Public Debt Sustainability Analysis in

Advanced and Emerging Market Economies:

The IMFs New Framework
at

Eurasian Economic Commission

April 2014
International Monetary Fund

Until recently, focus of debt sustainability

analysis was on debt trajectories.

New MAC DSA introduced in 2013

Key features of new DSA framework

MAC DSA examples

Key features of the new MAC DSA

Risk - based approach
More analysis for countries with potentially greater
vulnerabilities

Multifaceted analysis
Realism of underlying assumptions
Risks to debt level, gross financing needs, and debt profile,
macro-fiscal nexus, and bank-sovereign nexus

Clear and transparent presentation of results

Standardized charts and tables, fan charts, heat map, write-up
Risk assessment based on benchmarks derived from early warning model
Toolkit is flexible and can be tailored to country-specific circumstances

Risk indicators
Risk indicators include:
Ratio of debt to GDP
Ratio of gross financing needs to GDP
Market
perception

Bond spreads
Gross external financing requirements
Share of public debt in foreign currency
Share of debt held by non-residents
Change in short-term public debt

Signal
approach

Public
debt
burden

Countrys debt
burden

Debt
profile
Rollover risks

Other risk considerations

Inclusion of guarantees and quasi-fiscal operations
DSAs are done on a gross debt basis
Government guarantees are sometimes included
State-owned enterprises that impact the fiscal balance
are sometimes included

Relation between domestic debt capital market and

public debt sustainability
Banks holdings of sovereign debt can help lower
sovereign borrowing costs
But it may have implications for public debt
accumulation and fiscal adjustments

Risk-based approach
Public debt to GDP

> 50/60% for EMs/AEs

Public gross financing needs (GFN) to GDP

> 10/15% for EMs/AEs

Exceptional access to Fund resources

Lower
scrutiny

Judgment

Higher
scrutiny

Risk-based outputs
Lower scrutiny

Higher scrutiny

Basic DSA

Basic DSA

where relevant

Realism of baseline
assumptions

Customized and
contingent liabilities
analysis

Heat map, fan charts, debt

profile indicators

DSA write-up

Basic DSA (1)

Debt, Economic and Market Indicators

Nominal gross public debt

Public gross financing needs
Nominal net public debt

Actual
2002-2010
2011
26.2
36.8
5.0
6.7
26.2
36.8

Real GDP growth (in percent)

Inflation (GDP deflator, in percent)
Nominal GDP growth (in percent)
Effective interest rate (in percent) 3/

4.0
16.2
20.9
4.4

2012
37.4
8.1
37.4

5.2
14.4
20.3
5.8

2013
37.9
5.6
37.9

2014
37.8
6.4
37.8

0.0
5.0
5.0
1.7

2.8
7.2
10.2
1.9

0.2
8.0
8.2
5.0

1/

Projections
2015 2016
36.4 34.8
6.5
6.5
36.4 33.5
3.5
7.6
11.4
2.2

3.5
7.8
11.6
2.4

2017
33.5
6.9

2018
32.2
7.3
32.2

3.5
7.8
11.6
2.6

3.5
7.8
11.6
2.8

20
15

As of March 26, 2013

Sovereign Spreads
EMBI (bp) 450
CDS (bp)
475
Ratings
Moody's
S&Ps
Fitch

Foreign Local
Aa3
Aa3
AA
AAAA
A

15

Debt-Creating Flows Above

projection
10

(in percent of GDP)

10

0
-5

-5

-10

-10
-15

-15

-20

-20
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Primary deficit

Real GDP growth

Real interest rate

Other debt-creating flows

Residual

cumulative

Change in gross public sector debt

Basic DSA (2)

Composition of Public Debt
By Maturity

By Currency

(in percent of GDP)

(in percent of GDP)

70
60

70

Medium and long-term

Short-term

60

50

50

40

40

30

30

20

projection

20

projection

10
0
2002

Local currency-denominated
Foreign currency-denominated

10

2004

2006

2008

2010

2012

2014

2016

2018

0
2002

2004

2006

2008

2010

2012

2014

2016

2018

Alternative Scenarios
Baseline

Historical

Constant Primary Balance

Gross Nominal Public Debt

Public Gross Financing Needs

(in percent of GDP)

66

(in percent of GDP)

12

64

10

62

60
6

58

56
54

52
2011

2
projection
2012

2013

projection

2014

2015

2016

2017

2018

0
2011

2012

2013

2014

2015

2016

2017

2018

Realism of baseline assumptions

Cross-country tools to help identify potential optimism

Forecast track record

Projected fiscal adjustment

Boom-bust

Realism of baseline assumptions

Forecast track record
Real GDP Growth
(in percent, actual-projection)

Italy median forecast error, 2004-2012:

Has a percentile rank of:

-1.46
7%

pessimistic

6
4
2

optimistic

-2
-4
-6
-8
-10
2004

Distribution of forecast
errors: 1/
Interquartile range (25-75)
Median
Italy forecast error
2005

2006

2007

2008

2009

2010

Year
Source: Italy 2013: Article VI Consultation Staff Report, September 2013

2011

2012

Realism of baseline assumptions

Projected fiscal adjustment
3-Year Adjustment in Cyclically-Adjusted
Primary Balance (CAPB) 1/
(Percent of GDP)

14

Distribution 4/

12

Italy

10
8
6
4

-1

-2

-3

-4

Less

8
More

1/ For Italy the bulk of the adjustment already occurred in 2012 and the pace of
consolidation slows to 1 percent of GDP in 2013.
Source: Italy 2013: Article VI Consultation Staff Report, September 2013

Heat map
Debt level

Gross financing needs

Debt profile

Real GDP
Primary
Growth Shock Balance Shock

Real Interest Exchange Rate Contingent

Rate Shock
Shock
Liability shock

Real GDP
Primary
Growth Shock Balance Shock

Real Interest Exchange Rate Contingent

Rate Shock
Shock
Liability Shock

Market
Perception

External
Change in the Public Debt
Financing
Share of Short- Held by NonRequirements
Term Debt
Residents

Foreign
Currency
Debt

Risks to debt level

and GFN

Macro-fiscal stress tests

Primary balance shock
pass-through to higher interest rate

Capture interactions
between key macro
variables

Real GDP growth shock

primary balance deteriorates,
interest rate increases,
inflation declines

Designed to balance
standardization and
tailoring country-specific
circumstances

Real interest rate shock

Real exchange rate shock

pass-through to higher inflation
15

Contingent liabilities shocks

Triggered automatically for countries with banking
sector vulnerabilities
Financial sector CL shock
Triggers
Private sector credit-toGDP (3-year cumulative
level change)
Loan-to-deposit ratio

AEs

EMs

30%

15%

1.5

1.5

Shock of 10 percent of banking system

assets
Primary balance deteriorates, interest
rate increases, inflation decreases

May also be relevant to assess risks related to

natural disasters, PPPs, SOEs

Italy Public DSA - Stress Tests

Macro-Fiscal Stress Tests
Baseline
Real GDP Growth Shock

Primary Balance Shock

Real Exchange Rate Shock

Real Interest Rate Shock

Gross Nominal Public Debt

Gross Nominal Public Debt

(in percent of GDP)

Public Gross Financing Needs

(in percent of Revenue)

150

310

(in percent of GDP)

31

145

300

29

290

27

140
135

25

280

130

23

270

125

21

260

120

19

115

250

17

110
2013

240
2013

15
2013

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

Additional Stress Tests

Baseline
Reform Fatigue

Combined Macro-Fiscal Shock

Deep recession and confidence shock

Gross Nominal Public Debt

Gross Nominal Public Debt

(in percent of GDP)

Public Gross Financing Needs

(in percent of Revenue)

170

Contingent Liability Shock

(in percent of GDP)

40

340

330

160

320

150

310

140

290

35

300

30

25

280

130

270

120

260

110
2013

240
2013

20

250

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

15
2013

2014

2015

2016

2017

2018

Heat map
Debt level

Gross financing needs

Real GDP
Primary
Growth Shock Balance Shock

Real Interest Exchange Rate Contingent

Rate Shock
Shock
Liability shock

Real GDP
Primary
Growth Shock Balance Shock

Real Interest Exchange Rate Contingent

Rate Shock
Shock
Liability Shock

External
Change in the Public Debt
Financing
Share of Short- Held by NonRequirements
Term Debt
Residents

Market
Perception

Debt profile

Foreign
Currency
Debt

Risks to debt profile

Debt Profile Vulnerabilities

Lower early warning
356
bp

600

87%

17%
1

15

200
2

45

0.5

5
1

Upper early warning

15
1

60

24%
1

20
2

-4.5%

EMBI

External Financing
Requirement

(in basis points) 4/

(in percent of GDP)

Annual Change in
Short-Term Public
Debt
(in percent of total)

Public Debt Held

by Non-Residents

Public Debt in
Foreign Currency

(in percent of total)

(in percent of total)

Fan charts
Evolution of Predictive Densities of Gross Nominal Public Debt
(in percent of GDP)
Baseline

10th-25th

Percentiles:

25th-75th

75th-90th

Symmetric Distribution

Restricted (Asymmetric) Distribution

145

145

140

140

135

135

130

130

125

125

120

120

115

115

Restrictions on upside shocks:

110

110

no restriction on the growth rate shock

105

105

100
2011

100
2011

2012

2013

2014

2015

2016

2017

2018

Source: Italy 2013: Article VI Consultation Staff Report, September 2013

no restriction on the interest rate shock

0 is the max positive pb shock (percent GDP)
no restriction on the exchange rate shock

2012

2013

2014

2015

2016

2017

2018

DSA write-up
Reflects staffs overall assessment of debt
sustainability risks

Highlights vulnerabilities and country-specific

circumstances that mitigate or amplify risks
Includes background and key assumptions,
including the realism of the baseline

Example - Mexico
Gross debt levels in Mexico, at 45
percent of GDP projected by
end-2013, remain moderate. The
broad institutional coverage of
Mexicos public debtprovides
reassurance that gross liabilities of the
public sector are well captured
Given Mexicos debt structure, the
pass-through of either interest rates
or exchange rate shocks to the
budget is relatively small over the
projection period
While public debt profile indicators are
below early warning benchmarks,
there is a large share of debt held by
non-residentsabout 48 percent of
total debt.

Example - Romania

The main risks arise from

underperformance of GDP growth and
a banking sector contingent liability,
which could push the public debt ratio
to nearly 50 percent of GDPhowever,
banks are well capitalized with
limited exposure to short-term
external debt.
External vulnerabilities persist due to
relatively high external debt and
rollover needs

Example - Italy
Italy Public DSA Risk Assessment
Heat Map
Debt level 1/

Gross financing needs 2/

Debt profile

Real GDP
Primary
Growth Shock Balance Shock

Real Interest Exchange Rate Contingent

Rate Shock
Shock
Liability shock

Real GDP
Primary
Growth Shock Balance Shock

Real Interest Exchange Rate Contingent

Rate Shock
Shock
Liability Shock

Market
Perception

3/

External
Change in the Public Debt
Financing
Share of Short- Held by NonRequirements
Term Debt
Residents

At close to 130 percent of GDP, Italys

public debt ratio is the second highest
in the euro area and financing needs
are large

Foreign
Currency
Debt

Evolution of Predictive Densities of Gross Nominal Public Debt

(in percent of GDP)

Baseline

10th-25th

Percentiles:

25th-75th

75th-90th

Symmetric Distribution

Restricted (Asymmetric) Distribution

145

145

140

140

135

135

130

130

125

125

120

120

115

115

Restrictions on upside shocks:

110

110

no restriction on the growth rate shock

105

105

100
2011

2012

2013

2014

2015

2016

2017

2018

100
2011

Given the debt structure (average

maturity around 7 years), the direct
interest pass-through to the budget is
relatively slow

no restriction on the interest rate shock

0 is the max positive pb shock (percent GDP)
no restriction on the exchange rate shock

2012

2013

2014

2015

2016

2017

2018

Debt Profile Vulnerabilities

(Indicators vis--vis risk assessment benchmarks)

Italy

Lower early warning

Upper early warning

51%

Not applicable
for Italy
600
273
bp

400

25

1.5

17

1.0

Bond Spread over

German Bonds

External Financing
Requirement

(in basis points) 4/

(in percent of GDP)

Source: IMF staff.

45
0.8%

Annual Change in
Short-Term Public
Debt
1

30%

30

(in percent of total)

Public Debt Held

by Non-Residents

Public Debt in
Foreign Currency

(in percent of total)

(in percent of total)

The countrys high total external

financing requirements point to
continued vulnerability to changes in
market perceptions.

Appendix

Indicators for additional analysis

Lower
scrutiny

Indicators

Higher
scrutiny

AEs

EMs

3-year cumulative primary balance adjustment (percent of GDP)

Coefficient of variation of growth

Bond yield spreads or EMBI global spreads (basis points)

600

600

External financing requirements (percent of GDP)

25

15

Public debt held by non-residents (share of total)

45

45

Public debt in foreign-currency (share of total)

n.a.

60

Annual change in the share of short-term public debt at

original maturity

1.5

1.0

Macro-fiscal shocks in detail

Risk

Size and Duration of Shocks

Default Interaction

Primary
balance

Minimum shock of 50 percent of planned

cumulative adjustment or baseline minus
half of the 10-year historical standard
deviation, whichever is larger.

Additional borrowing leads to increase in interest rate of 25 basis

points per 1 percent of GDP worsening of the deficit.

Real GDP
growth

Real GDP growth is reduced by 1

standard deviation for 2 consecutive
years.

Primary balance deteriorates (the revenue-to-GDP ratio remains the

same as in the baseline, but the ratio of non-interest expenditures to
GDP increases as the level of spending is kept the same as in the
baseline). Deterioration in primary balance leads to higher interest
rate (see above).
Decline in growth leads to lower inflation (25 percentage points per 1
percent of GDP growth).

Interest
rate

Nominal interest rate increases by the

difference between the maximum real
interest rate over history (last 10 years)
and the average real interest rate level
over projection, or by 200bp, whichever
is larger.

Size of shock can be adjusted if risks are high (gross financing needs
are higher).

Exchange
rate

Estimate of real exchange rate

overvaluation, or maximum historical
movement of exchange rate over 10
years, whichever is highest.

Pass-through to inflation with default elasticity of 0.25 for EMs and

0.03 for AEs.
26