INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL MONETARY FUND GUINEA Joint Bank-Fund Debt Sustainability Analysis – 2018 Update Prepared jointly by the staff of the International Development Association (IDA) and the International Monetary Fund (IMF) Approved by Paloma Anos Casero (IDA) and Abebe Aemro Selassie (IMF) Guinea Joint Bank-Fund Debt Sustainability Analysis1 Risk of external debt distress Moderate Overall risk of debt distress Moderate Granularity in the risk rating Some space to absorb shocks The overall risk of debt distress is assessed to be Application of judgment Yes: moderate against a mechanical rating of high risk of debt distress. Guinea is at moderate risk of external debt distress with some space to absorb shocks. All external debt burden indicators under the baseline scenario lie below their policy-dependent thresholds and debt dynamics have improved compared to the June 2018 DSA update, owing to higher-than- anticipated growth in 2017. Stress tests suggest that debt vulnerabilities will increase if adverse shocks materialize. Under the most extreme stress tests, all solvency and liquidity indicators breach their thresholds for prolonged periods. The overall risk of public debt distress is also assessed to be moderate, with the application of judgement regarding a brief and marginal breach for the PV of overall debt to GDP ratio, importantly reflecting the one-off impact of the recapitalization of the central bank. A prudent external borrowing strategy aimed at maximizing the concessionality of new debt and limiting non-concessional loans to programmed amounts and strengthening debt management will be key to preserving medium-term debt sustainability. 1The Debt Sustainability Analysis (DSA) was prepared jointly with the World Bank and in collaboration with the Guinean authorities. This DSA updates the DSA analysis in the staff report, No. 18/234 and has been has been prepared following the revised Debt Sustainability Framework (DSF) for LICs and Guidance Note (2017) in effect as of July 1, 2018. Guinea’s debt carrying capacity is classified as weak based on the Composite Indicator (CI) under the revised LIC DSF. Thresholds for debt burden indicators are also those established in the revised 2017 DSF. COVERAGE OF PUBLIC DEBT 1. The definition of public debt used in this DSA covers central government debt, central government-guaranteed debt and central bank debt contracted on behalf of the government (Table 1).2 While other elements of public sector debt, such as non-guaranteed debt of state-owned enterprises and social security funds, are not included due to data constraints, a contingent liability stress test is performed to enhance the robustness of the DSA (Table 1). Staff continues to work with the authorities to broaden the coverage of public debt. The definition of PPG external debt used in the DSA includes the loan for the Souapiti dam (US$1.2 billion, 11 percent of 2017 GDP) signed on September 4, 2018.3 Furthermore, to depict the potential full impact on the debt profile, the government is assumed to be responsible for servicing the loan in the DSA.4 Table 1. Guinea: 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 1 The country's coverage of public debt The central government, central bank, government-guaranteed debt Used for the Reasons for deviations Default analysis from the default settings 2 Other elements of the general government not captured in 1. 0 percent of GDP 0.0 3 SoE's debt (guaranteed and not guaranteed by the government) 1/ 2 percent of GDP 2.0 4 PPP 35 percent of PPP stock 1.3 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) 8.3 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%. 2The definition of PPG external debt excludes French claims under C2D debt-for-development swaps, which were cancelled in the context of the HIPC debt relief. The C2D mechanism implies a payment of the debt service to the creditor from Guinea, which is later returned to the government in the form of grants to finance development projects. The payments with respect to C2D are included in debt service of the fiscal baseline. See EBS/15/4, Sup. 2, 01/28, 2015 and Country Report No. 15/39 for a detailed discussion. 3The grant element of the Souapiti loan is estimated to be 29 percent. The loan will be transferred to a Special Purpose Vehicle (SPV) jointly owned by the Guinean government (51 percent) and China International Water & Electricity Corporation (49 percent), which will be managing and operating the dam on a commercial basis and will be responsible for servicing it. 4The Souapiti loan is not included in the public investment of the central government as it will be carried out by an SPV that is not considered as part of the central government. 2 BACKGROUND 2. Guinea’s external public debt as a percent of GDP declined in 2017, after having increased gradually since 2012. Total public and publicly guaranteed (PPG) external debt increased to US$2 billion in 2017 (US$1.9 billion in 2016) while it decreased as a percent of GDP to 19.2 percent in 2017 (21.6 percent in 2016), reflecting strong GDP growth (Table 2). Approximately 54 percent of external debt is due to official bilateral creditors, Figure 1. Guinea: Stock of External Public and Publicly Guaranteed Debt,1 2010–17 mostly to non-Paris Club creditors, (Percent of GDP) while 43 percent is owed to multilateral creditors. Since Guinea reached the completion point of the HIPC initiative in 2012, external borrowing has been used to finance infrastructure investment in the energy and transport sectors. The loan for the Souapiti dam (US$1.2 billion) was signed on September 4, 2018 and two other non- concessional loans for the rehabilitation of the RN1 national road and urban roads in Conakry were signed on September 5, 2018 for a total amount of US$598 million.5 At end-2017, Guinea Sources: Guinean authorities; and IMF Staff calculations. had outstanding external debt arrears of 1Starting in 2014, external and domestic PPG debt includes guarantees US$150 million (1.4 percent of GDP).6 issued by the Guinean Central Bank (BCRG) to local and foreign banks to These arrears pre-date the completion of provide commercial loans to private sector operators to pre-finance the execution of public works. Notably, a guarantee issued to an external the HIPC initiative and are owed to non- creditor in foreign currency, increased the stock of public and publicly- Paris Club official bilateral (60 percent) guaranteed external debt by US$72 million in 2014. and commercial creditors (40 percent). The authorities continue to make best efforts to discuss debt relief and normalize these arrears with the creditors, with the aim of reaching an agreement on repayment at the earliest. Creditors have so far not requested payment of these arrears. 5For the Souapiti loan, US$980 million, US$155 million and US$41 million are expected to be disbursed in 2019, 2020 and 2021, respectively. For the US$650 million envelope of non-concessional loans, US$56 million is expected to be disbursed in 2018. US$340 million is expected to be disbursed evenly in 2019 and 2020, and the rest US$254 million will be disbursed in 2021-2022. 6Guinea owes long-standing arrears that predate the HIPC completion point to non-Paris Club countries (Libya, Morocco, Thailand, Bulgaria, Romania, and Iraq). These arrears continue to be deemed away under the IMF Policy on Arrears to official bilateral creditors as the underlying Paris Club Agreement is adequately representative and the authorities are making best efforts to resolve the arrears. Guinea also owes long-standing arrears to private creditors. the authorities continue to make good faith efforts to engage with commercial creditors and reach a collaborative agreement. The IMF Board concluded a financing assurance review on June 25, 2018. 3 Table 2. Guinea: Structure of External Public and Publicly Guaranteed Debt (Nominal values) end-2016 end-2017 Percent of Percent of USD (millions) USD (millions) Total GDP Total 1822.1 2026.9 100.0 19.3 Total incl. C2D 1934.4 2118.4 104.5 20.2 Multilateral creditors 778.7 869.5 42.9 8.3 IMF 241.3 277.2 13.7 2.6 World Bank 219.8 240.4 11.9 2.3 Other Multilateral creditors 317.5 351.9 17.4 3.4 Official Bilateral Creditors 984.4 1095.8 54.1 10.4 Paris Club (excl. C2D) 27.7 43.2 2.1 0.4 Non-Paris Club 956.7 1052.6 51.9 10.0 Commercial Creditors 58.9 61.6 3.0 0.6 Memo Arrears 147.4 150.1 7.4 1.4 Sources: Guinean authorities; and IMF Staff calculations. Notes: Arrears at end-2017 are due to Non-Paris Club official bilateral creditors (US$88.5 million) and commercial creditors (US$61.6 million). The Guinean authorities have started discussions with creditors in order to reach a resolution on the normalization of these arrears. 3. PPG domestic debt as a percent of GDP declined slightly to 20.2 percent of GDP in 2017 from 20.5 percent of GDP in 2016. The domestic debt stock increased to US$2.1 billion in 2017 from US$1.8 billion in 2016, which was mitigated by buoyant economic growth. On the one hand, continued settlement of debt to the central bank and debt related to the guarantees issued by the central bank and strong GDP growth lend support to domestic debt decumulation (Figure 2). Domestic debt related to the guarantees issued by the central bank during 2014–15 was reduced to 0.4 percent of GDP at end-2017.7 In addition, outstanding government debt towards the BCRG accumulated in 2015 was repaid in an amount equivalent to 0.3 percent of GDP in 2017. In addition to debt related to the 2014–15 central bank guarantees and to 2015 central bank advances to the government, Guinea continued to hold US$678 million (6.7 percent of 2017 GDP) in “dette conventionnée”, which is debt related to consolidated central bank advances accumulated prior to 2013, scheduled to be repaid over 40 years starting in 2023. On the other hand, the inclusion of the BCRG recapitalization8 (about US$300 million or 3.4 percent of GDP) in the DSA, retroactive 7In2014 and 2015, the central bank had issued US$870 million (9.6 percent of 2017 GDP) worth of guarantees to commercial banks to provide loans to private companies to pre-finance the execution of public investment projects. Most of the guarantees were domestic apart from US$72 million owed to a foreign bank. Owing to restructuring in 2015 and settlements, those guarantees were gradually reduced to reach 1.4 percent of GDP at end-2016 and were fully transferred to the Treasury. 8A Memorandum of Understanding (MoU) between the Ministry of Finance and Economics and the BCRG was reached in May 2018 which specifies the modalities and the timeline for the recapitalization of the BCRG. Non-marketable government securities 4 from 2017, increased the stock of domestic debt. The government also accumulated additional domestic arrears of 1 percent of GDP in 2017 owed to domestic suppliers of goods and services. The overall stock of domestic arrears is estimated at 3.3 percent of GDP at end-2017,9 of which 0.9 percent of GDP were repaid in the first quarter of 2018. The authorities approved a strategy to clear long-standing domestic arrears to the private sector in December 2017, aiming at clearing small creditors first which represent 80 percent of the number of creditors but only 20 percent of the nominal value of the audited and validated arrears. To this end, arrears to small creditors have already been cleared with repayment amounts of GNF 43 billion in 2017 and GNF 59 billion in 2018. The authorities plan to repay the remainder amounts over a seven-year period through issuance of securities and direct payments. They also started the second phase of the external audit in October 2018 for continuing negotiations with creditors and finalizing memoranda of understanding for audited and validated amounts. In addition, the authorities are in the process of negotiating with the same external auditor to conduct a review of domestic arrears contracted during 2014–17. Figure 2. Guinea: Stock of Domestic Public and Publicly Guaranteed Debt, 2013–17 (Percent of GDP) Sources: Guinean authorities; and IMF Staff calculations. Note: “Dette conventionnée” comprises consolidated past advances to the government which are to be repaid over 40 years with amortization payments beginning in 2023. BCRG debt in 2015 are central bank advances to the government whose repayment agreement calls for amortization over six years beginning in 2016. backdated to December 2017 (about US$300 million or 3.4 percent of GDP) with an interest rate of 8 percent were issued by the Treasury in October 2018 to recapitalize the BCRG. Additional securities will be issued in subsequent years to cover the interest of all outstanding securities. The government can start to redeem the securities at any point in time. 9In July 2016 the authorities completed an audit of the outstanding stock of central government arrears over 1982 –2013, which led to the inclusion of an additional US$0.2 billion (2.9 percent of GDP) in arrears, owed mainly to domestic suppliers of goods and services and for VAT credit refunds. 5 4. The stock of overall public debt as a share of GDP declined in 2017 as both external and domestic debt positions strengthened (Figure 3). Total public debt stood at US$4.1 billion (39.4 percent of GDP) at end-2017 compared with US$3.6 billion (42.1 percent of GDP) in 2016. The external debt stock reached US$2.0 billion, compared with US$1.9 billion in 2016, due to new disbursements of previously signed loans with bilateral creditors. The domestic debt stock increased by US$322 million, mainly owing to the inclusion of the BCRG recapitalization. Figure 3. Guinea: Stock of Total Public and Publicly Guaranteed Debt, 2010–17 (Percent of GDP) Sources: Guinean authorities; and IMF Staff calculations. UNDERLYING ASSUMPTIONS 5. Key assumptions are consistent with the macroeconomic framework outlined in the Staff Report for the Second Review under a Three-Year Extended Credit Facility10 (Table 3). Changes to the assumptions compared to the June 2018 DSA update are as follows: • Real GDP growth was revised upward to 9.9 percent (from 8.2 percent) in 2017 on the back of stronger-than-expected mining and construction activities, which led to a sizable upward revision of nominal GDP. The growth momentum is expected to continue, with real GDP growth reaching 5.8 percent in 2018 and averaging about 6 percent over the medium term, driven by strong performance in mining, construction, and scaled-up investments in infrastructure (Table 3). Over the long run (2022–38), growth is projected to remain near 5 percent, reflecting the increased productive capacity of the economy and its further diversification. Risks to the medium-term growth outlook are tilted to the 10Guinea—Second Review Under a Three-Year Extended Credit Facility, Financing Assurances Review, and Request for Waiver of Nonobservance of Performance Criterion. 6 downside, prospectively stemming from socio-political tensions and delays in projects and reform implementation. Upside potential could arise from faster-than-expected mining production capacity coming on stream. • Inflation is expected to remain moderate at around 9.7 percent in 2018 and decline slightly over the medium term, reflecting a prudent monetary policy stance. • Fiscal balance11. The primary fiscal balance is expected to record a deficit of 1 percent of GDP in 2018 and an average deficit of 0.5 percent over 2019–23, reflecting revenue mobilization efforts and the containment of non-priority current expenditure, including the gradual phasing out of electricity subsidies. Additional tax revenues of about 2.1 percent of GDP are expected to be mobilized over 2018-20, supported by a targeted tax policy, administrative reforms, and stronger mining revenues. Continued revenue mobilization effort is expected to gradually increase tax revenue by 0.8 percent of GDP over 2021-2028. In parallel, capital expenditures are expected to rise with the scale up in public infrastructure investment under the authorities’ National Economic and Social Development Plan (PDNES) from 6.1 percent of GDP in 2018 to 6.9 percent in 2023. In view of development needs, capital expenditures are expected to remain high at 6.9 percent of GDP, on average, over 2024-28. Grants are expected at 1.7 percent in 2018 and 1.1 percent on average over the period 2019–21, also reflecting the mobilization of donors’ support following the 2017 Consultative Group for Guinea. • The current account is expected to record a deficit of 16 percent of GDP in 2018 and to average 15 percent of GDP over 2019–23, reflecting high and volatile imports for mining and public infrastructure projects including the Souapiti dam financed by FDI and external borrowing. These investments will boost exports, resulting in a gradual narrowing of the current account deficit over the medium term. • External financing mix and terms. Authorities plan to mobilize external financing for scaling up public investments in infrastructure to place the economy on a higher growth path and to support economic diversification. New external borrowing is expected to pick up significantly in the near term, from 1.0 percent of GDP in 2017 to 4.0 percent of GDP in 2018, and average 6.3 percent of GDP over 2019–21. The debt accumulation pick-up in the short term reflects the one-off impact of the borrowing to finance the construction of the Souapiti dam signed in September 2018 (Table 5). In addition to the Souapiti loan to be disbursed over 2019–21, the DSA also incorporates the authorities’ expected borrowing of an additional US$650 million in non-concessional loans from China to be disbursed over 2018–21. These loans will finance priority growth-supporting infrastructure projects in the 11While it is the primary fiscal balance that drives public debt, the basic fiscal balance is the main fiscal anchor under the ECF program. The basic fiscal balance is defined as government revenue excluding grants minus expenditures, excluding interest payments on external debt and externally financed capital expenditure. This measure of fiscal balance aims to capture actual fiscal efforts. The basic fiscal surplus is projected to improve from 0.8 percent of GDP in 2018 to an average of 1 percent of GDP during 2019–23. 7 energy, transport and education sectors.12 Out of this envelope, US$598 million were also signed in September 2018 to finance rehabilitation of the RN1 national road and the Conakry urban road network. External borrowing is expected to continue in the long run to support infrastructure development, and average at about 2 percent of GDP. Due to the mostly non-concessional nature of borrowing in the near term, the average grant element of new borrowing would decline sharply to 30 in 2019 from 36.3 percent in 2018 due to an expected large disbursement from the Souapiti loan, and average 30.5 percent in the long run, reflecting that the use of non-concessional financing is expected to gradually increase over time. • Domestic borrowing. Net government domestic financing is expected to be negative throughout 2018–27, as the government is expected to gradually repay past borrowings from the BCRG, domestic arrears accumulated during 2017, and the validated 1982–2013 arrears to the private sector in line with the clearance strategy approved in December 2017. This will be supported by revenue mobilization and containing current non-priority spending. Net domestic borrowing is expected to turn positive in the long term and increase gradually from 2028 onwards. A prudent domestic borrowing strategy, anticipated repayments of government borrowing from the BCGR, and a gradual reduction in domestic arrears will contribute to the gradual stabilization of domestic debt in the next five years (Table 6). • Realism of assumptions. Growth projections at about 6 percent in 2018 – 19 are predicated on conservative assumptions, notably against the background of weak historical growth outturns in Guinea, reflecting adverse conditions as the Ebola crisis, commodity price shocks and earlier periods of social unrest. In this context, the investment-growth nexus remains conservative (Figure 8, bottom panel). While higher-than-projected primary fiscal deficits were historically the largest contributor to unexpected debt accumulation for the past five years (Figure 7), the current ECF arrangement supports a fiscal adjustment that is feasible for Guinea, taking into account its fragility and capacity constraints (Figure 8, top panel).13 12Projectsunder discussion include the rehabilitation of the RN1 national road and the Conakry urban road network, which were signed in September 2018, the construction of an electrical interconnection line, and the rehabilitation of a university. The grant element of these loans is expected to be approximately 18.9 percent. 13The ECF-program supported fiscal adjustment is below the top quartile of fiscal adjustments in all IMF programs for LICs approved since 1990 (Figure 8, top left panel). The programmed fiscal adjustment is expected to have limited impact on growth with a range of possible fiscal multipliers, and the implicitly assumed fiscal multiplier is very conservative (Figure 8, top right panel). 8 Table 3. Guinea: LIC DSA Macroeconomic Assumptions (Percent of GDP, unless otherwise indicated) Previous DSA Current DSA 2016 2017 2018 2023 2028 2016 2017 2018 2023 2028 Nominal GDP ($ Million) 8695 10251 11486 16729 23529 8695 10401 11743 16931 23800 Real GDP (percentage change) 10.5 8.2 5.8 5.0 5.0 10.5 9.9 5.8 5.0 5.0 Fiscal Accounts Revenues 14.6 13.8 14.5 16.8 16.9 14.6 13.6 13.7 16.1 16.7 Grants 1.2 1.5 1.3 1.1 0.5 0.9 1.4 1.4 1.1 0.5 Public Sector Expenditure 16.0 17.5 18.0 19.4 18.8 16.0 17.2 17.5 18.2 18.1 of which: Capital expenditure and net lending 4.8 5.9 6.5 7.8 7.4 4.8 5.8 6.6 7.0 7.0 Primary Fiscal Balance 0.9 -1.2 -1.1 -0.6 -0.3 0.9 -1.1 -1.0 0.0 0.1 New external borrowing … … 9.0 2.7 2.3 … … 3.9 2.7 1.8 Grant elements of new external borrowing … … 31.1 28.4 25.8 … … 36.3 34.7 31.0 Balance of Payments Exports of goods and services 28.4 39.9 35.9 35.0 33.3 28.4 39.3 37.3 34.8 33.1 Imports of goods and services 59.1 47.4 52.2 45.6 48.8 59.1 46.8 49.0 49.4 48.0 Current account (including transfers) -31.4 -7.1 -21.2 -11.0 -6.5 -31.8 -7.0 -16.4 -10.2 -6.4 Foreign direct investment 18.3 12.7 13.5 8.7 5.2 18.3 12.6 13.2 8.6 5.1 Sources: Guinean authorities; and IMF and World Bank staff estimates. COUNTRY CLASSIFICATION AND MODEL SIGNALS 6. The Composite Indicator for Guinea is 2.50 based on the October and April 2018 WEO vintages - as well as the 2017 update for the CPIA index, which classifies Guinea at weak debt-carrying capacity.14 The relevant thresholds for external debt burden indicators and benchmarks for total public debt indicators in the DSA are determined by Guinea’s debt carrying capacity (Table 4). Two tailored stress tests are triggered to account for Guinea’s specific economic features. A contingent liabilities stress test captures a combined shock from SOEs’ external debt default, PPPs’ distress and/or cancellations, and financial market vulnerabilities, all of which amount to 8.3 percent of GDP (Table 1).15 A commodity prices stress test is also applied as mining exports constitute more than 80 percent of total exports for Guinea.16 And two fully customized scenarios, a weak policy scenario, and a front-loaded disbursement scenario are also performed to assess Guinea’s country-specific risks. 14A country’s debt carrying capacity was determined by its CPIA score under the old LIC DSF. Debt carrying capacity for Guinea was also assessed to be weak in the 2017 DSA based on a CPIA score of 3.09 for Guinea. 15The contingent liability stress test has two components: (i) a minimum starting value of 5 percent of GDP representing the average cost to the government of a financial crisis in a LIC since 1980; and (ii) a tailored value, reflecting additional potential shocks from SOE’s debt and PPP that are not included in the definition of public debt. A tailored PPP shoc k is used, and the size of the PPP shock is estimated to be 3.8 percent of GDP based on the 2018 PIMA report, larger than the default value of 1.37 percent from the World Banks’ PPP database. Local governments in Guinea have limited debt exposure, and the stock of non-guaranteed SOE’s debt is also likely to be a small. Overall, a contingent liability shock of 8.3 percent of GDP should adequately capture risks arising from debt not covered under the baseline. 16The commodity prices stress test captures the impact of a sudden one standard deviation decline in the export prices of various fuel and non-fuel commodities, as relevant. The size of the commodity price shock is conservatively chosen to be larger than the default value, as commodity imports, which are a mitigating factor for the commodity price shock, do not perfectly offset commodity exports for Guinea. 9 Table 4. Guinea: Debt Carrying Capacity and Thresholds Final classification Classification based on Classification based on current vintage the previous LIC DSF framework Weak Weak Weak 2.51 3.09 EXTERNAL debt burden thresholds Current LIC DSF Previous LIC DSF PV of debt in % of Exports 140 100 GDP 30 30 Debt service in % of Exports 10 15 Revenue 14 18 TOTAL public debt burden benchmarks Current LIC DSF Previous LIC DSF PV of debt in % of GDP 35 38 A. External Debt 7. Under the baseline scenario, all external debt ratios remain below their policy dependent thresholds, indicating that Guinea remains at moderate risk of external debt distress (Table 5 and Figure 4). The PV of debt-to-GDP is expected to remain below the policy- dependent threshold (Table 7), peaking at 22.8 percent in 2020 (below the peak of 23 percent of GDP in the June 2018 DSA update) and then to decline. Furthermore, liquidity ratios (debt service- to-exports and debt service-to-revenues) are also expected to remain well below policy dependent thresholds and decline slightly compared with the June 2018 DSA update. The growth rate for accumulation of external debt will average 3.3 percent (y/y) over 2018–22 in line with the June 2018 DSA update. 8. Guinea remains at moderate risk of external debt distress while vulnerabilities have moderated. While more frontloaded-than-anticipated disbursement profiles for the newly signed Souapiti and the other two non-concessional loans signed in September 2018 increased the debt burden, stronger-than-expected growth has reduced vulnerabilities. Under the historical scenario and most extreme stress tests, all indicators except the debt service-to-exports ratio under the historical scenario breach their thresholds for prolonged periods (Figure 4).17 Under the bound tests, some indicators also breach their thresholds (Table 8). However, some of these tests are based on historical growth and export averages, which reflect exceptionally adverse economic conditions for Guinea, including the Ebola crisis and commodity price shocks during 2014–15 and earlier periods of civil unrest. Under two more plausible country-specific scenarios—i) a weak policy implementation scenario and ii) a less-prudent phasing of investment projects scenario with frontloaded disbursements of the anticipated US$650 million in non-concessional loans—all 17Themost extreme stress test for external debt indicators is an export shock that sets export growth to its historical average minus one standard deviation in the second and third years of the projection period. 10 indicators remain below their policy dependent thresholds but are slightly higher than under the baseline scenario (Figure 6).18 B. Total Public Debt 9. The model signals high risk of overall debt distress as the PV of public debt to GDP breaches the benchmark for two years under the baseline scenario (Table 6 and Figure 5). Public debt dynamics have worsened compared to the June 2018 DSA update mainly due to the one-off impact of the inclusion of the BCRG recapitalization.19 The PV of total public debt-to- GDP ratio peaks in 2019 at 37 percent of GDP (vis-à-vis the benchmark of 35 percent of GDP), compared with 32.5 percent of GDP in the June 2018 DSA update. The indicator remains above benchmark at 36 percent in 2020, and then declines gradually over the long term. This dynamic mirrors the path of the PPG external debt stock, which increases in the short run due to the Souapiti loan and an expected envelope of US$650 million in non-concessional loans. The PV of the total debt-to-GDP ratio exceeds the benchmark in the medium term only under the extreme shock20, four bounds tests and the commodity price stress test (Table 8). Delays in repaying domestic arrears or debt owed to the BCRG, unanticipated government borrowing from the BCRG,21 or data revisions after new audits of domestic debt and arrears could worsen the dynamics of total public debt. RISK RATING AND VULNERABILITIES 10. Guinea stands at moderate risk of external debt distress with some space to absorb shocks.22 External debt is expected to increase significantly in the short run due to borrowing for financing priority infrastructure. While more frontloaded-than-anticipated disbursement profiles for the newly signed Souapiti and two non-concessional loans to finance key infrastructure, projects increased the debt burden, stronger-than-expected growth have reduced vulnerabilities. The authorities’ strategy of carefully phasing investment projects and their commitment to containing non-concessional external borrowing within the amounts specified under the ECF 18The weak policy scenario assumes real GDP is 1 percentage point below the baseline over 2019 –38, reflecting slower reform implementation, and the basic fiscal balance is 0.5 percent of GDP in 2019–20, reflecting slower revenue collection. The frontloaded disbursement scenario assumes the US$650 million in non-concessional loans are disbursed over a three rather than five-year period. 19Without the BCRG recapitalization, the overall public debt-to-GDP ratio would not breach the benchmark. 20In this case, the most extreme shock scenario is a shock to other flows that sets current transfers-to-GDP and FDI-to-GDP ratios to their historical average minus one SD, or baseline projection minus one SD, whichever is lower in the second and third years of the projection period. 21The large unexpected changes in the residual over 2012-17 were due to the issuance of US$870 million (9.9 percent of GDP) worth of guarantees by the BCRG to commercial banks in 2014 and 2015 (Figure 7). 22The robustness of a country’s debt position at moderate risk of external debt distress depends on the country’s available “space” to absorb shocks without being downgraded to high risk of debt distress. For the PV of debt-to-exports ratio and debt service-to- exports ratio, only shocks in the upper quartile of the observed distribution of shocks would downgrade Guinea to high risk of debt distress. For the PV of debt-to-GDP ratio and debt service-to-revenue ratio, shocks smaller than the ones in the upper quartile but bigger than the median observed shocks could trigger a downgrade. As a result, Guinea is assessed to have some space to absorb shocks (Figure 9). 11 arrangement23 will be key to ensuring that debt remains sustainable at moderate risk of external debt distress. 11. Guinea’s risk of overall debt distress is assessed to be moderate, with application of staff judgement. The PV of total public debt-to-GDP ratio breaches the benchmark in 2019 and 2020, implying substantially less space to absorb shocks than suggested by external debt burden indicators. The increase of the debt burden indicator, leading to the breach of the benchmark, is due to the impact of the inclusion of the BCRG recapitalization in 2018, a key reform to enhance Central Bank independence. Staff applied judgment to assign a moderate risk rating for three main reasons. First, the magnitude of the breach is marginal, and the length is just two years. Second, the recapitalization will only affect one debt burden indicator—the PV of overall public debt to GDP. Notably, the recapitalization will not add to the debt service burden in the near term as it was conducted by issuing 30-year bonds for the overall recapitalization needs as well as related interest and no payment is expected to be made until 2046. Third, projections of growth in the macro-framework are conservative for 2018 as preliminary data point to mining activity being stronger than expected. To maintain debt sustainability, a basic fiscal surplus will need to be achieved to contain budgetary financing needs. A prudent domestic debt strategy will also support debt sustainability in the medium and long term. 12. Maximizing concessional debt and strengthening debt and public investment management will be essential to preserving debt sustainability. In this regard, the authorities’ commitment to implement a prudent borrowing strategy to maximize concessionality and limit non-concessional borrowing to a maximum of US$650 million (excluding Souapiti) during 2018– 21 is key to ensuring that the risk of external and overall debt distress does not exceed a moderate level. Strengthening the debt management framework, with the support of technical assistance from the IMF, World Bank, and other development partners, will be essential to contain debt vulnerabilities. A Debt Management Performance Assessment (DeMPA) was completed in May 2018 with the support of the World Bank, and a time-bound action plan to strengthen debt management based on DeMPA findings is being prepared. Updating the medium-term debt management strategy, enhancing capacity to conduct debt sustainability analysis, improving public debt statistics, and strengthening procedures for managing domestic debt will be key. Strengthening public investment management will enhance the transparency, efficiency, and returns of public investment projects. 13. The authorities broadly agreed with the conclusions of the DSA. They underscored their commitment to maintaining a sustainable level of debt that does not exceed a moderate risk of debt distress. They also concurred with the importance of maximizing concessional borrowing where possible but noted that financing under these terms is not available in the scale needed to finance their large infrastructure needs. The authorities are committed to implementing their strategy to gradually clear domestic arrears to the private sector. They also remain committed to strengthening debt management by working closely with development partners. 23Under the ECF arrangement, non-concessional borrowing is capped at US$650 million, excluding the use of IMF resources, debts classified as international reserve liabilities of the BCRG and the non-concessional loan to finance the Souapiti dam project. 12 Table 5. Guinea: External Debt Sustainability Framework, Baseline Scenario, 2015–38 (Percent of GDP, unless otherwise indicated) Actual Projections Average 8/ Historical Projections 2015 2016 2017 2018 2019 2020 2021 2022 2023 2028 2038 External debt (nominal) 1/ 21.6 21.6 19.2 21.3 31.1 32.4 31.7 30.9 30.5 25.6 15.9 31.3 28.8 Definition of external/domestic debt Currency-based of which: public and publicly guaranteed (PPG) 21.6 21.6 19.2 21.3 31.1 32.4 31.7 30.9 30.5 25.6 15.9 31.3 28.8 Is there a material difference between the No two criteria? Change in external debt 1.3 0.0 -2.4 2.1 9.8 1.3 -0.7 -0.7 -0.4 -1.2 -0.8 Identified net debt-creating flows 9.9 13.7 -9.1 2.2 9.7 2.0 -0.2 0.0 0.1 0.0 -0.6 6.2 1.3 Non-interest current account deficit 12.7 31.5 6.8 16.1 20.1 16.9 12.5 11.5 9.8 6.0 1.5 13.1 11.4 Deficit in balance of goods and services 9.5 30.7 7.5 11.7 13.5 10.9 7.5 6.3 4.8 2.2 -0.5 10.9 6.5 Debt Accumulation 9/ Exports 21.1 28.4 39.3 37.3 35.9 37.1 36.8 35.7 34.8 33.1 31.9 9.0 40 Imports 30.7 59.1 46.8 49.0 49.4 48.0 44.3 42.0 39.6 35.3 31.4 8.0 35 Net current transfers (negative = inflow) 0.4 -0.7 -0.9 -0.5 -0.8 -0.8 -1.0 -1.2 -1.3 -1.0 -0.9 -3.0 -1.0 of which: official -0.2 -0.7 -0.2 -0.2 -0.2 -0.2 -0.4 -0.5 -0.5 -0.3 -0.3 7.0 30 Other current account flows (negative = net inflow) 2.8 1.5 0.3 5.0 7.4 6.8 6.0 6.4 6.2 4.8 2.8 5.1 5.9 6.0 Net FDI (negative = inflow) -3.0 -18.3 -12.6 -13.2 -9.5 -13.6 -11.3 -10.4 -8.6 -5.1 -1.6 -6.1 -9.1 25 Endogenous debt dynamics 2/ 0.2 0.5 -3.3 -0.7 -0.9 -1.3 -1.4 -1.1 -1.0 -0.9 -0.5 5.0 20 Contribution from nominal interest rate 0.2 0.3 0.2 0.3 0.2 0.4 0.4 0.4 0.4 0.4 0.3 4.0 Contribution from real GDP growth -0.8 -2.3 -1.8 -1.0 -1.2 -1.7 -1.8 -1.6 -1.4 -1.2 -0.8 15 3.0 Contribution from price and exchange rate changes 0.8 2.5 -1.8 … … … … … … … … 2.0 10 Residual 3/ -8.6 -13.8 6.7 -0.1 0.0 -0.7 -0.5 -0.7 -0.6 -1.2 -0.2 -9.4 -0.7 of which: exceptional financing -0.5 0.0 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 5 0.0 0 Sustainability indicators 2018 2020 2022 2024 2026 2028 PV of PPG external debt-to-GDP ratio ... ... 14.3 14.9 21.8 22.8 22.4 22.0 21.8 19.0 12.2 PV of PPG external debt-to-exports ratio ... ... 36.4 40.0 60.7 61.5 60.8 61.6 62.7 57.5 38.1 Rate of Debt Accumulation, Souapiti PPG debt service-to-exports ratio 4.9 3.6 1.4 2.1 2.1 2.7 3.3 4.0 3.9 5.0 4.5 Rate of Debt Accumulation excl. Souapiti PPG debt service-to-revenue ratio 7.6 7.1 4.1 5.7 5.1 6.6 7.7 8.8 8.3 10.0 8.6 Grant-equivalent financing (% of GDP) Gross external financing need (Billion of U.S. dollars) 0.9 1.2 -0.5 0.4 1.4 0.6 0.4 0.4 0.4 0.6 0.7 Grant element of new borrowing (% right scale) Key macroeconomic assumptions Real GDP growth (in percent) 3.8 10.5 9.9 5.8 5.9 6.0 6.0 5.3 5.0 5.0 5.0 5.0 5.3 GDP deflator in US dollar terms (change in percent) -3.7 -10.5 8.9 6.7 1.7 1.8 1.9 1.9 1.9 2.0 2.0 0.6 2.4 Effective interest rate (percent) 4/ 0.8 1.4 1.1 1.5 1.2 1.4 1.4 1.5 1.5 1.5 1.7 1.1 1.5 External debt (nominal) 1/ Growth of exports of G&S (US dollar terms, in percent) -5.1 32.9 65.3 7.3 3.5 11.7 7.3 3.9 4.3 6.4 7.3 15.4 6.2 of which: Private Growth of imports of G&S (US dollar terms, in percent) -7.1 90.8 -5.4 18.3 8.6 5.0 -0.3 1.6 0.9 4.9 6.3 16.4 5.2 35 Grant element of new public sector borrowing (in percent) ... ... ... 36.3 30.1 33.3 36.5 35.5 34.7 31.0 27.7 ... 33.3 Government revenues (excluding grants, in percent of GDP) 13.7 14.6 13.6 13.7 14.5 15.3 15.7 16.1 16.1 16.7 16.9 12.9 15.8 30 Aid flows (in Billion of US dollars) 5/ 0.1 0.1 0.1 0.5 0.4 0.4 0.4 0.4 0.5 0.4 0.6 Grant-equivalent financing (in percent of GDP) 6/ ... ... ... 2.9 4.5 2.4 2.0 2.0 2.0 1.1 0.9 ... 2.0 25 Grant-equivalent financing (in percent of external financing) 6/ ... ... ... 53.5 35.2 45.0 54.4 54.7 53.3 45.9 45.7 ... 48.6 Nominal GDP (Billion of US dollars) 9 9 10 12 13 14 15 16 17 24 47 20 Nominal dollar GDP growth 0.0 -1.1 19.6 12.9 7.7 7.9 8.0 7.3 7.0 7.0 7.0 5.6 7.8 15 Memorandum items: 10 PV of external debt 7/ ... ... 14.3 14.9 21.8 22.8 22.4 22.0 21.8 19.0 12.2 In percent of exports ... ... 36.4 40.0 60.7 61.5 60.8 61.6 62.7 57.5 38.1 5 Total external debt service-to-exports ratio 4.9 3.6 1.4 2.1 2.1 2.7 3.3 4.0 3.9 5.0 4.5 PV of PPG external debt (in Billion of US dollars) 1.5 1.8 2.8 3.1 3.3 3.5 3.7 4.5 5.7 0 (PVt-PVt-1)/GDPt-1 (in percent) 2.6 8.5 2.9 1.4 1.2 1.3 0.6 0.2 2018 2020 2022 2024 2026 2028 Non-interest current account deficit that stabilizes debt ratio 11.4 31.6 9.2 14.0 10.4 15.6 13.2 12.3 10.2 7.2 2.3 Sources: Country authorities; and staff estimates and projections. 0 1/ Includes both public and private sector external debt. 2/ Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ 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/ Debt accumulation is expected to come from the Souapiti loan (light blue bar) and other new borrowing (dark blue bar). 13 Table 6. Guinea: Public Sector Debt Sustainability Framework, Baseline Scenario, 2015–38 (Percent of GDP, unless otherwise indicated) Actual Projections Average 6/ 2015 2016 2017 2018 2019 2020 2021 2022 2023 2028 2038 Historical Projections Public sector debt 1/ 43.6 42.1 39.4 38.4 45.6 45.0 42.4 40.5 39.0 31.0 19.3 46.5 38.3 Definition of external/domestic Currency- of which: external debt 21.6 21.6 19.2 21.3 31.1 32.4 31.7 30.9 30.5 25.6 15.9 31.3 28.8 debt based of which: local-currency denominated Change in public sector debt 6.1 -1.6 -2.7 -1.0 7.2 -0.7 -2.6 -1.9 -1.5 -1.6 -1.0 Is there a material difference Identified debt-creating flows 5.6 -3.8 -5.8 -2.2 -1.6 -2.4 -2.9 -2.3 -2.0 -1.4 -0.8 -2.5 -1.9 No between the two criteria? Primary deficit 6.1 -0.9 1.1 1.0 1.5 0.9 0.0 0.0 0.0 -0.1 -0.3 2.2 0.3 Revenue and grants 14.7 15.6 15.1 15.1 15.4 16.2 16.7 17.2 17.2 17.2 17.4 14.2 16.7 of which: grants 1.0 0.9 1.4 1.4 0.9 0.9 1.0 1.1 1.1 0.5 0.5 Public sector debt 1/ Primary (noninterest) expenditure 20.7 14.6 16.2 16.1 16.9 17.2 16.7 17.2 17.2 17.1 17.1 16.3 17.0 Automatic debt dynamics 0.5 -2.9 -6.9 -3.2 -3.0 -3.3 -2.8 -2.3 -2.0 -1.3 -0.5 of which: local-currency denominated Contribution from interest rate/growth differential -1.2 -4.6 -5.0 -3.2 -3.1 -3.3 -2.8 -2.3 -2.0 -1.3 -0.5 of which: foreign-currency denominated of which: contribution from average real interest rate 0.2 -0.5 -1.2 -1.0 -0.9 -0.7 -0.3 -0.1 -0.1 0.2 0.4 of which: contribution from real GDP growth -1.4 -4.1 -3.8 -2.2 -2.1 -2.6 -2.5 -2.1 -1.9 -1.5 -1.0 50 Contribution from real exchange rate depreciation 1.7 1.7 -1.9 ... ... ... ... ... ... ... ... 45 Other identified debt-creating flows -1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -2.8 0.0 40 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 35 30 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 25 Debt relief (HIPC and other) -1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 20 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 15 Residual 0.5 2.3 3.1 1.2 8.8 1.7 0.2 0.4 0.5 -0.2 -0.2 0.4 1.2 10 5 Sustainability indicators 0 PV of public debt-to-GDP ratio 2/ ... ... 34.4 32.6 37.0 36.1 33.8 32.1 30.8 25.0 15.9 2018 2020 2022 2024 2026 2028 PV of public debt-to-revenue and grants ratio … … 227.9 215.6 240.3 222.2 201.7 187.0 179.0 145.5 91.1 Debt service-to-revenue and grants ratio 3/ 10.0 11.9 8.1 16.9 15.4 14.6 16.2 16.0 15.3 14.8 12.6 Gross financing need 4/ 6.7 -0.2 2.4 3.7 4.0 3.5 2.8 2.8 2.6 2.5 1.9 of which: held by residents of which: held by non-residents Key macroeconomic and fiscal assumptions 1 Real GDP growth (in percent) 3.8 10.5 9.9 5.8 5.9 6.0 6.0 5.3 5.0 5.0 5.0 5.0 5.3 Average nominal interest rate on external debt (in percent) 0.8 1.5 1.1 1.5 1.2 1.5 1.5 1.5 1.5 1.6 1.8 1.2 1.5 1 Average real interest rate on domestic debt (in percent) 1.2 -2.7 -5.7 -4.7 -4.4 -3.8 -1.3 -0.3 0.7 6.0 14.1 -0.5 0.5 Real exchange rate depreciation (in percent, + indicates depreciation) 8.8 8.8 -9.9 … ... ... ... ... ... ... ... 1.6 ... 1 n.a. Inflation rate (GDP deflator, in percent) 2.8 7.1 10.4 9.7 8.8 8.1 8.0 7.9 7.8 8.0 8.0 8.4 8.2 0 Growth of real primary spending (deflated by GDP deflator, in percent) 14.0 -22.2 22.0 5.1 10.9 7.7 3.3 8.2 5.2 5.2 4.9 17.0 5.9 Primary deficit that stabilizes the debt-to-GDP ratio 5/ -0.1 0.6 3.8 2.0 -5.7 1.6 2.6 1.9 1.5 1.5 0.7 1.5 1.1 0 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 2018 2020 2022 2024 2026 2028 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 Currency-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. 14 Figure 4. Guinea: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2018–28 PV of debt-to GDP ratio PV of debt-to-exports ratio 60 200 180 50 160 140 40 120 30 100 80 20 60 10 40 Most extreme shock is Exports 20 Most extreme shock is Exports 0 0 2018 2020 2022 2024 2026 2028 2018 2020 2022 2024 2026 2028 Debt service-to-exports ratio Debt service-to-revenue ratio 16 25 14 20 12 10 15 8 10 6 4 5 2 Most extreme shock is Exports Most extreme shock is Exports 0 0 2018 2020 2022 2024 2026 2028 2018 2020 2022 2024 2026 2028 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 No Avg. nominal interest rate on new borrowing in USD 1.6% 1.6% Natural Disasters n.a. n.a. USD Discount rate 5.0% 5.0% Commodity Prices 2/ Yes No Avg. maturity (incl. grace period) 20 20 Market Financing n.a. n.a. Avg. grace period 6 6 Note: "Yes" indicates any change to the size or * Note: All the additional financing needs generated by the shocks under the stress tests interactions of the default settings for the stress are assumed to be covered by PPG external MLT debt in the external DSA. Default terms tests. "n.a." indicates that the stress test does not of marginal debt are based on baseline 10-year projections. apply. 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 2028. 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. 15 Figure 5. Guinea: Indicators of Public Debt Under Alternative Scenarios, 2018–28 PV of Debt-to-GDP Ratio 60 50 40 30 20 Most extreme shock is Non-debt flows 10 0 2018 2020 2022 2024 2026 2028 PV of Debt-to-Revenue Ratio Debt Service-to-Revenue Ratio 400 25 350 20 300 250 15 200 10 150 100 5 Most extreme shock is Non-debt flows Most extreme shock is Non-debt flows 50 0 0 2018 2020 2022 2024 2026 2028 2018 2020 2022 2024 2026 2028 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 91% 91% Domestic medium and long-term 1% 1% Domestic short-term 7% 7% Terms of marginal debt External MLT debt Avg. nominal interest rate on new borrowing in USD 1.6% 1.6% Avg. maturity (incl. grace period) 20 20 Avg. grace period 6 6 Domestic MLT debt Avg. real interest rate on new borrowing 2.4% 2.4% Avg. maturity (incl. grace period) 2 2 Avg. grace period 1 1 Domestic short-term debt Avg. real interest rate 0% 0.0% * 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 2028. 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. 16 Figure 6. Guinea: Indicators of Public and Publicly Guaranteed External Debt under Country Specific Alternative Scenarios, 2018–281 PV of debt-to GDP ratio PV of debt-to-exports ratio 35 160 30 140 120 25 100 20 80 15 60 10 40 5 20 0 0 2018 2020 2022 2024 2026 2028 2018 2020 2022 2024 2026 2028 Debt service-to-exports ratio Debt service-to-revenue ratio 12 16 14 10 12 8 10 6 8 6 4 4 2 2 0 0 2018 2020 2022 2024 2026 2028 2018 2020 2022 2024 2026 2028 Baseline Weak policy Frontloaded disbursement Threshold Sources: Country authorities; and staff estimates and projections. 1The weak policies scenario assumes real GDP growth of 1 percentage point below the baseline over 2019–28 and a lower overall primary fiscal balance of 0.5 percent of GDP in 2019–20 to reflect slower reform implementation and revenue collection. The frontloaded disbursement scenario assumes the $650 million in non- concessional loans are disbursed over a three rather than five-year period. 17 Table 7. Guinea: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2018–28 (Percent) Projections 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 PV of debt-to GDP ratio Baseline 14.9 21.8 22.8 22.4 22.0 21.8 21.4 21.0 20.6 19.8 19.0 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 14.9 19.6 23.6 27.6 31.4 35.3 38.8 42.7 46.6 49.7 52.7 Weak policy 14.9 21.9 23.2 23.0 22.8 22.8 22.5 22.3 22.1 21.5 20.9 B. Bound Tests B1. Real GDP growth 14.9 23.3 26.1 25.7 25.2 24.9 24.5 24.0 23.6 22.7 21.8 B2. Primary balance 14.9 24.1 27.9 27.4 26.9 26.6 26.0 25.5 25.0 24.0 23.0 B3. Exports 14.9 29.6 42.9 41.9 40.9 40.3 39.4 38.5 37.3 34.9 32.7 B4. Other flows 2/ 14.9 29.4 40.6 39.6 38.7 38.1 37.2 36.4 35.2 32.9 30.7 B6. One-time 30 percent nominal depreciation 14.9 27.4 25.5 25.1 24.6 24.5 24.0 23.6 23.2 22.5 21.8 B6. Combination of B1-B5 14.9 31.9 41.6 40.6 39.6 39.0 38.2 37.4 36.1 33.8 31.7 C. Tailored Tests C1. Combined contingent liabilities 14.9 26.8 27.9 27.3 26.8 26.4 25.9 25.4 24.9 24.0 23.1 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 14.9 22.1 23.3 22.8 22.4 22.2 21.8 21.4 21.0 20.2 19.4 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 30 30 30 30 30 30 30 30 30 30 30 PV of debt-to-exports ratio Baseline 40.0 60.7 61.5 60.8 61.6 62.7 61.0 61.2 61.3 59.5 57.5 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 40.0 54.5 63.5 74.9 88.1 101.6 111.0 124.7 138.6 149.4 159.1 Weak policy 40.0 61.2 62.5 62.5 63.8 65.5 64.4 65.1 65.9 64.6 63.0 B. Bound Tests B1. Real GDP growth 40.0 60.7 61.5 60.8 61.6 62.7 61.0 61.2 61.3 59.5 57.5 B2. Primary balance 40.0 67.1 75.1 74.4 75.4 76.4 74.3 74.5 74.3 72.0 69.4 B3. Exports 40.0 102.5 180.5 177.3 178.9 180.7 175.5 175.5 173.3 163.8 154.0 B4. Other flows 2/ 40.0 82.0 109.5 107.5 108.4 109.5 106.3 106.3 104.7 98.8 92.7 B6. One-time 30 percent nominal depreciation 40.0 60.7 54.5 54.1 54.8 55.9 54.5 54.7 54.8 53.6 52.2 B6. Combination of B1-B5 40.0 94.9 100.6 127.1 128.3 129.6 125.9 125.9 123.8 117.2 110.4 C. Tailored Tests C1. Combined contingent liabilities 40.0 74.8 75.3 74.2 75.1 76.1 74.0 74.1 74.2 72.2 69.9 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 40.0 62.4 63.4 62.6 63.2 64.1 62.3 62.5 62.6 60.8 58.7 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 140 140 140 140 140 140 140 140 140 140 140 Debt service-to-exports ratio Baseline 2.1 2.1 2.7 3.3 4.0 3.9 4.0 4.1 3.8 4.9 5.0 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 2.1 2.1 2.7 3.5 4.6 4.7 5.2 5.6 5.0 7.1 8.4 Weak policy 2.1 2.1 2.8 3.4 4.1 4.1 4.3 4.4 4.1 5.3 5.5 B. Bound Tests B1. Real GDP growth 2.1 2.1 2.7 3.3 4.0 3.9 4.0 4.1 3.8 4.9 5.0 B2. Primary balance 2.1 2.1 2.8 3.6 4.3 4.2 4.3 4.3 4.5 6.1 6.2 B3. Exports 2.1 2.7 5.3 7.3 8.4 8.2 8.4 8.4 9.9 15.1 14.9 B4. Other flows 2/ 2.1 2.1 3.2 4.3 5.0 4.9 5.0 5.0 6.2 9.1 9.0 B6. One-time 30 percent nominal depreciation 2.1 2.1 2.7 3.1 3.8 3.7 3.9 4.0 3.7 4.3 4.4 B6. Combination of B1-B5 2.1 2.4 4.1 5.3 6.2 6.0 6.2 6.2 7.8 10.7 10.6 C. Tailored Tests C1. Combined contingent liabilities 2.1 2.1 3.0 3.6 4.3 4.2 4.3 4.3 4.1 5.1 5.2 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 2.1 2.1 2.8 3.3 4.0 3.9 4.1 4.1 3.9 5.0 5.1 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 10 10 10 10 10 10 10 10 10 10 10 Debt service-to-revenue ratio Baseline 5.7 5.1 6.6 7.7 8.8 8.3 8.7 8.5 7.8 9.8 10.0 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 5.7 5.2 6.5 8.2 10.1 10.2 11.2 11.6 10.2 14.2 16.7 Weak policy 5.7 7.2 8.9 7.9 9.2 8.7 9.2 9.1 8.3 10.6 10.9 B. Bound Tests 5.7 7.2 8.9 7.9 9.2 8.7 9.2 9.1 8.3 10.6 10.9 B1. Real GDP growth 5.7 5.5 7.5 8.8 10.1 9.6 10.0 9.8 8.9 11.2 11.4 B2. Primary balance 5.7 5.1 6.9 8.4 9.5 9.0 9.3 9.0 9.1 12.2 12.3 B3. Exports 5.7 5.5 8.2 10.9 12.0 11.3 11.6 11.3 12.9 19.3 19.0 B4. Other flows 2/ 5.7 5.1 7.7 10.1 11.1 10.5 10.7 10.5 12.5 18.3 17.9 B6. One-time 30 percent nominal depreciation 5.7 6.5 8.3 9.2 10.7 10.1 10.6 10.4 9.5 10.8 11.1 B6. Combination of B1-B5 5.7 5.5 8.6 10.8 11.9 11.2 11.5 11.2 13.8 18.6 18.3 C. Tailored Tests C1. Combined contingent liabilities 5.7 5.1 7.3 8.4 9.5 8.9 9.3 9.1 8.3 10.3 10.4 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 5.7 5.0 6.5 7.6 8.7 8.3 8.7 8.5 7.9 10.0 10.2 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 14 14 14 14 14 14 14 14 14 14 14 Sources: Country authorities; and staff estimates and projections. 1/ 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. 2/ Includes official and private transfers and FDI. 18 Table 8. Guinea: Sensitivity Analysis for Key Indicators of Public Debt, 2018–28 (In percent) Projections 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 PV of Debt-to-GDP Ratio Baseline 32.6 37.0 36.1 33.8 32.1 30.8 29.4 28.1 27.0 26.1 25.0 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 33 38 38 38 37 37 37 36 36 37 37 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 33 40 44 42 42 42 42 41 42 42 42 B2. Primary balance 33 40 42 39 38 36 34 33 32 31 29 B3. Exports 33 43 53 50 48 46 44 43 41 38 36 B4. Other flows 2/ 33 45 54 51 49 48 46 44 42 40 37 B6. One-time 30 percent nominal depreciation 33 37 36 33 30 28 26 24 22 21 19 B6. Combination of B1-B5 33 39 40 35 33 32 30 29 28 27 26 C. Tailored Tests C1. Combined contingent liabilities 33 43 42 39 37 36 34 33 32 31 29 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 33 38 38 37 36 36 36 37 37 37 38 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 35 35 35 35 35 35 35 35 35 35 35 PV of Debt-to-Revenue Ratio Baseline 215.6 240.3 222.2 201.7 187.0 179.0 173.4 164.6 157.7 152.3 145.5 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 216 247 235 224 216 214 216 213 213 214 213 0 16.8688 10.1595 10.0354 11.2374 12.0343 12.0209 11.9056 13.3823 12.5778 14.154 14.5572 B. Bound Tests B1. Real GDP growth 216 261 267 251 242 241 244 241 241 242 242 B2. Primary balance 216 259 259 235 218 209 203 193 185 178 170 B3. Exports 216 280 325 298 278 268 261 250 238 224 210 B4. Other flows 2/ 216 291 335 307 287 276 270 258 245 231 215 B6. One-time 30 percent nominal depreciation 216 244 220 196 177 164 154 142 131 123 112 B6. Combination of B1-B5 216 253 243 207 192 184 178 169 164 158 151 C. Tailored Tests C1. Combined contingent liabilities 216 279 257 234 218 209 203 193 185 179 171 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 216 241 230 217 210 211 214 215 216 218 219 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 16.9 15.4 14.6 16.2 16.0 15.3 15.0 14.2 13.0 14.7 14.8 A. Alternative Scenarios A1. Key variables at their historical averages in 2018-2038 1/ 17 16 15 17 17 16 16 15 14 16 17 0 16.8688 10.1595 10.0354 11.2374 12.0343 12.0209 11.9056 13.3823 12.5778 14.154 14.5572 B. Bound Tests B1. Real GDP growth 17 16 17 19 19 19 19 18 17 20 21 B2. Primary balance 17 15 17 19 17 16 16 15 14 17 17 B3. Exports 17 15 15 18 18 17 17 16 17 22 22 B4. Other flows 2/ 17 15 16 18 18 17 17 16 18 23 23 B6. One-time 30 percent nominal depreciation 17 15 15 17 17 16 16 15 13 15 15 B6. Combination of B1-B5 17 15 15 16 16 15 15 14 15 17 17 C. Tailored Tests C1. Combined contingent liabilities 17 15 19 18 17 16 16 15 14 15 15 C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. C3. Commodity price 17 15 15 17 17 16 17 16 15 17 18 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/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP. 2/ Includes official and private transfers and FDI. 19 Figure 7. Guinea: Drivers of Debt Dynamics—Baseline Scenario External Debt 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 50 80 Curren t accou nt + FDI 20 Previous DSA proj . 70 DSA-2013 Inte rquartile 30 15 Nominal interest rate rang e ( 25-75) 60 10 50 10 Real GDP growth Chang e in PP G 40 5 deb t 3/ -10 30 Price and exchange rate 0 20 -30 Median Residual -5 10 -50 -10 0 Contribution of Chang e in PP G d ebt 5-year 5-year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 unexpected Distribution across LICs 2/ 3/ historical projected -15 changes 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) Current DSA Residual 40 25 Previous DSA proj. Inte rquartile DSA-2013 80 30 rang e ( 25- Other debt creating 20 75) 70 flows 20 60 Real Exch ange rate 15 dep reciatio n 50 10 10 Chang e in Real GDP growth deb t 40 0 30 Real interest rate 5 20 -10 0 10 Primary deficit -20 Median 0 5-year 5-year -5 Change in debt Contribution of 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Distribution across LICs 2/ historical projected unexpected -10 changes change change 1/ Difference betw een anticipated and actual contributions on debt ratios. 2/ Distribution across LICs for w hich LIC DSAs w ere 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. 20 Figure 8. Guinea: Realism Tools 3-Year Adjustment in Primary Balance Fiscal Adjustment and Possible Growth Paths 1/ (Percentage points of GDP) Distribution 1/ 12 1 14 Projected 3-yr 12 10 adjustment 3-year PB adjustment greater than In percentage points of GDP 2.5 percentage points of GDP in 10 approx. top quartile 8 In percent 8 6 0 6 4 4 2 2 0 0 -1 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 -4.5 -4.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 More 2012 2013 2014 2015 2016 2017 2018 2019 Baseline Multiplier = 0.2 Multiplier = 0.4 Multiplier = 0.6 Multiplier = 0.8 1/ Bars refer to annual projected fiscal adjustment (right-hand side scale) and lines show 1/ Data cover Fund-supported programs for LICs (excluding emergency financing) approved since possible real GDP growth paths under different fiscal multipliers (left-hand side scale). 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the percent of sample is found on the vertical axis. Public and Private Investment Rates Contribution to Real GDP growth (% of GDP) (percent, 5-year average) 25 7 6 20 5 15 4 3 10 2 5 1 0 0 Historical Projected (2018 DSA) Projected (2018 DSA) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Gov. Invest. - Prev. DSA Gov. Invest. - Current DSA Contribution of other factors Priv. Invest. - Prev. DSA Priv. Invest. - Current DSA Contribution of government capital 21 Figure 9. Guinea: Qualification of the Moderate Category, 2018–281 PV of debt-to GDP ratio PV of debt-to-exports ratio 35 160 30 140 Threshold 120 25 (1-X)*Threshold 100 20 (1-Y)*Threshold 80 15 60 10 40 5 20 0 0 2018 2020 2022 2024 2026 2028 2018 2020 2022 2024 2026 2028 Debt service-to-exports ratio Debt service-to-revenue ratio 12 16 14 10 12 8 10 6 8 6 4 4 2 2 0 0 2018 2020 2022 2024 2026 2028 2018 2020 2022 2024 2026 2028 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. 22