The IMF s New Approach

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1 Debt Sustainability Analysis in Market Access Countries The IMF s New Approach REZA BAQIR Division Chief Debt Policy Division Strategy, Policy, and Review Department

2 The old DSA Public debt (in percent of GDP) ???????? Baseline Historical scenario Growth shock

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5 5 Key changes to the DSA framework Risk-based approach Realism of baseline assumptions Risks to level and profile of sovereign debt Stochastic simulations of debt paths

6 Risk-based approach Lower Scrutiny Basic DSA Higher Scrutiny Basic DSA Text Realism of baseline assumptions Risks to level and profile of sovereign debt Stochastic simulations of debt paths 6

7 Risk-based approach Public debt level Public gross financing needs Exceptional access None of the above > 50% of GDP for EMs > 60% of GDP for AEs >10% of GDP for EMs >15% of GDP for AEs Any of the above Lower Scrutiny Higher Scrutiny 7

8 Lower Scrutiny Higher Scrutiny Indicators AEs EMs 3-year cumulative primary balance adjustment (percent of GDP) 2 2 Coefficient of variation of growth 1 1 Bond yield spreads or EMBI global spreads (basis points) External financing requirements (percent of GDP) Public debt held by non-residents (share of total) Public debt in foreign-currency (share of total) n.a. 60 Annual change in the share of short-term public debt at original maturity Constrained discretion: final determination informed by staff judgment 8

9 9 Requirements for Lower Scrutiny Countries Basic DSA: - Baseline scenario - Alternative scenarios and where relevant: contingent liabilities and customized scenarios

10 10 Requirements for Lower Scrutiny Basic DSA Indicators and Debt Dynamics Countries Text

11 11 Requirements for Lower Scrutiny Basic DSA Scenarios and Debt Structure Countries Text

12 12 Requirements for Higher Scrutiny Countries Basic DSA Realism of baseline assumptions Risks to level and profile of sovereign debt Stochastic simulations of debt paths

13 Cross-country tools to assess... Forecast track record Projected fiscal adjustment to help identify potential optimism Boom-bust analysis 13

14 14 Forecast track record Projected fiscal adjustment Boom-bust analysis

15 Forecast track record 15

16 Forecast track record 16

17 Projected fiscal adjustment 17

18 18 Heat map Risks to debt level and debt profile Debt level Gross financing needs Debt Profile

19 Risks to debt level Benchmarks 19

20 20

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22 Risks to debt level Contingent liabilities Relevant for countries with financial sector vulnerabilities Triggers AEs EMs Private sector creditto-gdp (3-year 30% 15% cumulative level change)

22 22 Risks to debt level Contingent liabilities Relevant for countries with financial sector vulnerabilities Triggers AEs EMs Private sector creditto-gdp (3-year 30% 15% cumulative level change) Loan-to-deposit ratio Also look at: 5-year average growth in nominal house prices 7.5% Financial sector CL shock Shock of 10 percent of financial system assets One standard-deviation shock to growth Primary balance deteriorates, interest rate increases, inflation decreases Other CLs: natural disasters, PPPs, SOEs

23 23 Heat map Risks to debt level and debt profile Debt level Gross financing needs Debt Profile

24 24 Risks to debt profile EMBI External Financing Requirement Annual Change in Short-Term Public Debt Public Debt held by Non- Residents Public Debt in Foreign Currency in basis points in percent of GDP in percent of total in percent of total in percent of total

25 25 Fan charts Percentiles: 90th 75th 25th 10th Baseline

26 Fan charts 26

27 27 Fan charts Limit positive primary balance shock

28 28 DSA write-up Country-specific judgement factors that mitigate risks factors that amplify risks

29 New DSA chartpack (1) 29

30 New DSA chartpack (2) 30

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33 Debt Sustainability Analysis in Market Access Countries The IMF s New Approach REZA BAQIR Division Chief Debt Policy Division Strategy, Policy, and Review Department 33

Structure & Learning Objectives

U1 Structure & Learning Objectives In this part of the course, we will study the newly revamped IMF framework for public debt sustainability in market-access countries A historical overview of debt-to-gdp