Deb Susainabiliy Analysis a Subnaional Level Sae of Alagoas, Brazil Background Case Sudy using Analyica DSA a Subnaional Level Trainning, Brasilia, December 5-9, 2011 PRMED in collaboraion wih LAC PREM Slides prepared by A. Manoel, J. Pradelli, L. Bandiera, and L. Garrido World Bank Copyrigh 1
World Bank Operaion Objecives and Consrains The 2009 Fiscal and Public Secor Reform Loan for Alagoas aims o assis he sae governmen in implemening public financial managemen and relaed reforms. The governmen requesed a wo-ranche operaion of US$195.5 million (oal). The financing package will also creae fiscal space for he governmen, enabling public invesmen, and helping o ensure ha he governmen remains in compliance wih applicable fiscal limis i.e., he Fiscal Responsibiliy Law (FRL). Based on he fiscal and deb susainabiliy analysis, he proposed operaion would saisfy all crieria for engagemen wih sub-naional governmens, as agreed under he World Bank s Counry Parnership Sraegy, which requires Bank lending o be consisen wih credi ceilings specified in he sae s fiscal adjusmen program, and subjec o Naional Treasury approval. 2
Background and Conex Unil he lae 1990s, expansionary fiscal policies by Brazilian saes, and a lack of effecive conrols over heir borrowing pracices resuled in frequen deb crises. On hree occasions 1989, 1993, and 1997, he Federal Governmen had o assume and reschedule debs of several imporan saes. The larges operaion ook place in 1997, when he Federal Governmen resrucured R$ 200 billion abou 12% of naional GDP in debs owed by 25 saes, including Alagoas. 3
Background and Conex A. 1997 Bailou Program of Fiscal Adjusmen (PAFs) The 1997 refinancing operaion refinanced Alagoas debs for 30 years. Refinanced deb inra-limie deb carries a real ineres rae of 6%, wih he nominal value rising wih inflaion (i.e., inflaion-indexed deb). Deb service is capped a 13% of NCR; anyhing above ha is recapialized and added o he inra-limie sock. A he end of he conracs in 2028, if here are residual deb balances, he Sae mus pay off he remainder wihin 10 years. The bailou resuled in hree-year rolling Programs of Fiscal Adjusmen (PAFs), which se annual arges for indebedness, primary balances, personnel spending, ax revenue, and public invesmen, and included srucural reforms such as privaizaion and oher public secor modernizaion iniiaives. The 2008-2010 PAF included he following arges: PAF Targes Deb / NCR <238% Primary Balance R$ 2.1 B Personnel Expendiures / NCR <60% Revenue Collecion R$ 21 B Curren Expendiures / NCR <36% 4
Background and Conex B. 2000 Fiscal Responsibiliy Law (FRL) In 2000, a Fiscal Responsibiliy Law was enaced, enshrining hard budge consrains, and explicily prohibiing refinancing operaions beween levels of governmen o address moral hazard creaed by frequen bailous in he pas. The FRL includes he following key limis: Personnel Expendiures Ne Consolidaed Deb Deb Service FRL Limis <60% NCR <200% NCR <11.5% NCR *The FRL will serve as he key benchmark for fiscal susainabiliy. 5
Fiscal Performance For 2 decades, Alagoas has been one of he wors performing saes in Brazil in erms of fiscal performance. Excessive personnel expendiures have resuled in coninuous deficis, high deb, low raes of public invesmen, and poor oucomes in erms of povery and developmen. This poor economic and fiscal performance resuled in repeaed breaches of FRL indicaors i.e., ne consolidaed deb levels and deb service boh breaching relevan indicaors. FRL Limis 2003 2004 2005 2006 2007 2008 Personnel Expendiures <60% NCR 66.8% 59.6% 50.2% 50.2% 57.7% 55.8% Ne Consolidaed Deb <200% NCR 277.0% 264.0% 225.0% 222.0% 202.0% 197.0% Deb Service <11.5% NCR 15.2% 11.7% 13.4% 11.8% 14.5% 14.1% 280% 270% 260% 250% 240% 230% 220% 210% 200% 190% Ne Consolidaed Deb / NCR 2003 2004 2005 2006 2007 2008 16% 16% 15% 15% 14% 14% 13% 13% 12% 12% 11% Deb Service / NCR 2003 2004 2005 2006 2007 2008 6 70% 65% 60% 55% 50% 45% Personnel Expendiures / NCR 2003 2004 2005 2006 2007 2008
Fiscal and Deb Susainabiliy Analysis A muli-sep approach was used o develop he susainabiliy analysis: i. Assess fiscal and deb susainably under a baseline scenario (w.r.. FRL indicaors). ii. Assess fiscal and deb susainably (w.r.. FRL) under alernaive reform scenarios, assuming he implemenaion of he WB operaion and associaed reform program (e.g., impac on revenues, personnel expendiures, overall fiscal ouurns). iii. Consider he impac of poenial shocks o macroeconomic variables. Policy Reform Scenario The susainabiliy analysis considers he impac of he WB operaion under boh he baseline and policy reform scenario. The objecives of reforms argeed by he operaion include: Increasing efficiency of ax collecion Changing pension fund policy (reducing benefis) Improving conrol of payroll oulays Imposing a rule o dicipline salary increases Improving he efficency of public invesmen 7
Fiscal and Deb Susainabiliy Analysis Ex. Impac of Reforms local ax revenue (relaive o he baseline scenario) 8
Fiscal and Deb Susainabiliy Analysis Ex. Impac of Reforms payroll expendiures (relaive o he baseline scenario) 9
Fiscal and Deb Susainabiliy Analysis Ex. Impac of Reforms fiscal space (rel. o he baseline scenario) 10
Fiscal and Deb Susainabiliy Analysis Deb Susainabiliy Susainabiliy (under he FRL) wih and wihou reforms, and WB operaion. 220.00% 200.00% 180.00% 160.00% 140.00% Ne Consoldiaed Deb / NCR 120.00% 100.00% 80.00% No Reform, Wihou WB loan Reform, Wih WB loan No Reform, Wih WB loan FRL LIMIT 11
Fiscal and Deb Susainabiliy Analysis Deb Susainabiliy Susainabiliy (under he FRL) wih and wihou reforms, and WB operaion. 19% Toal Deb Service / NCR 17% 15% 13% 11% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 No Reform, Wihou WB loan Reform, Wih WB loan No Reform, Wih WB loan FRL LIMIT 12
Fiscal and Deb Susainabiliy Analysis Deb Susainabiliy Susainabiliy (under he FRL) wih and wihou reforms, and WB operaion. 68% Personnel Expendiures / NCR 66% 64% 62% 60% 58% 56% 54% No Reform, Wihou WB loan Reform, Wih WB loan No Reform, Wih WB loan FRL LIMIT 13
Fiscal and Deb Susainabiliy Analysis Risk Analysis: Revenue impac of alernaive growh scenarios (rel. o baseline) 14
Fiscal and Deb Susainabiliy Analysis Risk Analysis: Expendiure impac of alernaive growh scenarios (rel. o baseline) 15
Fiscal and Deb Susainabiliy Analysis Risk Analysis: Fiscal Balance impac of alernaive growh scenarios (rel. o baseline) 16
Alagoas: Analyical Issues Bailou by federal governmen (1997) Inra-limie deb due o federal governmen and exra-limie deb used o cover gross financing needs. Ceiling on deb service (15 percen of Ne Real Revenue NRR) paid on inralimie deb. Any excess amoun is auomaically incorporaed ino he deb sock and rolled over. Full indexaion o inflaion measured by General Price Index. Fiscal Responsibiliy Law (2000) - A benchmark for DSA Ceiling on personnel expendiure (60 percen of Ne Curren Revenue NCR). Ceiling on ne consolidaed deb (200 percen of NRC). Ceiling on deb service (11.5 percen of NCR). World Bank Developmen Policy Loan WB loan (US$ 200 million) allocaed o paying Parana deb and funding invesmen projecs. Insiuional reforms on public managemen. NRR is defined as oal revenue (operaional and capial) less credi operaions, asse sales, capial ransfers, ransfers o municipaliies, FUNDEF conribuions, and he social securiy conribuions of civil servans ha op ou of he sae sysem. NRR refers o he revenues colleced by sae reasury accoun (direc adminisraion), while he NCR refers o he consolidaed public secor.
Model srucure Submodels Macro variables Budge variables Indicaors Alernaive scenarios and policy reforms Deb dynamics Gross financing needs (GFN) Projecion horizon Time Sar year Years considered
Macro Growh GDP and GSDP Populaion GDP growh rae Baseline Shock o GDP growh GDP growh rae Alernaive Populaion growh rae GSDP growh rae Baseline GSDP growh rae Alernaive Ineres raes Inflaion Ineres rae on inra-limie domesic deb (disaggregaed) Inra-limie domesic deb -Iniial values- (disaggregaed) Ineres rae on inra-limie domesic deb (average) Inflaion GPI Baseline Inflaion IPCA Baseline Shock o Inflaion GPI Shock o Inflaion IPCA Inflaion GPI Alernaive Inflaion IPCA Alernaive Ineres rae on exra-limie domesic deb (disaggregaed) Ineres rae on exra-limie exernal deb (disaggregaed) Exra-limie domesic deb -Iniial values- (disaggregaed) Exra-limie exernal deb -Iniial values- (disaggregaed) Ineres rae on exra-limie domesic deb (average) Ineres rae on exra-limie exernal deb (average) Exchange rae Exchange rae (R/USD) Baseline Exchange rae (R/USD) Alernaive Ineres rae on WB loan Shock o Depreciaion Depreciaion Baseline Depreciaion Alernaive
Macro - Sochasic Analysis Dealing wih uncerainy around he baseline projecions. Macroeconomic fundamenals subjec o unexpeced shocks : exchange raes, growh, and inflaion. Performing Mone-carlo sochasic simulaion by randomly drawing shocks from specific probabiliy disribuions. Shocks are assumed o be normally disribued wih mean=0 and s.d.=1% over he projecion period.
Budge Gross Operaing Balance: Primary Balance: Overall Balance: GOB PB OB R R R G G G Capex Ineres Revenue Expendiure Gross Operaing Balance Primary Balance Overall Balance
Deb D I Inra-limie Deb D I DSpaid DSpaid D Deb Dynamics (1) D E I D Indexed by inflaion, ceiling on deb service paid (15% of NRR) I I I 1 D id DSpaid I I GPI DSdue I 0.15* NRR 1 1 id I 1 A I if if DSdue I DSdue I 0.15* NRR 0.15* NRR (assumed!) Exra-limie Deb D E h E E E WB D Dh, Df, Df, Inernal h and exernal f valued in LCU E E Inves E Parana D GFN WBdisb A WBdisb GPI h, 1 h,, 1 E E E D f, e / e 1 * D f, 1 Af, D WB f, e e 1 * / D WBdisb WBdisb WB f, 1 Inves Parana A WB f,
Deb Dynamics (2) Inra-limie deb Inra-limie Domesic Deb Ineres Paymens on inra-limie domesic deb Inra-limie domesic deb -Iniial values- (disaggregaed) Inra-limie domesic deb -Iniial values- Inra-Limie Domesic Deb Amorizaion of inra-limie domesic deb Deb Service on inra-limie domesic deb Residual in 2008 Deb service ceiling (as % of NRR) Iniial Ineres Paymen on inra-limie domesic deb
Deb Dynamics (3) Exra-limie domesic deb and World Bank loan Exra-limie Domesic Deb Exra-limie domesic deb -Iniial values- (disaggregaed) Exra-limie domesic deb -Iniial values- Exra-limie Domesic Deb Amorizaion of exra-limie domesic deb Ineres Paymens on exra-limie domesic deb Deb Service on exra-limie domesic deb Indexing by inflaion GPI Iniial Ineres Paymens on exra-limie domesic deb Gross financing needs (GFN) GFN covered w ih exra-limie domesic deb Amorizaion of exra-limie domesic deb (Iniial values) Disbursemen allocaed o invesmen Disbursemen allocaed o Parana deb (deb resrucuring) WB loan - Disbursemens (in USD) WB loan - Disbursemens (in Reais) WB loan - DOD (in Reais) Amorizaion of WB loan Ineres Paymens on WB loan Deb Service on WB loan
Deb Dynamics (4) Exra-limie exernal deb Exra-limie Exernal Deb Exra-limie exernal deb -Iniial values- (disaggregaed) Exra-limie exernal deb -Iniial values- Exra-limie Exernal Deb excluding WB loan Amorizaion of exra-limie exernal deb excluding WB loan Ineres Paymens on exra-limie exernal deb excluding WB loan Deb Service on exra-limie exernal deb excluding WB loan Indexing by exchange rae depreciaion Iniial Ineres Paymens exra-limie exernal deb Amorizaion of exra-limie exernal deb (Iniial values)
Gross Financing Needs Covered by exra-limie domesic deb and WB loan Inra-limie deb Exra-limie deb Amorizaions local currency foreign currency Amorizaions (aggregaed) Amorizaion of inra-limie domesic deb Amorizaion of exra-limie domesic deb Amorizaion of exra-limie exernal deb including WB loan + Ineres paymens Ineres Paymens (aggregaed) Ineres Paymens on inra-limie domesic deb Ineres Paymens on exra-limie domesic deb Ineres Paymens on exra-limie exernal deb including WB loan = Deb service Deb Service (aggregaed) Deb Service on inra-limie domesic deb Deb Service on exra-limie domesic deb Deb Service on exra-limie exernal deb including WB loan Deb service Primary Balance Ineres revenue Gross financing needs (GFN) - Covered wih exra-limie domesic deb & WB loan disbursemen allocaed o invesmen Deb Service - - = Primary Balance Ineres Revenues Gross financing needs (GFN)
Deb Susainabiliy Indicaors Toal Ne Consolidaed Deb Toal Ne Consolidaed Deb (% of NCR) Toal Ne Consolidaed Deb: Probabiliy of Compliance Gross Operaing Balance (% of NCR) Toal Deb Service Toal Deb Service (% of NCR) Toal Deb service: Probabiliy of Compliance Primary Balance (% of NCR) Toal Personnel Expendiures wihou deducions Personnel expendiures wihou deducions (% of NCR) Overall Balance (% of NCR) Toal Personnel Expendiures wih deducions Toal Personnel Expendiures (% of NCR) Toal Personnel Expendiures: Probabiliy of Compliance Capial expendiure (% of NCR)
Alernaive scenarios Policy reforms on axes, payroll, procuremen, ec. WB loan allocaed o Parana deb repaymen and invesmen. WB loan Policy Reform (Taxes) Policy Reform (Payroll: salary rule) Policy Reform (Procuremen) Toal Ne Consolidaed Deb's Targe Shock o GDP growh - s.dev. 0 or 0.1 Tax Collecion Efficiency Gains Policy Reform (Payroll: audiing) Policy Reform (Producive Invesmen) Toal Deb Service's Targe Shock o ER depreciaion - s.dev. 0 or 0.1 Toal Personnel Expendiures' Targe
Deb Service (% NCR)
Ne Consolidaed Deb (% NCR)
Primary Balance (million Reais)
Overall Balance (million Reais)
Gross Operaing Balance (million Reais)
Fiscal Susainabiliy Main Conclusions Oucomes are sensiive o assumpions regarding he macroeconiomc siuaion (baseline), reform scenarios, and percepions regarding risk Any increase in fiscal space and hus invesmen will depend on he fullfillmen of reforms, which would have an impac on revenue and expendiure performance The proposed loan, if accompanied by reforms, should comply wih CAS requiremens, and no cause a breach of FRL limis Fiscal and Deb susainabiliy a he sub-naional level require careful consideraion of he specific nuances and consrains faced by SNs. In he absence of clear crieria for assessing susainabiliy a he SN level, oher facors mus guide he analysis. 34