Lebanese Economic Association
Debt Sustainability
Lebanon’s Medium Term Outlook
Mounir Rached
1
I. Government Debt:
Developments and Structure
2
Outline
I.
II.
III.
IV.
V.
Debt Structure
Debt Sustainability
Options to Reduce Debt
Debt Sustainability Outlook
Concluding Remarks
3
I. Debt Structure
1.Currency Composition
Year
2000
2001
2002
2003
2004
2005
2006
Gross
Debt
25.2
28.3
30.7
33.4
35.9
38.5
40
LL
17.4
18.1
16.8
17.8
17.5
19.6
USD
7.8
10.3
13.9
15.6
18.4
18.9
16.7
17.1
18.5
19.9
21.8
22.1
GDP
22.4?
N.B. Figures are in billion USD
•
•
•
•
Most of dollar financing is from domestic sources.
Shift toward dollar financing, 50% by 2005.
$ financing cheaper but immune to deflating.
LL financing has higher rate, low default risk, but value risk.
4
2.Gross Debt by source
Year
2000
2001
2002
2003
2004
2005
BDL
5
16
8
24
25
25
Public
Enterprises
7
7
7
5
4
4.2
Commercial B
64
56
60
44
47
49
Non-bank
23
21
25
28
24
22
(ow ext. off)
5.5
4.9
5.8
12.6
12
11.2
N.B. Figures are in Percentage
•
•
BDL increased its share.
Government absorbs 36 % of bank’s claims:
•
•
•
•
BDL absorbs 44% of banks claims (including RRs). Absorbs liquidity.
BDL and Government take up to 80% of bank’s resources
Crowding out of private sector is less intense than other cases due to high
deposit/GDP. Claims on private sector = 75% of GDP
Rising external official financing after Paris II but remains low.
5
3.Gross debt by Maturity
Dec 03
Dec 04
June 05
Dec 05
Short-term
35.7
32.2
35.7
27.7
Long-term
64.3
67.8
64.3
72.3
N.B. Figures are in percent of total debt
•
•
•
•
$16 billion mature in 2007-8 and $9 billion in 2009-10
Short-term debt: 46% of GDP at end 2005
Present value of debt is high.
Average maturity is low.
6
Summary:
Features of Government Debt
•
High debt burden to GDP
•
High domestic bank financing
•
High BDL financing
•
Currency composition is about 50:50
•
Maturity is short
•
Present value of debt is also high
•
Bilateral & multilateral share is low
•
Rollover risk exposure
•
Deposit base risk-capital outflow risk
7
II. Debt sustainability
Can Lebanon go on with rising debt?
Is debt sustainable ?
8
•
There is no simple definition of debt sustainability
•
Practical definition (IMF):
Debt is sustainable when the fiscal stance keeps debt-GDP ratio
on a stable (or declining) path.
•
Should we look only at GDP ratio ?
•
No precise thresholds
For low income countries (worse than Lebanon):
Some use a stress (threshold) PV of debt ratio of 50%+
But mostly for external debt
•
Thresholds are country specific
9
Debt Sustainability
(Cont’d)
•
By any definition, Lebanon’s debt based on debt
GDP ratio is unsustainable.
•
There is a convergence of view on this among:
•
•
International Financial Institutions
Government & bilateral donors.
10
1.Gross Debt (GD) *
Year
2000
2001
2002
2003
2004
2005
2006
GD
(%GDP)
151
166
167
168
165
175
190?
GDP
(B$)
16.7
17.1
18.8
19.9
21.8
22.2
21.1?
Gross debt is rising along unsustainable path
•
•
•
Paris II provided a temporary halt to debt ratios through concessional debt
Interest payments went down to 10% of GDP from 17%
Concessional lending by banks helped
Since 2004, low growth & higher interest payments are main factor for debt
increase
* Gross Debt of Central Government
11
2.Gross Market Debt*
Year
2000
2001
2002
2003
2004
2005
GMD
132
126
140
119
118
118
2006
(% of
GDP)
•
•
•
•
•
Should we consider gross market debt instead of gross debt?
Debt held by the market is declining due to rise in BDL debt .
Bank’s may view the BDL as a better (lower) risk than government.
Risk related to market sentiment is less.
It’s another indicator that lowers solvency risk.
* Gross Market Debt (GMD): Debt less debt to BDL, public entities and external official
creditors.
12
3.Net Government Debt
Year
2000
2001
2002
2003
2004
2005
Gross
Debt
151
166
166
168
165
175
Net Debt
143
162
156
156
152
158
NMD
127
122
133
98
96
105
N.B. Figures are in % of GDP
Net Government Debt (excluding government deposits) is a
better indicator of debt burden
13
4.Gross & Net Debt to Disposable
Income
Year
2000
2001
2002
2003
2004
2005
GD
140
151
156
158
155
165
ND
133
147
146
147
143
150
GMD
124
121
133
112
112
112
NMD
118
111
125
92
90
100
N.B. Figures are in percentage
•
•
•
Disposable income: GDP + net income from abroad + grants (transfers).
In case of Lebanon, it’s a more appropriate measure?
Debt burden is significantly less.
14
5.Present Value of Debt
•
Maturity is short for debt on average
•
Discounting debt will further reduce Debt /GDP ratios
•
Should take ratio of present value of debt for each year
to GDP
•
With average maturity of 4 years at 8%
•
Present value of debt (PVD) will be:
Discount factor is 1.36
PVD= $40 b/1.36= $29.4 billion in 2005
15
6.Debt- to- Revenue
Year
2001
2002
2003
2004
2005
D/Rev
911
792
762
722
784
N.B. Numbers are in percent
•
An Indicator of government debt to government income
•
The ratio declined until 2004 - Remains high
16
7.Public Debt
•
Government + Public entities
•
Need net debt of PEs
•
Debt of Public enterprises could burden
government ability to service debt.
•
EDL is prime burden.
17
8. External Debt
Indicator for External Shocks
Year
2002
2003
2004
2005
External debt (B$)
5.6
7.4
7.4
7.6
External market debt
(B$)
3.6
3.3
3
3.5
Short term external
debt (B$)
1.1
1.7
2.4
1.1
External debt/GDP (%)
30
38
34
35
External market
debt/GDP (%)
19
17
14
16
Short term Ext. Debt/
GDP (%)
6
9
11
6
•
•
•
External debt (LL & $) to GDP & to reserves of BDL is low
Reserves (excluding gold)/ external debt : 130% at end 2005
Reserves (ex. gold)/external market debt : 230% at 2005
18
9. External Debt in Crisis Countries
Country
External debt to
exports
Argentina
500
Brazil
380
Ecuador
300
Turkey
280
Uruguay
500
High external debt contributed to financial
crises in these countries in recent
years.
Had debt/GDP ratios above 70% and high
external debt to exports
Lebanon has low external debt exposure:
External market debt/Exports
=190%
Short t. external debt to exports = 60%
N.B.
Figures are in percent
19
10. options to Place Debt on a Sustainable
Path
Debt Dynamics equation (stochastic):
d= ((1+ r)/(1+g))*d(t-1) –ps – priv
dd= ((r-g)/(1+g))* d(t-1)–PS –Priv
Increase g and ps to reduce debt.
d: debt in percent of GDP (income)
dd: change in debt ratio
r : effective real interest rate (on LL and $)
g: real growth rate (private sector & government)
ps: primary surplus/deficit (including grants)
priv: privatization receipts: net worth of PEs
20
IV. Lebanon’s DS Outlook
Debt ratio stabilized in 2002-2004
Supported by :
•
•
•
Paris II in 2002 ($ 2.4 billion at 5%, 15 year maturity, grace period of 3-5
years)
Bank’s subsidy in 2002 ($3.6 billion at zero interest)
Improved primary balance-positive since 2002:
•
•
•
•
Resumption of escalation of debt ratio in 2005 & 2006
Rise in interest rates a major factor
Without exceptional measures and adjustment effort debt is
expected to rise
Debt needs to be addressed
21
Outlook 2006-2011 (Debt/GDP Ratio)
Year
06
07
08
09
10
11
Scenario
1-IMF /a
179
184
188
195
205
213
Scenario
2- (Gov)
/b
180
170
161
157
151
145
Scenario
3- (MR)
/c
180
168
156
153
147
139
a. Before war & no adjustment as in recovery paper
b. After war with adjust. w/o Paris 3 (based on recovery doc.)
c. After war with adjustment & Paris 3 grants equivalent to losses stated in
recovery doc equal to $4.5 billion & primary surplus of 9% by
2011.
Additional privatization receipts will reduce debt further-15% of GDP ?
22
V.Concluding Remarks
•
Debt is unsustainable at present.
•
Even if reform is successful, debt ratio will remain high into the medium
term.
•
However Debt could become sustainable with adjustment toward 2011
•
Debt reduction should be the guiding principle of fiscal adjustment.
•
Need 2.6% Primary Surplus to stabilize debt after 2011-attainable with
r=6% and g=4%
•
Privatization receipts (= 15% 0f GDP) play a crucial role as well as
Regional and international support
23
Concluding Remarks (Cont’d)
•
•
•
External debt is low: reduces risk due to external shocks.
Solvency concerns remain with large debt with short maturity
Reserves to external debt is high at 1.7 times
Rollover risk linked to stability (shocks) of deposit base is not
excessive.
Non-resident deposits amount to 16% of total deposits and BDL has
high reserves.
•
•
•
High reserves and potential use of interest rate instrument dilute
risk
Low market exposure dilutes risk
The challenge is to reduce debt and extend maturity
24