... ... ... ... ... ... Inflation rate (GDP deflator, in percent) -4.3 10.0 8.9 8.2 5.4 4.7 6.5 5.0 4.9 4.4 4.4 5.0 4.4 4.4 4.4 Growth of real primary spending (deflated by GDP deflator, in percent) 0.3 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Grant element of new external borrowing (in percent) ... ... ... … … 26.5 27.5 27.1 26.2 27.2 27.0 26.9 26.6 19.6 ... Sources: Country authorities; and staff estimates and projections. 1/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability. 2/ [Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.] 3/ 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. 4/ Revenues excluding grants. 5/ Debt service is defined as the sum of interest and amortization of medium and long-term debt.   Table 3.Lao PDR: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2012–2032 (In percent) Projections 2012 2013 2014 2015 2016 2017 2022 2032 PV of debt-to GDP ratio Baseline 30 30 30 31 31 30 26 20 A. Alternative Scenarios A1. Key variables at their historical averages in 2012-2032 1/ 30 24 18 19 24 29 50 61 A2. New public sector loans on less favorable terms in 2012-2032 2 30 31 32 33 34 35 33 30 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2013-2014 30 30 30 31 31 31 26 20 B2. Export value growth at historical average minus one standard deviation in 2013-2014 3/ 30 31 34 34 34 33 28 21 B3. US dollar GDP deflator at historical average minus one standard deviation in 2013-2014 30 30 30 30 30 30 25 20 B4. Net non-debt creating flows at historical average minus one standard deviation in 2013-2014 4/ 30 34 38 37 37 37 30 21 B5. Combination of B1-B4 using one-half standard deviation shocks 30 31 29 30 30 29 25 19 13  B6. One-time 30 percent nominal depreciation relative to the baseline in 2013 5/ 30 42 42 43 43 43 36 28 PV of debt-to-exports ratio Baseline 80 83 85 88 86 92 82 69 A. Alternative Scenarios A1. Key variables at their historical averages in 2012-2032 1/ 80 66 51 54 67 88 156 207 A2. New public sector loans on less favorable terms in 2012-2032 2 80 84 89 96 97 105 103 102 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2013-2014 80 81 83 87 85 90 81 68 B2. Export value growth at historical average minus one standard deviation in 2013-2014 3/ 80 89 103 108 104 110 96 78 B3. US dollar GDP deflator at historical average minus one standard deviation in 2013-2014 80 81 83 87 85 90 81 68 B4. Net non-debt creating flows at historical average minus one standard deviation in 2013-2014 4/ 80 93 105 108 104 110 94 72 B5. Combination of B1-B4 using one-half standard deviation shocks 80 83 82 85 83 88 78 65 B6. One-time 30 percent nominal depreciation relative to the baseline in 2013 5/ 80 81 83 87 85 90 81 68 PV of debt-to-revenue ratio Baseline 171 171 171 172 173 173 151 121 A. Alternative Scenarios A1. Key variables at their historical averages in 2012-2032 1/ 171 135 104 105 135 167 289 359 A2. New public sector loans on less favorable terms in 2012-2032 2 171 173 180 188 194 199 191 178 B. Bound Tests   B1. Real GDP growth at historical average minus one standard deviation in 2013-2014 171 169 172 174 174 175 153 122 B2. Export value growth at historical average minus one standard deviation in 2013-2014 3/ 171 174 189 190 190 189 162 122 B3. US dollar GDP deflator at historical average minus one standard deviation in 2013-2014 171 167 166 168 169 169 148 118 B4. Net non-debt creating flows at historical average minus one standard deviation in 2013-2014 4/ 171 192 212 211 210 208 174 126 B5. Combination of B1-B4 using one-half standard deviation shocks 171 173 166 167 168 167 145 113 B6. One-time 30 percent nominal depreciation relative to the baseline in 2013 5/ 171 236 237 240 241 242 211 168   Table 3. Lao PDR: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2012-2032 (continued) (In percent) Debt service-to-exports ratio Baseline 5 5 5 5 4 5 5 5 A. Alternative Scenarios A1. Key variables at their historical averages in 2012-2032 1/ 5 4 4 3 3 3 4 8 A2. New public sector loans on less favorable terms in 2012-2032 2 5 5 5 5 5 5 6 7 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2013-2014 5 5 5 5 4 5 5 5 B2. Export value growth at historical average minus one standard deviation in 2013-2014 3/ 5 5 5 5 5 5 6 6 B3. US dollar GDP deflator at historical average minus one standard deviation in 2013-2014 5 5 5 5 4 5 5 5 B4. Net non-debt creating flows at historical average minus one standard deviation in 2013-2014 4/ 5 5 5 5 5 5 6 6 B5. Combination of B1-B4 using one-half standard deviation shocks 5 4 4 5 4 4 5 5 14  B6. One-time 30 percent nominal depreciation relative to the baseline in 2013 5/ 5 5 5 5 4 5 5 5 Debt service-to-revenue ratio Baseline 10 9 9 9 9 9 10 9 A. Alternative Scenarios A1. Key variables at their historical averages in 2012-2032 1/ 10 9 8 7 6 6 8 14 A2. New public sector loans on less favorable terms in 2012-2032 2 10 9 9 10 10 10 12 13 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2013-2014 10 9 10 9 9 9 10 10 B2. Export value growth at historical average minus one standard deviation in 2013-2014 3/ 10 9 10 10 9 9 11 10 B3. US dollar GDP deflator at historical average minus one standard deviation in 2013-2014 10 9 9 9 9 8 10 9 B4. Net non-debt creating flows at historical average minus one standard deviation in 2013-2014 4/ 10 9 10 10 10 9 12 10 B5. Combination of B1-B4 using one-half standard deviation shocks 10 9 9 9 8 8 9 9 B6. One-time 30 percent nominal depreciation relative to the baseline in 2013 5/ 10 13 13 13 13 12 14 13 Memorandum item: Grant element assumed on residual financing (i.e., financing required above baseline) 6/ 23 23 23 23 23 23 23 23 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 a 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 4. Lao PDR: Sensitivity Analysis for Key Indicators of Public Debt 2012–2032 Projections 2012 2013 2014 2015 2016 2017 2022 2032 PV of Debt-to-GDP Ratio Baseline 39 39 38 37 37 36 29 21 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 39 40 41 41 42 43 43 43 A2. Primary balance is unchanged from 2012 39 39 38 37 36 35 31 29 A3. Permanently lower GDP growth 1/ 39 39 38 38 37 36 31 25 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2013-2014 39 39 39 39 38 38 32 25 B2. Primary balance is at historical average minus one standard deviations in 2013-2014 39 41 42 42 41 40 32 23 B3. Combination of B1-B2 using one half standard deviation shocks 39 41 42 41 41 40 33 25 B4. One-time 30 percent real depreciation in 2013 39 51 49 47 46 44 35 26 B5. 10 percent of GDP increase in other debt-creating flows in 2013 39 46 45 44 43 42 34 23 PV of Debt-to-Revenue Ratio 2/ 15  Baseline 202 198 194 192 190 188 161 125 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 202 207 210 214 218 223 236 258 A2. Primary balance is unchanged from 2012 202 198 194 191 188 186 173 173 A3. Permanently lower GDP growth 1/ 202 198 195 193 192 191 169 147 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2013-2014 202 201 201 200 199 198 177 149 B2. Primary balance is at historical average minus one standard deviations in 2013-2014 202 211 218 214 211 208 177 134 B3. Combination of B1-B2 using one half standard deviation shocks 202 210 216 213 211 209 183 148 B4. One-time 30 percent real depreciation in 2013 202 262 252 244 237 231 195 155 B5. 10 percent of GDP increase in other debt-creating flows in 2013 202 237 232 227 223 219 186 139 Debt Service-to-Revenue Ratio 2/ Baseline 10 11 10 10 9 9 10 10 A. Alternative scenarios A1. Real GDP growth and primary balance are at historical averages 10 11 11 11 10 10 12 16 A2. Primary balance is unchanged from 2012 10 11 10 10 9 9 10 12 A3. Permanently lower GDP growth 1/ 10 11 10 10 9 9 10 11 B. Bound tests B1. Real GDP growth is at historical average minus one standard deviations in 2013-2014 10 11 11 10 10 9 10 11 B2. Primary balance is at historical average minus one standard deviations in 2013-2014 10 11 11 11 11 9 11 10 B3. Combination of B1-B2 using one half standard deviation shocks 10 11 11 11 10 10 11 11 B4. One-time 30 percent real depreciation in 2013 10 13 14 14 13 13 15 16   B5. 10 percent of GDP increase in other debt-creating flows in 2013 10 11 11 13 10 10 12 11 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.