Debt Sustainability Analysis at Subnational Level. Province of Buenos Aires, Argentina. Background Case Study using Analytica

Transcription

1 Debt Sustainability Analysis at Subnational Level Province of Buenos Aires, Argentina Background Case Study using Analytica DSA at Subnational Level Trainning, Brasilia, December 5-9, 2011 PRMED in collaboration with LAC PREM Slides prepared by A. Manoel, J. Pradelli, L. Bandiera, and L. Garrido World Bank Copyright

2 World Bank Economic Memorandum Role of the F/DSA The 2010 Economic Memorandum for the Province of Buenos Aires: Key Public Policy Issues responded to requests from the government for an indepth analysis of three key policy areas under their control: (i) creating fiscal space for public investment while ensuring sustainability, (ii) education spending, and (iii) infrastructure investment. In this context, the Memorandum considered economic performance at the state level, critical areas requiring additional public investment (including education and infrastructure), and the fiscal and debt sustainability implications of addressing these needs.

3 Background and Context Unfunded Decentralization and Deterioration of Public Finances Successive waves of expenditure decentralization since the 1970s have had a major impact on provincial fiscal accounts. While responsibility for many public services have been devolved to the provinces i.e., for education and health care no significant additional taxation authority has been devolved. This made the province highly dependent on transfers, which have not been adequate to cover increasing expenditures. Estimated unfunded costs of decentralization between to BA are $US1.5 billion, equal to 20% of new debt issued during that period. At the same time, provincial tax authority was reduced. Has led to a structural deficit since 1993, deficits have materialized during 11 of the last 16 years.

4 Background and Context 2004 Federal Fiscal Responsibility Law The Federal Government can apply penalties at its discretion (e.g., withhold some transfers) if rules are not adhered to. Rule 1: The nominal growth rate of budgeted primary public expenditure must be lower than projected GDP growth. Rule 2: Budgets must be executed preserving fiscal balance. Rule 3: Necessary measures must be taken such that borrowing (not including overdrafts) in each fiscal year results in debt service payments that are below 15% of net current revenues (i.e. net of transfers to municipalities). Rule 4: In the case that debt levels generate debt service payments greater than 15% of net current revenues, provincial budgets must be presented and executed with a primary surplus.

5 Macroeconomic and Fiscal Performance Province of Buenos Aires Fiscal Outcomes (% of Gross Regional Product (GRP)) 12% 10% 8% 6% 4% 2% 0% -2% % 3rd wave decentr. and fiscal pact Recession and '99 Compr. Fed. Crisis and prov. debt restr. Econ. recovery Revenues Primary expenditures Primary balance

6 Macroeconomic and Fiscal Performance Provincial Revenue Trends (% GRP) and Sources (2008) Social security contributions 15% Other 10% 20,000 18,000 16, % 4.9% 4.8% Provincial taxes 40% Turnover tax 28% Ar$ million 14,000 12,000 10,000 8, % 4.6% 4.5% 4.4% 6, % Transfers from fed gov 35% Real estate tax 3% Automobile tax 2% Stamp tax 3% Other taxes 4% 4,000 2, % 4.1% 4.0% Turnover tax Real estate tax Automobile tax Stamp tax Other taxes Total tax revenue (% of GRP, right axis)

7 Macroeconomic and Fiscal Performance Transfers from Federal Government (Ar$) Federal Tax Sharing 9,245 12,352 14,874 Non-earmarked 6,528 8,569 10,428 Earmarked 2,716 3,783 4,446 Education 1,141 2,098 2,515 Social security Roads Fondo Conurbano Other Non-tax transfers Current Capital Housing Other TOTAL 9,901 12,944 15,396

8 Macroeconomic and Fiscal Performance Per cap. Total Expenditure by Province (Ar$ 2008) 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Santa Cruz Tierra del Fuego Neuquen Chubut Catamarca La Pampa La Rioja Formosa Rio Negro San Luis Chaco San Juan Jujuy Santiago del Estero City of Buenos Aires Entre Rios Tucuman Misiones Mendoza Cordoba Salta Santa Fe Corrientes Buenos Aires Source: Staff calculations based on data from National Ministry of Economy.

9 Macroeconomic and Fiscal Performance Provincial Expenditures (% gross regional prod) 14% 12% 10% 8% 6% 4% 2% 0% Salaries Other current Interest Capital

10 Macroeconomic and Fiscal Performance Debt by Creditor (Ar$ million) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, National government Multilaterals Official creditors Bondholders Banco Provincia

11 IV. Macroeconomic and Fiscal Performance Assumptions and Projections Key Assumptions for Baseline Scenario Year Real GDP growth rate Official CPI inflation Private sector estimates of CPI inflation Growth in personnel expenditure baseline alternative baseline alternative baseline baseline reform scenario alternative % -0.4% 6.0% 7.9% 11.0% 11.0% 9.0% 20% % 1.6% 12.0% 13.9% 12.0% 12.0% 10.0% 20% % 1.6% 9.0% 10.9% 9.0% 9% 7% 20% % 1.6% 8.0% 9.9% 8.0% 8% 6% 20% % 1.6% 8.0% 9.9% 8.0% 8% 6% 20% Source: Staff projections.

12 Fiscal and Debt Sustainability Analysis A multi-step approach was used to develop the sustainability analysis: i. Assess fiscal and debt sustainably under a baseline scenario (w.r.t. FRL indicators). ii. Assess fiscal and debt sustainably (w.r.t. FRL) under alternative reform scenarios, assuming the implementation of the WB operation and associated reform program (e.g., impact on revenues, personnel expenditures, overall fiscal outturns). iii. Consider the impact of potential shocks to macroeconomic variables.

13 Fiscal and Debt Sustainability Analysis Primary Balance (% of NCR) Note: Alternative scenario refers to GDP growth rate 1 standard deviation below baseline scenario. Source: Staff projections based on data from provincial Ministry of Economy.

14 Fiscal and Debt Sustainability Analysis Projections of Debt and Debt Service Total Debt (% of NCR) Primary Balance (% of NCR) 130% 120% 110% 100% 90% real GDP growth rate Baseline Time Alternative (lower) Source: Staff projections based on data from provincial Ministry of Economy.

15 Fiscal and Debt Sustainability Analysis Projections of Personnel Expenditure Personnel expenditure as % of NCR Primary balance as % of NCR Source: Staff projections based on data from provincial Ministry of Economy.

16 Fiscal and Debt Sustainability Analysis Projections of Financing Needs Total Financing Needs (Ar$ billion) Financing Gap (Ar$ billion) *G=billion Source: Staff projections based on data from provincial Ministry of Economy.

17 Fiscal Sustainability Analysis Risk Analysis Debt Stock (%NCR) Debt Service (%NCR) 25% 250% 20% 200% 15% 150% 10% 100% 5% 50% 0% % 50-75% 25-50% 5-25% Baseline 0% % 50-75% 25-50% 5-25% Baseline Staff projections based on data from provincial Ministry of Economy.

18 Buenos Aires: Analytical Issues Federal Fiscal Responsibility Law - A benchmark for DSA Primary expenditure growth should not exceed GDP growth. Balanced budget. Ceiling on debt service (15 percent of Net Current Revenue NCR; net of transfers to municipalities). Primary surplus is required if ceiling is breached. Uncertainty and macroeconomic instability Joint (multivariate) shocks to macro variables, with effects on subnational budget and debt. Individual shock to primary balance and personnel expenditure. Sources of funding: transfers and borrowing Buenos Aires has a structural fiscal problem: decentralization policies coupled with limitations on own tax revenues have led to a heavy burden of public expenditures. Transfers from federal government and debt instruments (mainly bonds, issued in local and foreign capital market) constitute key sources of funding. World Bank AAA work EM developed as an input for the provincial development plan, informing public policy making on three areas: fiscal space and sustainability, education, and infrastructure and logistics.

19 Model structure and Alternative scenarios Submodels Projection horizon Macro variables Budget variables Indicators Time Base Year Time Horizon Alternative scenarios Debt dynamics Gross financing needs (GFN) CPI inflation - Baseline and Alternative Real GDP grow th - Baseline and Alternative Real GSDP grow th - Baseline and Alternatives (2)

20 Macro CPI Inflation (official vs own estimates) and CER Exchange rates CPI inflation Baseline CER AR$/EUR AR$/US$ CPI inflation - sd CPI inflation Alternative CPI inflation w ith shocks CPI inflation Adjustment factor (ow n estimate) CPI inflation (ow n estimates) AR$/EUR w ith shocks AR$/US$ w ith shocks Depreciation rate (AR$/US$) Stochastic shocks Joint Stochastic Shocks Stochastic module Growth GDP Growth GSDP Pass-through factor CPI-GDP deflator (ow n estimates) GDP deflator inflation GDP deflator Real GDP grow th Baseline Nominal GDP Nominal GDP grow th Nominal GDP grow th w ith shocks Nominal GSDP grow th w ith shocks Differential betw een grow th rate of nominal GSDP and GDP Real GDP grow th - sd Real GDP grow th rate Real GDP Real GDP grow th Alternative

21 Macro Stochastic Analysis Real GDP growth rate - historical series CPI inflation rate - historical series Exchange rate AR$/US$ - historical series Mean Variance-co variance matrix Past I Real GDP growth rate - historical mean CPI inflation rate - historical mean Exchange rate AR$/US$ - historical mean Joint Stochastic Shocks J Parametric Multivariate Distributions Gaussian( m, cv, i, j ) BiNormal (m, s, i, c ) Multinormal(m,s,c,i,j) Multinomial (n, theta, i ) Dirichlet ( a, i ) MultiUniform ( c, i, j, lb, ub ) Uniform Spherical (i, r ) Inverted Wishart(Psi,n,I,J) Wishart(cv,n,I,J) Creating a single univariate distribution correlated with another existing dist: Correlate With (s, ref, rc ) Normal_correl(m, s, r, y) Reshaped distributions: Dist_reshape(x, newdist) Creating an array of mutually correlated distributions: Correlate Dists (d, rc, i, j ) Arrays with serial correlation Normal_serial_correl(m,s,r,i) Normal_additive_gro(x,m,s,r,i) Normal_compound_gro(x,m,s,r,t) Dist_serial_correl(x,r,i) Dist_additive_growth(x,g,r,i) Dist_compound_growth(x,g,r,i) Distributions on Linear Regression coefficients RegressionDist(Y,B,I,K) RegressionNoise(Y,B,I,K,C) RegressionFitProb(Y,B,I,K,C) Sample Covariance sample correlation SameIndexes(x,y) UniqueRank

22 Budget and Gross Financing Needs Re ve nue Expe nditure Gross Operating Balance Primary Balance Overall Balance Shock to Primary Balance G r o s s f i n a n c in g n e e d s ( G F N ) G r o s s f in a n c in g n e e d s ( G F N ) P r i m a r y B a l a n c e T o ta l D e b t S e r v ic e T o t a l In te r e s t P a y m e n ts f r o m IO, b o n d s a n d N G d e b t In itia l in t e r e s t p a y m e n ts T o ta l A m o r t i z a t i o n s T o t a l I n t e r e s ts C o v e r a g e o f G F N N e w d e b t - B o n d X is s u a n c e N e w d e b t - D is b u r s e m e n ts IO

23 Revenues (1) Tax revenue Tax revenue Non-tax revenue Initial non-tax revenue Non-tax revenue Current transfers from NG and other current revenue Initial current transfers from NG Initial other current revenue Current transfers from NG Other current revenue Current tranfers from NG and other current revenue Current revenue Net current revenue Current revenue Capital revenue (own and capital transfers from NG) Initial ow n capital revenue Ow n capital revenue Initial capital transfers from NG Capital transfers from NG Capital revenue Reduction in financial investment Total Revenues Total Revenues

24 Revenues (2) Own tax revenue Initial turnover tax Turnover tax - Elasticity Turnover tax grow th Turnover tax Initial real estate tax Real estate tax - Elasticity Real estate tax grow th Real estate tax Initial stamp tax Initial energy tax Stamp tax - Elasticity Energy tax - Elasticity Stamp tax grow th Energy tax grow th Stamp tax Energy tax Ow n tax revenue Initial other taxes Regulation tax - Elasticity Regulation tax grow th Other taxes Initial vehicle tax Vehicle tax - Elasticity Vehicle tax grow th Vehicle tax Tax-sharing with NG Initial co-participation law Co-participation law National tax - Elasticity National tax grow th Initial other taxes from NG Other taxes from NG Initial social security contributions Social security contributions Tax-sharing w ith NG Initial school transfers Initial capital gain tax

25 Expenditures Current expenditure Initial goods expenditure Goods expenditure Initial non-personnel expenditure Non-personnel expenditure Consumption expenditure Initial personnel expenditure Personnel expenditure Pool of personnel grow th Personnel expenditure grow th Shock to personnel expenditure Initial tranfers to Municipalities Initial transfers to private sector Transfers to Municipalities Transfers to private sector Transfers to Municipalities and private sector Initial social security spending Social security spending Total Interest Payments from IO, bonds and NG debt Current expenditure Capital expenditure Initial real direct investment Real direct investment Initial financial investment Capital expenditure Initial capital transfers to Municipalities Capital transfers to Municipalities

26 Debt Dynamics (1) International Organisations IBRD & IADB Initial debt IO (US$) Initial amortizations IO (US$) Debt IO (US$) Debt IO (all) Interest payments IO (all) Initial interest payments IO (US$) Amortizations IO (all) New debt - Disbursements IO (US$) Bonds in US$ Initial debt Bonds US$ (US$) Initial amortization Bonds US$ (US$) Debt Bonds US$ (US$) Debt Bonds US$ Interest payments Bond US$ Interest rate Bonds US$ Amortizations Bonds US$ Bonds in EUR Initial debt Bonds EUR (EUR) Initial amortization Bonds EUR (EUR) Debt Bonds EUR (EUR) Debt Bonds EUR Interest payments Bond EUR Interest rate Bonds EUR Amortizations Bonds EUR Non-indexed Bonds in AR$ Initial debt Non-indexed Bonds AR$ Initial amortization Non-indexed Bonds AR$ Debt Non-indexed Bonds AR$ Initial interest payments Non-indexed Bonds AR$

27 Debt Dynamics (2) CER-indexed Bonds in AR$ Capital Bono Malvinas Monthly amortization rate Bono Malvinas Initial debt Bono Malvinas (at issuance date) Initial debt Bono Malvinas (at end-2008) Accumulated capital Bono Malvinas Monthly interest rate Bono Malvinas Amortization Bono Malvinas Debt Bono Malvinas Interest payments Bono Malvinas Amortizations Bonds (all) Debt Bonds (all) Interest payments Bonds (all) NG debt CER-indexed bonds Capital BOGAR Monthly amortization rate BOGAR Initial debt BOGAR (at issuance date) Initial debt BOGAR (at end-2008) Accumulated capital BOGAR Monthly interest rate BOGAR Amortization BOGAR Debt BOGAR Interest payments BOGAR Capital PUM Monthly amortization rate PUM Initial debt PUM (at issuance date) Initial debt PUM (at end-2008) Accumulated capital PUM Monthly interest rate PUM Amortization PUM Debt PUM Interest payments PUM

28 Debt Dynamics (3) NG debt Fiduciary Funds (FF) Initial debt FF Initial amortization FF Debt FF Initial interest payments FF NG debt PAF/PFO ( ) Initial PAF/PFO ( ) Initial amortization PAF/PFO ( ) Debt PAF/PFO ( ) Initial interest payments PAF/PFO ( ) NG debt Convenio 2007 Initial Amount Convenio 2007 Initial amortization Convenio 2007 Debt Convenio 2007 Initial interest payments Convenio 2007 Amortizations NG debt (all) Debt NG (all) Interest payments NG debt (all) New debt - Bond X New debt - Bond X issuance Amortizations Bond X Debt Bond X Interest payments Bond X Interest rate Bond X Total Amortizations Total Debt Total Interests

29 Debt Sustainability Indicators Personnel expenditure (% of NCR) Gross Operating Balance (% of NCR) Overall Balance (% of NCR) Debt service (% of NCR) Real direct investment (% of NCR) Primary Balance (% of NCR) Gross financing needs (% of NCR) Debt (% of NCR)

30 Debt Service (% NCR)

31 Primary Balance (% NCR)

32 Gross Financing Needs (% NCR)

33 Personnel Expenditures (% NCR)

34 Main Conclusions Fiscal and Debt sustainability at the sub-national level require careful consideration of the specific nuances and constrains faced by SNs. In the absence of clear criteria for assessing sustainability at the SN level, other factors must guide the analysis. Constraints on revenue and expenditure will differ from region to region. Tools used for such analyses should be flexible and customizable. Central macroeconomic (baseline) forecasts are crucial. A region-specific probabilistic approach to risk analysis is usually warranted. Clear objectives will help to guide the analysis e.g., assess the impact on pre-defined variables (e.g., FRL limits) of a specific operation (e.g., DPL) or alternative to the baseline (e.g., accelerated investment program).